Ford Motor Company — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Filed August 5, 2011. Amounts are U.S. dollars; financial statements are unaudited interim statements reviewed by PwC, not audited.
Business context and financial results
Ford reports Automotive and Financial Services (principally Ford Credit). For the quarter, revenue increased modestly, but net income attributable to Ford declined year over year. First-half revenue and attributable net income were higher.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $35.5B | $35.1B | $68.6B | $66.6B |
| Net income attributable to Ford | $2.398B | $2.599B | $4.949B | $4.684B |
| Diluted EPS | $0.59 | $0.61 | $1.20 | $1.10 |
| Pre-tax results, excluding special items | $2.878B | $2.942B | $5.715B | $4.952B |
Automotive revenue was $33.476B in Q2, up from $32.564B. Automotive pre-tax operating profit excluding special items was about $2.3B, up $209M; reported automotive sector pre-tax income was $2.004B. Ford Credit pre-tax profit was $604M, down $284M; first-half Ford Credit profit was $1.308B versus $1.690B. Financial Services revenue fell to $2.051B from $2.503B in Q2 and to $4.127B from $5.175B in the first half.
Automotive operating margin was 7.3% for the first half. Management attributed pressure on margins mainly to higher commodity costs, partly offset by stronger pricing and North American volume and mix. Ford reported first-half GAAP operating cash flow of $6.226B versus $6.457B; Automotive operating-related cash flow, a company-defined non-GAAP measure, was $4.5B versus $2.5B. Capital expenditures were $2.022B versus $2.027B.
Balance sheet, debt and liquidity
- At June 30, total assets were $168.1B, total debt $98.6B and total equity $5.35B. Ford-attributable equity improved to $5.31B from a $673M deficit at year-end 2010.
- Automotive gross cash was $22.0B; Automotive debt was $14.0B, yielding reported Automotive net cash of $8.0B, versus $1.4B at year-end. Automotive liquidity, including available credit lines, was $32.2B.
- Ford Credit debt was $82.4B. Its available-for-use liquidity was $16.9B, down from $22.6B at year-end, following debt payments, distributions and tax payments. Ford Credit managed leverage was 7.5:1, up from 6.7:1.
- Ford Credit’s finance receivables, net, were $75.9B, up from $73.3B at year-end. Its credit-loss allowance was $673M, or 0.78% of relevant receivables and lease investments, down from $854M and 1.02%.
Material changes and unusual items
- Q2 attributable net income declined $201M year over year, while first-half attributable net income rose $265M. Ford said lower Ford Credit reserve releases and the absence of unusually low lease depreciation in 2010 reduced Ford Credit earnings.
- Automotive debt fell about $5.1B from year-end, including redemption of roughly $3B of subordinated convertible debentures and repayments on secured loans. The redemption generated a $60M first-quarter pre-tax charge but lowered annualized interest costs by about $190M.
- A $104M Belgium pension settlement loss was recorded in Q2. First-half worldwide pension contributions were about $800M; Ford expected a further $400M for funded plans in 2011.
- Ford classified its Russian operations as held for sale following an agreement to form a 50/50 joint venture with Sollers; closing and commencement of operations were expected in Q4 2011.
Outlook, risks and contingencies
- Ford expected 2011 total-company pre-tax operating profit to improve on 2010’s $8.3B, while anticipating second-half results below first-half levels. It expected full-year Automotive operating-related cash flow to improve from $4.4B in 2010 and capital spending of $5B–$5.5B.
- Management projected full-year commodity and Automotive structural costs each to increase about $2B versus 2010. It expected full-year Automotive and Ford North America operating margins to equal or exceed 2010 levels of 6.1% and 8.4%, respectively. Ford Credit was expected to remain solidly profitable, but below 2010, with about $1.1B of year-over-year profit headwind from lower reserve reductions and lease depreciation effects.
- Ford anticipated reversing almost all of its valuation allowance on deferred tax assets as early as Q4 2011. The release would create an unusually large tax benefit; timing and amount depend on evidence of future taxable income and other factors.
- Key business risks include weaker vehicle demand or market share, commodity and currency movements, supplier disruption, product quality and recall costs, pension obligations, and access to capital markets. Ford Credit also cited securitization and funding-market access, credit losses, lease residual values and regulation.
- Ford estimated reasonably possible material litigation losses above accruals of up to about $2.7B in aggregate. Separately, an Ohio court entered an approximately $2B class judgment in a truck-dealer case; Ford appealed and stated it believed the law supported its position.
- Ford signed a commitment supporting continuation of a national U.S. fuel-economy and greenhouse-gas regulatory program for model years 2017–2025, conditional on final rules being substantially consistent with the agencies’ proposal. The proposed fleet standards were described as equivalent to about 45 mpg by 2021 and 54.5 mpg by 2025, assuming emissions reductions achieved through fuel-economy technology.
Most important facts for investors to verify
- Whether the expected deferred-tax valuation-allowance reversal occurs, and its effect on reported earnings versus operating earnings.
- Progress toward Automotive margin and cash-flow targets amid forecast commodity and structural cost increases.
- Ford Credit’s liquidity, funding access, leverage and credit-loss trends, including its planned distributions to Ford.
- Outcomes and potential cash exposure from the dealer class-action judgment, other litigation and guarantees.
- Execution and accounting effects of the planned Ford Sollers transaction, and final U.S. emissions and fuel-economy rules.