Ford Motor Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Results are unaudited and reflect the onset of the COVID-19 pandemic.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $34.320 billion | $40.342 billion | Down 15% |
| Operating income/(loss) | $(1.558) billion | $1.202 billion | Decline of $2.760 billion |
| Net income/(loss) attributable to Ford | $(1.993) billion | $1.146 billion | Decline of $3.139 billion |
| Diluted EPS | $(0.50) | $0.29 | Decline of $0.79 |
| Net margin | (5.8)% | 2.8% | Down 8.6 percentage points |
| Adjusted EBIT (non-GAAP) | $(632) million | $2.447 billion | Decline of $3.079 billion |
| Adjusted EBIT margin (non-GAAP) | (1.8)% | 6.1% | Down 7.9 percentage points |
| Operating cash flow | $(473) million | $3.544 billion | Decline of $4.017 billion |
| Adjusted free cash flow (non-GAAP) | $(2.2) billion | $1.9 billion | Decline of $4.1 billion |
Automotive revenue was $31.340 billion, down 16%; Automotive EBIT was a loss of $177 million versus income of $2.009 billion, with a (0.6)% EBIT margin versus 5.4%. Ford Credit revenue was $2.967 billion and earnings before taxes were $30 million, down $771 million year over year. Mobility recorded a $334 million EBIT loss.
Cash, debt, and liquidity
- At March 31, Ford reported $25.971 billion of cash and cash equivalents and $20.399 billion of marketable securities. Company cash excluding Ford Credit was $34.3 billion; Company liquidity was $35.1 billion.
- Company debt excluding Ford Credit was $30.5 billion, up from $15.3 billion at year-end 2019, primarily after drawing $15.4 billion from revolving facilities. Ford Credit debt was $136.8 billion; consolidated total debt was approximately $167.3 billion.
- Ford Credit had $28.3 billion of net liquidity available for use, above its approximately $25 billion target. Its managed leverage was 9.2:1, above its 8:1–9:1 target range.
- Ford suspended its regular quarterly dividend and share repurchase program in March. The Q1 cash-flow statement shows $596 million in dividend payments.
- After quarter-end, Ford issued $8 billion of unsecured notes on April 22: $3.5 billion due in three years at 8.5%, $3.5 billion due in five years at 9%, and $1 billion due in ten years at 9.625%.
Material changes and unusual items
- Ford idled manufacturing operations in most regions in late March; its China operations began resuming in March after earlier suspensions. Lower production and vehicle demand drove a 21% decline in Automotive wholesales.
- Management estimated COVID-19 reduced Q1 net income and adjusted EBIT by at least $2 billion. Operating cash flow was also pressured by reduced revenue while supplier payables continued to fall due.
- Ford Credit’s allowance for credit losses increased by $718 million in Q1, including a $252 million adoption adjustment for the new expected-credit-loss standard and a $486 million increase primarily attributed to COVID-19. Ford also cited approximately $100 million of asset adjustments related to lower auction values.
- A $855 million valuation allowance against certain deferred tax assets contributed to the reported $847 million tax provision and negative 73.9% effective tax rate.
- Q1 pre-tax special-item charges were $287 million, principally UAW retirement buyouts and global redesign actions; related cash effects were $172 million. Separately, the filing estimates $700 million–$1.2 billion of 2020 global redesign charges and cash effects.
- Ford received $1.34 billion in proceeds from the February sale of Ford Credit’s Forso operations and recognized a $4 million pre-tax loss. The planned India automotive joint venture sale remained subject to approvals and closing conditions.
Outlook, risks, and contingencies
- Ford withdrew its earlier 2020 financial guidance in March. In its April 28 outlook, it forecast a Q2 adjusted EBIT loss greater than $5 billion. It expected 2020 capital spending of $6.3 billion–$6.8 billion and funded pension contributions of $0.5 billion–$0.7 billion.
- Ford expected the pandemic to adversely affect full-year 2020 results. Management said a phased manufacturing restart was probable to commence in Q2 and believed available cash, the April debt proceeds, and its operating plan would fund operations for at least 12 months. A delayed restart or lower-than-expected production could require further cost reductions or financing.
- Ford Credit forecast 2020 auction values down more than 5% versus 2019 at constant mix, continued receivables declines, public funding of $12 billion–$22 billion, liquidity around $25 billion, and managed leverage returning to its target range later in the year.
- Credit ratings were downgraded during March: Fitch to BBB-, Moody’s to Ba2, and S&P to BB+. Moody’s and S&P ratings were below investment grade. Ford said certain subsidiaries provided unsecured guarantees to lenders and the Department of Energy on April 23 following rating actions.
- Material uncertainties include the duration of shutdowns and demand weakness, supplier and dealer recovery, higher Ford Credit defaults and lower vehicle residual values, capital-market access and funding costs, and currency, commodity, and interest-rate movements.
- Ford disclosed reasonably possible aggregate losses of up to approximately $400 million for indirect tax and customs matters, plus an emissions-certification matter whose loss could not be estimated. It also disclosed a $673 million maximum potential vehicle resale-value guarantee, with $252 million recorded as its best estimate of expected payment.
Important facts for investors to verify
- Whether production restarted on schedule and could be sustained, and how quickly vehicle demand, dealer activity, and supplier operations recovered.
- Actual Q2 and full-year results against the April guidance, including cash burn, capital spending, and liquidity needs.
- Subsequent changes in Ford Credit’s credit-loss allowance, delinquencies, payment deferrals, auction values, lease returns, and managed leverage.
- Debt costs, refinancing and market access, rating-agency actions, and any effects of subsidiary guarantees or facility covenants.
- Progress and final proceeds from the India transaction, global redesign costs, and developments in the disclosed tax, emissions, warranty, and other legal matters.