Ford Motor Company — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless stated otherwise, amounts are U.S. dollars; financial statement amounts are in millions. Results reflect the COVID-19 pandemic and the phased restart of manufacturing after production was idled in late March.
Key financial results
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $37.5B | $37.0B | $91.2B | $116.2B |
| Net income attributable to Ford | $2.385B | $425M | $1.509B | $1.719B |
| Diluted EPS | $0.60 | $0.11 | $0.38 | $0.43 |
| Company adjusted EBIT (non-GAAP) | $3.644B | $1.793B | $1.066B | $5.894B |
| Adjusted EBIT margin (non-GAAP) | 9.7% | 4.8% | 1.2% | 5.1% |
| Cash from operating activities | $11.1B | $4.7B | $19.7B | $14.7B |
| Company adjusted free cash flow (non-GAAP) | $6.3B | $0.2B | $(1.2)B | $2.3B |
Q3 GAAP operating income was $2.351B. The strong quarter reflected better-than-expected vehicle demand, healthy pricing, lower incentives amid constrained inventories, and improved Automotive and Ford Credit results. Q3 adjusted EBIT is a non-GAAP measure and should not be equated with GAAP operating income or net income.
Business performance and material changes
- Automotive: Q3 revenue was $34.7B and EBIT was $2.644B, up $1.315B year over year; EBIT margin was 7.6%. Higher net pricing and lower structural costs more than offset lower wholesale volume and mix. North America generated $3.178B EBIT; Europe recorded a $440M loss, including about $400M of Kuga PHEV-related costs. South America remained loss-making; China and the International Markets Group improved.
- Ford Credit: Q3 EBT was $1.123B versus $736M, driven mainly by stronger off-lease auction performance and lower operating costs, partly offset by lower receivables. Nine-month EBT was $1.696B versus $2.368B. Net receivables were $131B, down 6% year over year. The allowance for credit losses rose to $1.314B from $513M at year-end 2019, largely reflecting COVID-related economic expectations and adoption of the expected-credit-loss standard.
- Mobility: Q3 EBIT loss was $281M, slightly improved from $290M. In Q2, Ford’s transaction with Volkswagen involving Argo AI generated a $3.5B gain, including remeasurement of Ford’s retained investment. This materially boosted nine-month other income and should be distinguished from ongoing operating performance.
- Cash and liquidity: At September 30, consolidated cash and cash equivalents were $24.3B and marketable securities were $20.6B. Ford reported $29.5B of Company cash and $45.5B of Company liquidity excluding Ford Credit. Q3 adjusted free cash flow benefited substantially from about $4B of rebuilt payables following first-half production suspensions; nine-month adjusted free cash flow remained negative.
- Debt and capital: Automotive debt was $23.7B and Ford Credit debt was $133.1B at quarter-end. Company debt excluding Ford Credit was $24.2B, up from $15.3B at December 2019, primarily due to an $8B unsecured debt issuance; Ford repaid amounts drawn on its $15.5B corporate revolvers during Q3. Ford made no shareholder distributions in Q3; nine-month dividends were $596M.
Outlook, risks, and unusual items
- Guidance issued October 28, 2020: full-year Company adjusted EBIT of $0.6B–$1.1B, including Q4 adjusted EBIT from a loss of $0.5B to breakeven; capital spending of $5.9B–$6.4B; pension contributions of $0.5B–$0.7B; and global redesign EBIT charges and cash effects each of $0.7B–$1.2B.
- Management expected Q4 headwinds from about 100,000 fewer wholesales associated with the F-150 changeover, launch and material costs, and lower Ford Credit EBT than Q3. Full-year guidance assumed no material deterioration in the economic environment and no further significant COVID-related production or distribution disruption.
- COVID-19 remained a major uncertainty: renewed restrictions could affect demand, production, supply chains, dealer operations, and Ford Credit originations and credit losses. Management warned that full-year 2020 results would be adversely affected by the pandemic.
- Ford established about $1B of valuation allowance against certain deferred tax assets in the first nine months. The nine-month tax provision was $1.179B, including this valuation allowance.
- Global redesign continued, including facility closures and planned asset sales. The India transaction with Mahindra was delayed by COVID-related shutdowns and approvals, though Ford continued to consider the sale probable. Ford estimated reasonably possible material loss above accruals of up to about $900M for indirect tax and customs matters.
- Warranty and field-service obligations were $6.584B at September 30. Financial guarantees had maximum potential payments of $437M; certain other indemnities have no estimable maximum. S&P affirmed Ford and Ford Credit at BB+ in August with a negative outlook; other listed agency outlooks were also negative.
Most important facts for investors to verify
- Whether Q3 pricing, demand, and unusually favorable inventory dynamics persist, and how the F-150 changeover affects Q4 volume.
- Whether the $0.6B–$1.1B full-year adjusted EBIT guidance remains achievable amid renewed COVID restrictions and supply-chain risks.
- Ford Credit’s loss allowance and future credit losses as relief programs expire and unemployment and used-vehicle values evolve.
- Liquidity, debt, and funding needs, including Ford Credit’s access to securitization and debt markets and the distinction between Ford and Ford Credit liquidity.
- The timing and proceeds of planned business and asset sales, pension funding needs, and potential tax, warranty, and litigation exposures.