Ford Motor Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011 unless noted. The interim financial statements are unaudited and were reviewed, not audited, by PwC. Ford reports Automotive and Financial Services sectors.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 or prior date |
|---|---|---|
| Total revenue | $32.445 billion | $33.114 billion |
| Net income attributable to Ford | $1.396 billion | $2.551 billion |
| Diluted earnings per share | $0.35 | $0.61 |
| Income before tax, including special items | $2.038 billion | $2.776 billion |
| Income before tax, excluding special items | $2.293 billion | $2.837 billion |
| Operating cash flow, consolidated | $2.075 billion | $2.497 billion |
| Automotive operating-related cash flow | $0.9 billion | $2.2 billion |
| Automotive gross cash / net cash | $23.0 billion / $9.3 billion | $22.9 billion / $9.8 billion at Dec. 31, 2011 |
| Consolidated debt | $100.490 billion | $99.488 billion at Dec. 31, 2011 |
| Total assets | $182.075 billion | $178.348 billion at Dec. 31, 2011 |
Revenue fell about 2% year over year and Ford-attributable net income fell about 45%. Management said the higher, largely non-cash tax expense—following the release of a tax valuation allowance in Q4 2011—accounted for about half the net-income decline; lower operating results and increased unfavorable special items accounted for the balance. The income tax provision was $640 million versus $220 million.
Margins and sectors: Automotive operating margin, excluding special items and Other Automotive, was 6.4%, down 1.3 percentage points year over year. Automotive pre-tax operating profit was about $1.8 billion versus $2.1 billion; Ford Credit pre-tax profit was $452 million versus $713 million. North America earned $2.133 billion before tax, South America $54 million, Europe lost $149 million, and Asia Pacific Africa lost $95 million. Financial Services sector pre-tax income was $456 million versus $706 million.
Liquidity and cash flow: Consolidated cash and cash equivalents were $15.244 billion and marketable securities were $20.783 billion at quarter-end. Consolidated cash decreased $1.904 billion during the quarter; investing activities used $4.511 billion, including capital spending of $1.093 billion. Automotive liquidity was $32.9 billion, including $23.0 billion gross cash and $9.9 billion of available credit lines. Ford Credit reported $18.1 billion liquidity available for use and $12.3 billion in cash, cash equivalents, and marketable securities. Its managed leverage was 8.1:1, down from 8.3:1 at year-end.
Ford declared a $0.05-per-share dividend, payable June 1, 2012, and repurchased $27 million of common stock in a modest anti-dilution program.
Material changes and unusual items
- Q1 special items were $255 million of expense, compared with $61 million in Q1 2011. They primarily reflected $239 million of personnel-reduction actions; the 2011 period included a $60 million debt-reduction charge.
- Automotive North America improved to $2.133 billion pre-tax income from $1.844 billion. Europe deteriorated to a $149 million loss from $293 million income, while South America and Asia Pacific Africa also weakened.
- Ford Credit earnings declined, reflecting fewer lease terminations and gains on returned vehicles, lower financing margin, and lower credit-loss reserve reductions. Ford reported historically low credit losses; first-quarter net charge-offs were $35 million.
- Automotive funded pension contributions were about $1.1 billion in Q1. Ford expected an additional $2.3 billion of contributions and $300 million of direct unfunded-plan benefit payments during 2012, for about $3.8 billion total. It said it did not expect a legal funding requirement for its major U.S. plans in 2012.
- On March 15, Ford extended the principal $9 billion revolving credit facility to November 30, 2015; the filing said it had no material adverse change clauses, restrictive financial covenants, or credit-rating triggers that could limit access.
- On April 24, Fitch upgraded Ford and Ford Credit to BBB- with stable outlook. On May 3, an Ohio appeals court reversed a roughly $2 billion dealer class-action judgment, vacated the damages award, and remanded for a new trial.
Outlook, commentary, and risks
- Ford expected 2012 total-company pre-tax operating profit, excluding special items, to be about equal to 2011’s $8.8 billion, with stronger Automotive profit and margin, and strong Automotive operating-related cash flow. The company expected second-half pre-tax profit to be slightly higher than first-half results.
- Ford projected Automotive pre-tax profit to improve and operating margin to improve from 2011’s 5.4%; capital spending was forecast at $5.5–$6 billion. Automotive structural costs were expected to rise by less than $2 billion, and net interest expense to be slightly higher.
- Ford expected North America profit and margin to be significantly higher than 2011; South America to remain solidly profitable but below 2011; Europe to lose $500–$600 million; and Asia Pacific Africa to be profitable for the full year despite its Q1 loss.
- Ford Credit forecast about $1.5 billion full-year pre-tax profit, below 2011, and year-end managed receivables of $85–$95 billion. It expected to distribute $500 million–$1 billion to Ford, subject to liquidity and leverage objectives.
- Management cited weak European conditions, uncertain Brazil–Mexico trade arrangements, product-launch execution and production capacity, exchange rates, commodity prices, and global economic conditions as important variables. Other disclosed risks include vehicle defects and recalls, regulation, supplier disruption, pension obligations, litigation, and Ford Credit funding, credit-loss, and vehicle-residual-value risks.
- Ford estimated reasonably possible loss in excess of accruals for material matters at up to about $1.5 billion, relating to non-U.S. indirect tax matters. It also disclosed guarantees with maximum potential payments of $425 million and indemnities for which it could not estimate a maximum exposure.
Important facts for investors to verify
- Whether Automotive and total-company full-year profit targets remain achievable, particularly given Europe’s projected loss and the dependence on North American performance and second-half launches.
- Cash generation after pension contributions and capital spending, the level and maturity profile of debt, and the availability and conditions of Ford Credit funding and securitization capacity.
- Ford Credit portfolio quality, lease-return volumes and used-vehicle auction values, and whether credit-loss and residual-value assumptions remain appropriate.
- Developments in the non-U.S. indirect-tax matters, product and dealer litigation, warranty and recall costs, and the Brazil–Mexico trade agreement.
- Execution and financial effects of Ford’s announced pension lump-sum offers, including the number of eligible participants who elect payment.