Business Context and Reporting Period
This Form 10-Q covers Ford Motor Company's operations for the quarterly and six-month periods ended June 30, 1999. The results include the consolidation of AB Volvo's worldwide passenger car business ("Volvo Car"), acquired on March 31, 1999. The filing also details the acquisition of Kwik-Fit Holdings plc and Plastic Omnium's automotive interior business, both pending full consolidation in the third quarter.
Key Financial Metrics
| Metric | Q2 1999 | Q2 1998 | YTD 1999 | YTD 1998 |
|---|---|---|---|---|
| Total Sales & Revenues ($ millions) | $42,282 | $37,289 | $80,167 | $73,873 |
| Net Income ($ millions) | $2,338 | $2,381 | $4,317 | $20,027 |
| Diluted EPS ($) | $1.89 | $1.91 | $3.48 | $16.11 |
| Automotive Net Cash ($ millions) | $12,553 | $14,056 | $12,553 | $14,056 |
| Stockholders' Equity ($ millions) | $26,242 | $23,070 | $26,242 | $23,070 |
| Capital Expenditures ($ millions) | $1,895 | $1,812 | $3,377 | $4,011 |
Segment Performance (Q2 1999): Automotive Sector net income was $1,931 million; Financial Services Sector net income was $407 million.
Material Changes vs. Prior Period
- Revenue Growth: Total sales increased by $5.0 billion (13%) in Q2 1999 compared to Q2 1998, driven by higher vehicle unit sales (1.93 million vs. 1.79 million) and the inclusion of Volvo Car revenues ($3.4 billion).
- Net Income Comparison: Q2 1999 net income ($2,338 million) was slightly lower than Q2 1998 ($2,381 million). However, YTD 1999 net income ($4,317 million) is significantly lower than YTD 1998 ($20,027 million) due to a one-time $15.955 billion gain on the spin-off of The Associates in Q1 1998.
- Regional Performance: North American Automotive earnings rose to $1,969 million (Q2 1999) from $1,655 million (Q2 1998). Conversely, Automotive Outside North America reported a loss of $38 million in Q2 1999, compared to earnings of $396 million in Q2 1998, impacted by lower volumes in Europe and South America.
- Acquisition Impact: The Volvo Car acquisition resulted in a one-time profit reduction of $146 million ($0.11 per share) in Q2 1999 due to inventory write-ups required under U.S. accounting rules.
Guidance, Outlook, and Risks
Management Commentary: Excluding the one-time Volvo inventory charge, Q2 1999 operating earnings would have been $2,484 million ($2.00 per share). Management notes that while North American performance is strong, achieving 1999 operating earnings milestones in Europe remains a challenge despite the addition of Volvo Car.
Liquidity and Capital Resources:
- Automotive sector held $24.0 billion in cash and marketable securities at June 30, 1999.
- Automotive debt totaled $11.4 billion, representing 30.3% of total capitalization.
- On July 9, 1999, Ford committed to issue $1.8 billion of long-term debt securities, and Ford Credit committed to issue $6.8 billion.
Risks and Contingencies:
- Legal Proceedings: A jury in California awarded $290 million in punitive damages plus $6 million in compensatory damages in a Bronco rollover case; Ford intends to appeal. Multiple class actions are pending regarding head gaskets, seat backs, and lease agreement disclosures.
- Year 2000 (Y2K): Ford estimates total Y2K compliance costs at $400 million, with $280 million incurred through June 30, 1999. Compliance status is reported as 97% for business computer systems and 99% for plant floor equipment.
- Regulatory: The EPA proposed new emissions standards for model years 2004 and beyond, which may impact product certification and diesel technology usage.
Investor Verification Checklist
- Volvo Car Integration: Verify the long-term profitability impact of the Volvo acquisition, specifically the sustainability of European margins post-inventory write-up.
- South America Exposure: Assess the severity of losses in South America ($120 million Q2 loss) driven by currency devaluation and volume declines.
- Legal Liabilities: Monitor the appeal process for the Bronco rollover verdict and the status of pending class action lawsuits regarding head gaskets and seat backs.
- Debt Levels: Review the increase in Automotive debt to $11.4 billion and the upcoming $8.6 billion in debt issuances scheduled for July 1999.
- Y2K Readiness: Confirm the final status of the 3% of business computer systems and 1% of plant floor equipment not yet compliant as of June 30, 1999.