filings.toolsItem 6. Selected Financial Data.
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Item 6. Selected Financial Data.
The following table sets forth selected financial data for each of the last five years (dollar amounts in millions, except for per share amounts):
| SUMMARY OF INCOME | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||
| Total revenues | $ | 149,558 | $ | 151,800 | $ | 156,776 | $ | 160,338 | $ | 155,900 | |||||||||
| Income/(Loss) before income taxes | $ | 10,179 | $ | 6,784 | $ | 8,159 | $ | 4,345 | $ | (640 | ) | ||||||||
| Provision for/(Benefit from) income taxes | 2,854 | 2,184 | 402 | 650 | (724 | ) | |||||||||||||
| Net income | 7,325 | 4,600 | 7,757 | 3,695 | 84 | ||||||||||||||
| Less: Income/(Loss) attributable to noncontrolling interests | (2 | ) | 11 | 26 | 18 | 37 | |||||||||||||
| Net income attributable to Ford Motor Company | $ | 7,327 | $ | 4,589 | $ | 7,731 | $ | 3,677 | $ | 47 | |||||||||
| Earnings Per Share Attributable to Ford Motor Company Common and Class B Stock | |||||||||||||||||||
| Average number of shares of Ford Common and Class B Stock outstanding (in millions) | 3,969 | 3,973 | 3,975 | 3,974 | 3,972 | ||||||||||||||
| Basic income | $ | 1.85 | $ | 1.16 | $ | 1.94 | $ | 0.93 | $ | 0.01 | |||||||||
| Diluted income | 1.83 | 1.15 | 1.93 | 0.92 | 0.01 | ||||||||||||||
| Cash dividends declared | 0.60 | 0.85 | 0.65 | 0.73 | 0.60 | ||||||||||||||
| BALANCE SHEET DATA AT YEAR END | |||||||||||||||||||
| Total assets | $ | 225,491 | $ | 238,510 | $ | 258,496 | $ | 256,540 | $ | 258,537 | |||||||||
| Automotive debt | $ | 12,839 | $ | 15,907 | $ | 15,931 | $ | 13,547 | $ | 14,678 | |||||||||
| Ford Credit debt | 119,417 | 126,464 | 137,757 | 140,066 | 140,029 | ||||||||||||||
| Other debt | 598 | 599 | 599 | 600 | 600 | ||||||||||||||
| Total equity | $ | 29,223 | $ | 29,746 | $ | 35,606 | $ | 35,966 | $ | 33,230 |
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Revenue
Our Automotive segment revenue is generated primarily by sales of vehicles, parts, and accessories. Revenue is recorded when control is transferred to our customers (generally, our dealers and distributors). For the majority of sales, this occurs when products are shipped from our manufacturing facilities. This is not the case, however, with respect to vehicles produced for sale to daily rental car companies with an obligation to repurchase the vehicle for a guaranteed amount, exercisable at the option of the customer. These contracts are accounted for as operating leases, with lease revenue and profits recognized over the term of the lease. Proceeds from the sale of vehicles at auction are recognized in revenue upon transfer of control of the vehicle to the buyer.
Most of the vehicles sold by us to our dealers and distributors are financed at wholesale by Ford Credit. Upon Ford Credit originating the wholesale receivable related to a dealer’s purchase of a vehicle, Ford Credit pays cash to the relevant Automotive legal entity in payment of the dealer’s obligation for the purchase price of the vehicle. The dealer then pays the wholesale finance receivable to Ford Credit when it sells the vehicle to a retail customer.
Our Ford Credit segment revenue is generated primarily from interest on finance receivables, net of certain deferred origination costs that are included as a reduction of financing revenue, and such revenue is recognized over the term of the receivable using the interest method. Also, revenue from operating leases is recognized on a straight-line basis over the term of the lease. Income is generated to the extent revenues exceed expenses, most of which are interest, depreciation, and operating expenses.
Transactions between our Automotive and Ford Credit segments occur in the ordinary course of business. For example, we offer special retail financing and lease incentives to dealers’ customers who choose to finance or lease our vehicles from Ford Credit. The cost for these incentives is included in our estimate of variable consideration at the date the related vehicle sales to our dealers are recorded. In order to compensate Ford Credit for the lower interest or lease payments offered to the retail customer, we pay the discounted value of the incentive directly to Ford Credit when it originates the retail finance or lease contract with the dealer’s customer. Ford Credit recognizes the incentive amount over the life of retail finance contracts as an element of financing revenue and over the life of lease contracts as a reduction to depreciation. See Note 1 of the Notes to the Financial Statements for a more detailed discussion of transactions between our Automotive and Ford Credit segments.
Costs and Expenses
Our income statement classifies our Automotive segment total costs and expenses into two categories: (i) cost of sales, and (ii) selling, administrative, and other expenses. We include within cost of sales those costs related to the development, manufacture, and distribution of our vehicles, parts, and accessories. Specifically, we include in cost of sales each of the following: material costs (including commodity costs); freight costs; warranty, including product recall costs; labor and other costs related to the development and manufacture of our products; depreciation and amortization; and other associated costs. We include within selling, administrative, and other expenses labor and other costs not directly related to the development and manufacture of our products, including such expenses as advertising and sales promotion costs.
Certain of our costs, such as material costs, generally vary directly with changes in volume and mix of production. In our industry, production volume often varies significantly from quarter to quarter and year to year. Quarterly production volumes experience seasonal shifts throughout the year (including peak retail sales seasons and the impact on production of model changeover and new product launches). Annual production volumes are heavily impacted by external economic factors, including the pace of economic growth and factors such as the availability of consumer credit and cost of fuel.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
As a result, we analyze the profit impact of certain cost changes holding constant present-year volume and mix and currency exchange, in order to evaluate our cost trends absent the impact of varying production and currency exchange levels. We analyze these cost changes in the following categories:
| • | Contribution Costs – these costs typically vary with production volume. These costs include material (including commodity), warranty, and freight and duty costs. |
| • | Structural Costs – these costs typically do not have a directly proportionate relationship to production volume. These costs include manufacturing, engineering, spending-related, advertising and sales promotion, administrative and selling, and pension and OPEB costs. |
While contribution costs generally vary directly in proportion to production volume, elements within our structural costs category are impacted to differing degrees by changes in production volume. We also have varying degrees of discretion when it comes to controlling the different elements within our structural costs. For example, depreciation and amortization expense largely is associated with prior capital spending decisions. On the other hand, while labor costs do not vary directly with production volume, manufacturing labor costs may be impacted by changes in volume, for example when we increase overtime, add a production shift, or add personnel to support volume increases. Other structural costs, such as advertising or engineering costs, do not necessarily have a directly proportionate relationship to production volume. Our structural costs generally are within our discretion, although to varying degrees, and can be adjusted over time in response to external factors.
We consider certain structural costs to be a direct investment in future growth and revenue. For example, structural costs are necessary to grow our business and improve profitability, invest in new products and technologies, respond to increasing industry sales volume, and grow our market share.
Cost of sales and Selling, administrative, and other expenses for full-year 2019 were $145.9 billion. Our Automotive segment’s material and commodity costs make up the largest portion of these costs and expenses, representing in 2019 about two-thirds of the total amount. Structural costs are the largest piece of the remaining balance. Although material costs are our largest absolute cost, our margins can be affected significantly by changes in any category of costs.
Key Economic Factors and Trends Affecting the Automotive Industry
Currency Exchange Rate Volatility. The U.S. Federal Reserve lowered its policy interest rate three times in 2019, after nine increases over the course of the tightening cycle beginning in late 2015. Central banks in other developed markets have also signaled the potential for rate cuts in response to recent global economic headwinds, extending the era of monetary policy easing that began with the 2008-2009 global financial crisis. The related shifts in capital flows have contributed to increased volatility for both developed and emerging market currencies globally. Emerging markets also face differing inflation backdrops and, in some cases, exposure to commodity prices and political instability, contributing to unpredictable movements in the value of their exchange rates. In addition to direct impacts on the financial flows of global automotive companies, currency movements can also impact pricing of vehicles exported to overseas markets, most notably in the case of the Japanese yen and Korean won. In most markets, exchange rates are market-determined, and all are impacted by many different macroeconomic and policy factors, and thus likely to remain volatile. However, in some markets, exchange rates are heavily influenced or controlled by governments.
Excess Capacity. According to IHS Automotive, an automotive research firm, the estimated automotive industry global production capacity for light vehicles of about 139 million units exceeded global production by about 50 million units in 2019. While global production capacity rose by about 2 million units in 2019 compared with 2018, excess capacity rose by nearly 7 million units, including increases in North America, Europe, and, most substantially, in China. In North America and Europe, two regions where a significant share of industry revenue is earned, excess capacity as a percent of production in 2019 increased to 30% and 33%, respectively. In China, the auto industry witnessed excess capacity at 104% in 2019, as industry sales remained below expectations due to weaker economic conditions there. According to production capacity data projected by IHS Automotive, global excess capacity conditions could continue for several years at an average of about 50 million units per year, declining only gradually from current levels, during the period from 2020 to 2025.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Pricing Pressure. Excess capacity, coupled with a proliferation of new products being introduced in key segments, will keep pressure on manufacturers’ ability to set prices. In North America, the industry restructuring of the past few years has allowed manufacturers to better match production with demand, although Japanese and Korean manufacturers also have capacity located outside of the region directed to North America. In the future, Chinese and Indian manufacturers are expected to enter U.S. and European markets, further intensifying competition. Over the long term, intense competition and excess capacity will continue to put downward pressure on inflation-adjusted prices for similarly-contented vehicles in the United States and contribute to a challenging pricing environment for the automotive industry. In Europe, the excess capacity situation has been exacerbated by the nominal reductions in existing capacity, such that negative pricing pressure is expected to continue for the foreseeable future.
Commodity and Energy Price Changes. Changes in market expectations for global demand, notably weaker growth in China, along with geopolitical tensions have generated volatility in energy prices, though they remain at a relatively low level compared with historical performance. Oil prices are expected to remain volatile, and on a lower long-term trend than in prior commodity cycles. Prices for other commodities have also been volatile, as fluctuating global demand and the threat of further tariff actions continues to impact prices despite some easing in global trade tensions at the start of this year.
Vehicle Profitability. Our financial results depend on the profitability of the vehicles we sell, which may vary significantly by vehicle line. In general, larger vehicles tend to command higher prices and be more profitable than smaller vehicles, both across and within vehicle segments. For example, in North America, our larger, more profitable vehicles had an average contribution margin that was about 130% of our total average contribution margin across all vehicles, whereas our smaller vehicles had significantly lower contribution margins. In addition, government regulations aimed at reducing emissions and increasing fuel efficiency (e.g., ZEV mandates and low emission zones) may increase the cost of vehicles by more than the perceived benefit to the consumer. Given the backdrop of excess capacity, these regulations could dampen contribution margins.
Trade Policy. To the extent governments in various regions erect or intensify barriers to imports, or implement currency policy that advantages local exporters selling into the global marketplace, there can be a significant negative impact on manufacturers based in other markets. While we believe the long-term trend will support the growth of free trade, we have noted with concern recent developments in a number of regions. The imposition of tariffs on steel and aluminum coming into the United States in 2018 had a direct negative impact on costs for manufacturers in the U.S. market. In Asia Pacific, a weak yen significantly reduces the cost of exports into the United States, Europe, and other global markets by Japanese manufacturers, and, over a period of time, contribute to other countries pursuing weak currency policies by intervening in the exchange rate markets. This is particularly likely in other Asian countries, such as South Korea. We will continue to monitor and address developing issues around trade policy.
Other Economic Factors. Interest rates, notably mature market government bond yields, and inflation have remained lower than expected. At the same time, government deficits and debt remain at high levels in many major markets. The eventual implications of higher government deficits and debt, with potentially higher long-term interest rates, may drive a higher cost of capital over our planning period. Higher interest rates and/or taxes to address the higher deficits also may impede real growth in gross domestic product and, therefore, vehicle sales over our planning period.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
RESULTS OF OPERATIONS - 2019
Net income attributable to Ford Motor Company was $47 million in 2019. Company adjusted EBIT was $6,379 million.
Net income includes certain items (“special items”) that are excluded from Company adjusted EBIT. These items are discussed in more detail in Note 28 of the Notes to the Financial Statements. We report special items separately to allow investors analyzing our results to identify certain infrequent significant items that they may wish to exclude when considering the trend of ongoing operating results. Our pre-tax and tax special items were as follows (in millions):
| 2018 | 2019 | |||||||
| Global Redesign | ||||||||
| Europe excl. Russia | $ | (309 | ) | $ | (1,246 | ) | ||
| India | — | (804 | ) | |||||
| South America | (65 | ) | (566 | ) | ||||
| Russia | — | (357 | ) | |||||
| China | — | (101 | ) | |||||
| Separations and Other (not included above) | (163 | ) | (107 | ) | ||||
| Subtotal Global Redesign | $ | (537 | ) | $ | (3,181 | ) | ||
| Other Items | ||||||||
| Focus cancellation | $ | (16 | ) | $ | (72 | ) | ||
| Other, including Transit Connect customs ruling and Chariot | (40 | ) | (201 | ) | ||||
| Subtotal Other Items | $ | (56 | ) | $ | (273 | ) | ||
| Pension and OPEB Gain / (Loss) | ||||||||
| Pension and OPEB remeasurement | $ | (851 | ) | $ | (2,500 | ) | ||
| Pension curtailment | 15 | (45 | ) | |||||
| Subtotal Pension and OPEB Gain / (Loss) | $ | (836 | ) | $ | (2,545 | ) | ||
| Total EBIT Special Items | $ | (1,429 | ) | $ | (5,999 | ) | ||
| Cash effect of Global Redesign (incl. separations) | $ | (196 | ) | $ | (911 | ) | ||
| Tax special items* | $ | (88 | ) | $ | (1,323 | ) |
| * | Includes related tax effect on special items and tax special items. |
We recorded $6 billion of special item charges in 2019. Actions related to our Global Redesign accounted for $3.2 billion of the special items, including European restructuring, with cash effects of $911 million. Special item charges also included $2.5 billion for pension and OPEB remeasurement losses. The remeasurement loss did not have an impact on our cash in 2019.
In Note 28 of the Notes to the Financial Statements, special items are reflected as a separate reconciling item, as opposed to being allocated among the Automotive, Mobility, and Ford Credit segments. This reflects the fact that management excludes these items from its review of operating segment results for purposes of measuring segment profitability and allocating resources.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
COMPANY KEY METRICS
The table below shows our full year 2019 key metrics for the Company compared to a year ago.
| 2018 | 2019 | H / (L) | ||||||||||
| GAAP Financial Measures | ||||||||||||
| Cash Flows from Operating Activities ($B) | $ | 15.0 | $ | 17.6 | $ | 2.6 | ||||||
| Revenue ($M) | 160,338 | 155,900 | (3)% | |||||||||
| Net Income ($M) | 3,677 | 47 | $ | (3,630 | ) | |||||||
| Net Income Margin (%) | 2.3 | % | 0.0 | % | (2.3) ppts | |||||||
| EPS (Diluted) | $ | 0.92 | $ | 0.01 | $ | (0.91 | ) | |||||
| Non-GAAP Financial Measures***** | ||||||||||||
| Company Adj. Free Cash Flow ($B) | $ | 2.8 | $ | 2.8 | $ | — | ||||||
| Company Adj. EBIT ($M) | 7,002 | 6,379 | (623 | ) | ||||||||
| Company Adj. EBIT Margin (%) | 4.4 | % | 4.1 | % | (0.3) ppts | |||||||
| Adjusted EPS (Diluted) | $ | 1.30 | $ | 1.19 | $ | (0.11 | ) | |||||
| Adjusted ROIC (Trailing Four Qtrs) | 7.1 | % | 7.8 | % | 0.7 ppts |
| * | See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. |
For full year 2019, revenue was down 3 percent, or 1 percent excluding the impact of exchange, to $155.9 billion.
In 2019, our diluted earnings per share of Common and Class B Stock was $0.01 and our diluted adjusted earnings per share was $1.19.
Net income margin was 0.0 percent in 2019, down from 2.3 percent a year ago. Company adjusted EBIT margin was 4.1 percent in 2019, down from 4.4 percent a year ago.
The table below shows our full year 2019 net income attributable to Ford and Company adjusted EBIT by segment (in millions).
| 2018 | 2019 | H / (L) | ||||||||||
| Automotive | $ | 5,422 | $ | 4,926 | $ | (496 | ) | |||||
| Mobility | (674 | ) | (1,186 | ) | (512 | ) | ||||||
| Ford Credit | 2,627 | 2,998 | 371 | |||||||||
| Corporate Other | (373 | ) | (359 | ) | 14 | |||||||
| Company Adjusted EBIT * | 7,002 | 6,379 | (623 | ) | ||||||||
| Interest on Debt | (1,228 | ) | (1,020 | ) | 208 | |||||||
| Special Items | (1,429 | ) | (5,999 | ) | (4,570 | ) | ||||||
| Taxes / Noncontrolling Interests | (668 | ) | 687 | 1,355 | ||||||||
| Net Income | $ | 3,677 | $ | 47 | $ | (3,630 | ) |
| * | See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. |
The $3.6 billion year-over-year decline in net income in 2019 is more than explained by the $6 billion of special item charges discussed in more detail above under “Results of Operations.”
Company adjusted EBIT decreased about 9 percent year-over-year in 2019, driven by higher investments in Mobility and lower Automotive EBIT, offset partially by improved Ford Credit EBT.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Automotive Segment
The table below shows our full year 2019 Automotive segment EBIT by business unit (in millions).
| 2018 | 2019 | H / (L) | ||||||||||
| North America | $ | 7,607 | $ | 6,612 | $ | (995 | ) | |||||
| South America | (678 | ) | (704 | ) | (26 | ) | ||||||
| Europe | (398 | ) | (47 | ) | 351 | |||||||
| China | (1,545 | ) | (771 | ) | 774 | |||||||
| Asia Pacific Operations | 443 | (23 | ) | (466 | ) | |||||||
| Middle East & Africa | (7 | ) | (141 | ) | (134 | ) | ||||||
| Automotive Segment | $ | 5,422 | $ | 4,926 | $ | (496 | ) |
The tables below and on the following pages provide full year 2019 key metrics and the change in full year 2019 EBIT compared with full year 2018 by causal factor for our Automotive segment and its regional business units. For a description of these causal factors, see Definitions and Information Regarding Automotive Causal Factors*.*
| 2018 | 2019 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 6.3 | % | 6.0 | % | (0.3) ppts | |||||||
| Wholesale Units (000) | 5,982 | 5,386 | (596 | ) | ||||||||
| Revenue ($M) | $ | 148,294 | $ | 143,599 | $ | (4,695 | ) | |||||
| EBIT ($M) | 5,422 | 4,926 | (496 | ) | ||||||||
| EBIT Margin (%) | 3.7 | % | 3.4 | % | (0.3) ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2018 Full Year EBIT | $ | 5,422 | ||
| Volume / Mix | (720 | ) | ||
| Net Pricing | 3,093 | |||
| Cost | (1,552 | ) | ||
| Exchange | (904 | ) | ||
| Other | (413 | ) | ||
| 2019 Full Year EBIT | $ | 4,926 |
In 2019, wholesales in our Automotive segment declined 596,000 units year-over-year, reflecting decreases in each business unit, while Automotive revenue was down 3.1 percent from a year ago.
Our full year 2019 Automotive segment EBIT was $5 billion, down $496 million from a year ago, and EBIT margin was 3.4 percent. Favorable mix was more than offset by the impact of lower volume, including the effects of new product launches. We had higher net pricing across most business units. Costs were higher, driven by higher material and warranty costs, while structural costs, excluding pension and OPEB, were lower, primarily as a result of improved fitness and global redesign actions. Exchange was unfavorable, and other adverse impacts included UAW contract ratification costs.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
North America
| 2018 | 2019 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 13.4 | % | 13.2 | % | (0.2) ppts | |||||||
| Wholesale Units (000) | 2,920 | 2,765 | (155 | ) | ||||||||
| Revenue ($M) | $ | 96,617 | $ | 98,053 | $ | 1,436 | ||||||
| EBIT ($M) | 7,607 | 6,612 | (995 | ) | ||||||||
| EBIT Margin (%) | 7.9 | % | 6.7 | % | (1.2) ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2018 Full Year EBIT | $ | 7,607 | ||
| Volume / Mix | (241 | ) | ||
| Net Pricing | 1,910 | |||
| Cost | (1,865 | ) | ||
| Exchange | (174 | ) | ||
| Other | (625 | ) | ||
| 2019 Full Year EBIT | $ | 6,612 |
In North America, 2019 wholesales declined 5 percent from a year ago, driven by the impact of major product launches. Full year 2019 revenue increased 1 percent year-over-year, driven by improved mix and higher net pricing, offset partially by lower volume.
North America’s 2019 EBIT decreased 13 percent from a year ago with an EBIT margin of 6.7 percent, driven by UAW contract-related bonuses, higher warranty expenses, and lower wholesales. Higher net pricing and favorable mix were partial offsets.
South America
| 2018 | 2019 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 8.3% | 7.2% | (1.1) ppts | |||||||||
| Wholesale Units (000) | 365 | 295 | (70 | ) | ||||||||
| Revenue ($M) | $ | 5,288 | $ | 3,893 | $ | (1,395 | ) | |||||
| EBIT ($M) | (678 | ) | (704 | ) | (26 | ) | ||||||
| EBIT Margin (%) | (12.8 | )% | (18.1 | )% | (5.2) ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2018 Full Year EBIT | $ | (678 | ) | |
| Volume / Mix | (180 | ) | ||
| Net Pricing | 626 | |||
| Cost | (350 | ) | ||
| Exchange | (175 | ) | ||
| Other | 53 | |||
| 2019 Full Year EBIT | $ | (704 | ) |
In South America, 2019 wholesales declined 19 percent from a year ago, driven by the discontinuation of heavy trucks, Fiesta, and Focus. Full year 2019 revenue declined 26 percent year over year, driven by lower volume and adverse exchange.
South America’s 2019 EBIT loss of $704 million was 4 percent higher than a year ago, driven by lower wholesales.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Europe
| 2018 | 2019 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 7.2% | 6.8% | (0.4) ppts | |||||||||
| Wholesale Units* (000) | 1,533 | 1,418 | (115 | ) | ||||||||
| Revenue ($M) | $ | 31,272 | $ | 28,627 | $ | (2,645 | ) | |||||
| EBIT ($M) | (398 | ) | (47 | ) | 351 | |||||||
| EBIT Margin (%) | (1.3)% | (0.2)% | 1.1 ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2018 Full Year EBIT | $ | (398 | ) | |
| Volume / Mix | (124 | ) | ||
| Net Pricing | 452 | |||
| Cost | (25 | ) | ||
| Exchange | (232 | ) | ||
| Other | 280 | |||
| 2019 Full Year EBIT | $ | (47 | ) |
| * | Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Turkey (about 44,000 units in 2018 and 34,000 in 2019); revenue does not include these sales. |
In Europe, 2019 wholesales declined 8 percent from a year ago, driven by lower share from planned actions to drive gross margin and improve EBIT. Full year 2019 revenue declined 8 percent year-over-year, driven by adverse exchange and planned lower share from our business redesign.
Europe’s 2019 EBIT loss improved $351 million year-over-year, driven by higher net pricing and lower structural costs.
China
| 2018 | 2019 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 2.9% | 2.2% | (0.7) ppts | |||||||||
| Wholesale Units* (000) | 732 | 535 | (197 | ) | ||||||||
| Revenue ($M) | $ | 4,619 | $ | 3,615 | $ | (1,004 | ) | |||||
| EBIT ($M) | (1,545 | ) | (771 | ) | 774 | |||||||
| EBIT Margin (%) | (33.4)% | (21.3)% | 12.1 ppts |
| * | Wholesale units include Ford brand and JMC brand vehicles produced and sold in China by our unconsolidated affiliates; revenue does not include these sales. |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2018 Full Year EBIT | $ | (1,545 | ) | |
| Volume / Mix | 7 | |||
| Net Pricing | 61 | |||
| Cost | 612 | |||
| Exchange | 143 | |||
| Other | (49 | ) | ||
| 2019 Full Year EBIT | $ | (771 | ) |
In China, 2019 wholesales declined 27 percent from a year ago, driven by lower joint venture volumes. Full year 2019 consolidated revenue declined 22 percent year-over-year, driven primarily by lower component sales to our joint ventures in China and lower volume.
China’s 2019 EBIT loss narrowed by 50 percent year-over-year, driven by lower structural costs, favorable exchange, lower tariffs, and higher net pricing.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Asia Pacific Operations
| 2018 | 2019 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 1.9% | 1.7% | (0.2) ppts | |||||||||
| Wholesale Units* (000) | 323 | 279 | (44 | ) | ||||||||
| Revenue ($M) | $ | 7,811 | $ | 7,017 | $ | (794 | ) | |||||
| EBIT ($M) | 443 | (23 | ) | (466 | ) | |||||||
| EBIT Margin (%) | 5.7% | (0.3)% | (6.0) ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2018 Full Year EBIT | $ | 443 | ||
| Volume / Mix | (221 | ) | ||
| Net Pricing | (25 | ) | ||
| Cost | 124 | |||
| Exchange | (281 | ) | ||
| Other | (63 | ) | ||
| 2019 Full Year EBIT | $ | (23 | ) |
In our Asia Pacific Operations, 2019 wholesales declined 14 percent from a year ago, driven by lower share and industry. Full year 2019 revenue declined 10 percent year-over-year, driven by lower volume.
Asia Pacific Operations’ 2019 EBIT was $466 million lower than a year ago, with a $23 million loss driven by adverse exchange and unfavorable market factors, offset partially by lower costs. The adverse exchange was driven by the Australian dollar and Thai baht.
Middle East & Africa
| 2018 | 2019 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 3.0% | 3.2% | 0.2 ppts | |||||||||
| Wholesale Units* (000) | 109 | 94 | (15 | ) | ||||||||
| Revenue ($M) | $ | 2,688 | $ | 2,392 | $ | (296 | ) | |||||
| EBIT ($M) | (7 | ) | (141 | ) | (134 | ) | ||||||
| EBIT Margin (%) | (0.3)% | (5.9)% | (5.6) ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2018 Full Year EBIT | $ | (7 | ) | |
| Volume / Mix | 39 | |||
| Net Pricing | 70 | |||
| Cost | (49 | ) | ||
| Exchange | (184 | ) | ||
| Other | (10 | ) | ||
| 2019 Full Year EBIT | $ | (141 | ) |
In Middle East & Africa, 2019 wholesales declined 14 percent from a year ago, driven by lower share in South Africa. Full year 2019 revenue declined 11 percent year-over-year, driven by lower volume and adverse exchange.
Middle East & Africa’s 2019 EBIT loss was $134 million higher than a year ago, primarily driven by adverse exchange, offset partially by industry pricing. The adverse exchange was primarily driven by the South African rand.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Definitions and Information Regarding Automotive Causal Factors
In general, we measure year-over-year change in Automotive segment EBIT using the causal factors listed below, with net pricing and cost variances calculated at present-year volume and mix and exchange:
| • | Market Factors (exclude the impact of unconsolidated affiliate wholesales): |
| ◦ | Volume and Mix – primarily measures EBIT variance from changes in wholesale volumes (at prior-year average contribution margin per unit) driven by changes in industry volume, market share, and dealer stocks, as well as the EBIT variance resulting from changes in product mix, including mix among vehicle lines and mix of trim levels and options within a vehicle line |
| ◦ | Net Pricing – primarily measures EBIT variance driven by changes in wholesale prices to dealers and marketing incentive programs such as rebate programs, low-rate financing offers, special lease offers, and stock adjustments on dealer inventory |
| • | Cost: |
| ◦ | Contribution Costs – primarily measures EBIT variance driven by per-unit changes in cost categories that typically vary with volume, such as material costs (including commodity and component costs), warranty expense, and freight and duty costs |
| ◦ | Structural Costs – primarily measures EBIT variance driven by absolute change in cost categories that typically do not have a directly proportionate relationship to production volume. Structural costs include the following cost categories: |
| ▪ | Manufacturing, Including Volume-Related - consists primarily of costs for hourly and salaried manufacturing personnel, plant overhead (such as utilities and taxes), and new product launch expense. These costs could be affected by volume for operating pattern actions such as overtime, attendance, line speed, and shift schedules |
| ▪ | Engineering – consists primarily of costs for engineering personnel, prototype materials, testing, and outside engineering services |
| ▪ | Spending-Related – consists primarily of depreciation and amortization of our manufacturing and engineering assets, but also includes asset retirements and operating leases |
| ▪ | Advertising and Sales Promotions – includes costs for advertising, marketing programs, brand promotions, customer mailings and promotional events, and auto shows |
| ▪ | Administrative and Selling – includes primarily costs for salaried personnel and purchased services related to our staff activities and selling functions, as well as associated information technology costs |
| ▪ | Pension and OPEB – consists primarily of past service pension costs and other postretirement employee benefit costs |
| • | Exchange – primarily measures EBIT variance driven by one or more of the following: (i) transactions denominated in currencies other than the functional currencies of the relevant entities, (ii) effects of converting functional currency income to U.S. dollars, (iii) effects of remeasuring monetary assets and liabilities of the relevant entities in currencies other than their functional currency, or (iv) results of our foreign currency hedging |
| • | Other – includes a variety of items, such as parts and services earnings, royalties, government incentives, and compensation-related changes |
In addition, definitions and calculations used in this report include:
| • | Wholesales and Revenue – wholesale unit volumes include all Ford and Lincoln badged units (whether produced by Ford or by an unconsolidated affiliate) that are sold to dealerships, units manufactured by Ford that are sold to other manufacturers, units distributed by Ford for other manufacturers, and local brand units produced by our China joint venture, Jiangling Motors Corporation, Ltd. (“JMC”), that are sold to dealerships. Vehicles sold to daily rental car companies that are subject to a guaranteed repurchase option (i.e., rental repurchase), as well as other sales of finished vehicles for which the recognition of revenue is deferred (e.g., consignments), also are included in wholesale unit volumes. Revenue from certain vehicles in wholesale unit volumes (specifically, Ford badged vehicles produced and distributed by our unconsolidated affiliates, as well as JMC brand vehicles) are not included in our revenue |
| • | Industry Volume and Market Share – based, in part, on estimated vehicle registrations; includes medium and heavy duty trucks |
| • | SAAR – seasonally adjusted annual rate |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Mobility Segment
Our Mobility segment primarily includes development costs related to our autonomous vehicles and our investment in mobility through Ford Smart Mobility LLC (“FSM”). Autonomous vehicles includes self-driving systems development and vehicle integration, autonomous vehicle research and advanced engineering, autonomous vehicle transportation-as-a-service network development, user experience, and business strategy and business development teams. FSM designs and builds mobility products and subscription and other services on its own, and collaborates with service providers and technology companies. In 2019, we began recording in the Mobility segment subscription related income previously reported in the Automotive segment. This income is generated from services managed in our Mobility segment.
In our Mobility segment, our 2019 EBIT loss was $1.2 billion, a $512 million higher loss than a year ago. Our strategic investments in Mobility in 2019 increased by more than 75 percent year-over-year as we continued to expand our capabilities in mobility and autonomous vehicles.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Ford Credit Segment
The tables below provide full year 2019 key metrics and the change in full year 2019 EBT compared with full year 2018 by causal factor for the Ford Credit segment. For a description of these causal factors, see Definitions and Information Regarding Ford Credit Causal Factors.
| 2018 | 2019 | H / (L) | ||||||||||
| GAAP Financial Measures | ||||||||||||
| Net Receivables ($B) | $ | 146 | $ | 142 | (3 | )% | ||||||
| Loss-to-Receivables* (bps) | 55 | 52 | (3 | ) | ||||||||
| Auction Values** | $ | 18,540 | $ | 18,150 | (2 | )% | ||||||
| EBT ($M) | 2,627 | 2,998 | $ | 371 | ||||||||
| ROE (%) | 14 | % | 15 | % | 1 ppt | |||||||
| Other Balance Sheet Metrics | ||||||||||||
| Debt ($B) | $ | 140 | $ | 140 | — | |||||||
| Net Liquidity ($B) | 27 | 33 | 22 | % | ||||||||
| Financial Statement Leverage (to 1) | 9.4 | 9.8 | 0.4 |
| * | U.S. retail financing only, previously included both retail financing and operating leases. |
| ** | U.S. 36-month off-lease auction values at full-year 2019 mix. |
| 2018 | 2019 | H / (L) | |||||||||
| Non-GAAP Financial Measures | |||||||||||
| Managed Receivables* ($B) | $ | 155 | $ | 152 | (2 | )% | |||||
| Managed Leverage** (to 1) | 8.8 | 8.9 | 0.1 |
| * | See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. |
| ** | See Liquidity and Capital Resources - Ford Credit Segment section for reconciliation to GAAP. |
| Change in EBT by Causal Factor (in millions) | ||||
| 2018 Full Year EBT | $ | 2,627 | ||
| Volume / Mix | (38 | ) | ||
| Financing Margin | (86 | ) | ||
| Credit Loss | 127 | |||
| Lease Residual | 249 | |||
| Exchange | (71 | ) | ||
| Other | 190 | |||
| 2019 Full Year EBT | $ | 2,998 |
Ford Credit’s loss metrics reflected healthy and stable consumer credit conditions, and auction values for off-lease vehicles were slightly better than expected. We expect full year 2020 auction values to be about 5 percent lower compared with 2019 at a constant mix, based on third party assessments. Receivables at December 31, 2019 were lower year-over-year.
Ford Credit delivered $3 billion of EBT in 2019, a 14 percent increase from a year ago, driven by favorable lease residual, credit loss, and derivatives performance.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Definitions and Information Regarding Ford Credit Causal Factors.
In general, we measure year-over-year changes in Ford Credit’s EBT using the causal factors listed below:
| • | Volume and Mix: |
| ◦ | Volume primarily measures changes in net financing margin driven by changes in average managed receivables at prior period financing margin yield (defined below in financing margin) at prior period exchange rates. Volume changes are primarily driven by the volume of new and used vehicles sold and leased, the extent to which Ford Credit purchases retail financing and operating lease contracts, the extent to which Ford Credit provides wholesale financing, the sales price of the vehicles financed, the level of dealer inventories, Ford-sponsored special financing programs available exclusively through Ford Credit, and the availability of cost-effective funding |
| ◦ | Mix primarily measures changes in net financing margin driven by period-over-period changes in the composition of Ford Credit’s average managed receivables by product within each region |
*•*Financing Margin:
| ◦ | Financing margin variance is the period-to-period change in financing margin yield multiplied by the present period average managed receivables at prior period exchange rates. This calculation is performed at the product and country level and then aggregated. Financing margin yield equals revenue, less interest expense and scheduled depreciation for the period, divided by average managed receivables for the same period |
| ◦ | Financing margin changes are driven by changes in revenue and interest expense. Changes in revenue are primarily driven by the level of market interest rates, cost assumptions in pricing, mix of business, and competitive environment. Changes in interest expense are primarily driven by the level of market interest rates, borrowing spreads, and asset-liability management |
| • | Credit Loss: |
| ◦ | Credit loss is the change in the provision for credit losses at prior period exchange rates. For analysis purposes, management splits the provision for credit losses into net charge-offs and the change in the allowance for credit losses |
| ◦ | Net charge-off changes are primarily driven by the number of repossessions, severity per repossession, and recoveries. Changes in the allowance for credit losses are primarily driven by changes in historical trends in credit losses and recoveries, changes in the composition and size of Ford Credit’s present portfolio, changes in trends in historical used vehicle values, and changes in economic conditions. For additional information, refer to the “Critical Accounting Estimates - Allowance for Credit Losses” section of Item 7 of Part II of our 2019 Form 10-K Report |
| ◦ | As of January 1, 2019, we changed our accounting method for reporting early termination losses related to customer defaults on operating leases. Previously, we presented the early termination loss reserve on operating leases due to customer default events as part of the allowance for credit losses which reduces Net investment in operating leases on the balance sheet. We now consider the effects of operating lease early terminations when determining depreciation estimates, which are included as part of accumulated depreciation within Net investment in operating leases on the balance sheet. We believe this change in accounting method is preferable as the characterization of these changes is better reflected as depreciation. We have reclassified prior period amounts to reflect these changes. |
| • | Lease Residual: |
| ◦ | Lease residual measures changes to residual performance at prior period exchange rates. For analysis purposes, management splits residual performance primarily into residual gains and losses, and the change in accumulated supplemental depreciation |
| ◦ | Residual gain and loss changes are primarily driven by the number of vehicles returned to Ford Credit and sold, and the difference between the auction value and the depreciated value (which includes both base and accumulated supplemental depreciation) of the vehicles sold. Changes in accumulated supplemental depreciation are primarily driven by changes in Ford Credit’s estimate of the expected auction value at the end of the lease term, and changes in Ford Credit’s estimate of the number of vehicles that will be returned to it and sold. With the change in accounting method discussed above, accumulated depreciation now reflects early termination losses on operating leases due to customer default events for all periods presented. For additional information, refer to the “Critical Accounting Estimates - Accumulated Depreciation on Vehicles Subject to Operating Leases” section of Item 7 of Part II of our 2019 Form 10-K Report |
| • | Exchange: |
| ◦ | Reflects changes in EBT driven by the effects of converting functional currency income to U.S. dollars |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
| • | Other: |
| ◦ | Primarily includes operating expenses, other revenue, insurance expenses, and other income at prior period exchange rates |
| ◦ | Changes in operating expenses are primarily driven by salaried personnel costs, facilities costs, and costs associated with the origination and servicing of customer contracts |
| ◦ | In general, other income changes are primarily driven by changes in earnings related to market valuation adjustments to derivatives (primarily related to movements in interest rates) and other miscellaneous items |
In addition, the following definitions and calculations apply to Ford Credit when used in this report:
| • | Cash (as shown in the Funding Structure, Liquidity, and Leverage tables) – Cash, cash equivalents, and marketable securities, excluding amounts related to insurance activities |
| • | Debt (as shown in the Key Metrics and Leverage tables) - Debt on Ford Credit’s balance sheet. Includes debt issued in securitizations and payable only out of collections on the underlying securitized assets and related enhancements. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions |
| • | Earnings Before Taxes (EBT) – Reflects Ford Credit’s income before income taxes |
| • | Return on Equity (ROE) (as shown in the Key Metrics table) – Reflects return on equity calculated by annualizing net income for the period and dividing by monthly average equity for the period |
| • | Securitization Cash (as shown in the Liquidity table) – Cash held for the benefit of the securitization investors (for example, a reserve fund) |
| • | Securitizations (as shown in the Public Term Funding Plan table) – Public securitization transactions, Rule 144A offerings sponsored by Ford Credit, and widely distributed offerings by Ford Credit Canada |
| • | Term Asset-Backed Securities (as shown in the Funding Structure table) – Obligations issued in securitization transactions that are payable only out of collections on the underlying securitized assets and related enhancements |
| • | Total Net Receivables (as shown in the Key Metrics and Ford Credit Net Receivables Reconciliation To Managed Receivables tables) – Includes finance receivables (retail financing and wholesale) sold for legal purposes and net investment in operating leases included in securitization transactions that do not satisfy the requirements for accounting sale treatment. These receivables and operating leases are reported on Ford Credit’s balance sheet and are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations of Ford Credit or the claims of Ford Credit’s other creditors |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Corporate Other
Corporate Other primarily includes corporate governance expenses, interest income (excluding interest earned on our extended service contract portfolio that is included in our Automotive segment) and gains and losses from our cash, cash equivalents, marketable securities and other investments, and foreign exchange derivatives gains and losses associated with intercompany lending. Corporate governance expenses are primarily administrative, delivering benefit on behalf of the global enterprise, and are not allocated to specific Automotive business units or operating segments. These include expenses related to setting and directing global policy, providing oversight and stewardship, and promoting the Company’s interests. Our full year 2019 Corporate Other results were a $359 million loss, compared with a $373 million loss a year ago. The year-over-year improvement was driven by fair market value adjustments offset partially by higher interest expense on income taxes.
Interest on Debt
Interest on Debt consists of interest expense on Automotive and Other debt. Full year 2019 interest expense on Automotive and Other debt was $1 billion, which is $208 million lower than a year ago, more than explained by lower foreign debt interest expense, reflecting our repayment of higher-cost affiliate debt as discussed in the Liquidity and Capital Resources section below, as well as the extinguishment of Ford Sollers debt.
Taxes
Our Provision for/(Benefit from) income taxes for full year 2019 was a $724 million benefit, reflecting an effective tax rate of 113%. This includes a one-time benefit arising from restructuring in our European operations.
Our full year 2019 adjusted effective tax rate, which excludes special items, was 11.2%.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
RESULTS OF OPERATIONS - 2018
Net income attributable to Ford was $3.7 billion in 2018. Company adjusted EBIT was $7 billion.
Our pre-tax and tax special items were as follows (in millions):
| 2017 | 2018 | |||||||
| Pension and OPEB Gain / (Loss) | ||||||||
| Pension and OPEB remeasurement | $ | (162 | ) | $ | (851 | ) | ||
| Pension curtailment | 354 | 15 | ||||||
| Total pension and OPEB gain / (loss) | $ | 192 | $ | (836 | ) | |||
| Separation-related actions | $ | (297 | ) | $ | (537 | ) | ||
| Other Items | ||||||||
| San Luis Potosi plant cancellation | $ | 41 | $ | — | ||||
| Next-generation Focus footprint change | (225 | ) | (9 | ) | ||||
| Focus cancellation | — | (7 | ) | |||||
| Chariot closure | — | (40 | ) | |||||
| Total other Items | $ | (184 | ) | $ | (56 | ) | ||
| Total pre-tax special items | $ | (289 | ) | $ | (1,429 | ) | ||
| Tax special items | $ | 897 | $ | (88 | ) |
We recorded $1.4 billion of special item charges in 2018, including $851 million for pension and OPEB remeasurement losses and $537 million for separation-related actions from our Global Redesign.
COMPANY KEY METRICS
The table below shows our full year 2018 key metrics for the Company compared with full year 2017.
| 2017 | 2018 | H / (L) | ||||||||||
| GAAP Financial Measures | ||||||||||||
| Cash Flows from Operating Activities ($B) | $ | 18.1 | $ | 15.0 | $ | (3.1 | ) | |||||
| Revenue ($M) | 156,776 | 160,338 | 2 | % | ||||||||
| Net Income ($M) | 7,731 | 3,677 | $ | (4,054 | ) | |||||||
| Net Income Margin (%) | 4.9 | % | 2.3 | % | (2.6) ppts | |||||||
| EPS (Diluted) | $ | 1.93 | $ | 0.92 | $ | (1.01 | ) | |||||
| Non-GAAP Financial Measures***** | ||||||||||||
| Company Adj. Free Cash Flow ($B) | $ | 4.2 | $ | 2.8 | $ | (1.4 | ) | |||||
| Company Adj. EBIT ($M) | 9,638 | 7,002 | (2,636 | ) | ||||||||
| Company Adj. EBIT Margin (%) | 6.1 | % | 4.4 | % | (1.7) ppts | |||||||
| Adjusted EPS (Diluted) | $ | 1.78 | $ | 1.30 | $ | (0.48 | ) | |||||
| Adjusted ROIC (Trailing Four Qtrs) | 11.8 | % | 7.1 | % | (4.7) ppts |
| * | See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. |
For full year 2018, revenue grew 2 percent to $160.3 billion.
In 2018, our diluted earnings per share of Common and Class B stock was $0.92 and our diluted adjusted earnings per share was $1.30.
Net income margin was 2.3 percent and Company adjusted EBIT margin was 4.4 percent for full year 2018, down 2.6 percentage points and 1.7 percentage points, respectively, from 2017.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The table below shows our full year 2018 net income attributable to Ford and Company adjusted EBIT by segment (in millions).
| 2017 | 2018 | H / (L) | ||||||||||
| Automotive | $ | 8,084 | $ | 5,422 | $ | (2,662 | ) | |||||
| Mobility | (299 | ) | (674 | ) | (375 | ) | ||||||
| Ford Credit | 2,310 | 2,627 | 317 | |||||||||
| Corporate Other | (457 | ) | (373 | ) | 84 | |||||||
| Company Adjusted EBIT * | 9,638 | 7,002 | (2,636 | ) | ||||||||
| Interest on Debt | (1,190 | ) | (1,228 | ) | (38 | ) | ||||||
| Special Items | (289 | ) | (1,429 | ) | (1,140 | ) | ||||||
| Taxes / Noncontrolling Interests | (428 | ) | (668 | ) | (240 | ) | ||||||
| Net Income | $ | 7,731 | $ | 3,677 | $ | (4,054 | ) |
| * | See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. |
Net income attributable to Ford and Company adjusted EBIT were driven by our Automotive and Ford Credit segments. Mobility and Corporate Other were losses.
The year-over-year decline in net income was primarily due to the lower Automotive EBIT, the larger mark-to-market adjustment for global pension and OPEB plans due to adverse financial market conditions that occurred late in 2018, and personnel separation-related actions in North America, South America, and Europe.
The lower Automotive EBIT fully explains the $2.6 billion decline in Company adjusted EBIT, compared with 2017.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Automotive Segment
The table below shows our full year 2018 Automotive segment EBIT by business unit (in millions).
| 2017 | 2018 | H / (L) | ||||||||||
| North America | $ | 8,057 | $ | 7,607 | $ | (450 | ) | |||||
| South America | (753 | ) | (678 | ) | 75 | |||||||
| Europe | 367 | (398 | ) | (765 | ) | |||||||
| China | 152 | (1,545 | ) | (1,697 | ) | |||||||
| Asia Pacific Operations | 507 | 443 | (64 | ) | ||||||||
| Middle East & Africa | (246 | ) | (7 | ) | 239 | |||||||
| Automotive Segment | $ | 8,084 | $ | 5,422 | $ | (2,662 | ) |
The tables below and on the following pages provide full year 2018 key metrics and the change in full year 2018 EBIT compared with full year 2017 by causal factor for our Automotive segment and its regional business units. For a description of these causal factors, see Definitions and Information Regarding Automotive Causal Factors.
| 2017 | 2018 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 7.0 | % | 6.3 | % | (0.7) ppts | |||||||
| Wholesale Units (000) | 6,607 | 5,982 | (625 | ) | ||||||||
| Revenue ($M) | $ | 145,653 | $ | 148,294 | $ | 2,641 | ||||||
| EBIT ($M) | 8,084 | 5,422 | (2,662 | ) | ||||||||
| EBIT Margin (%) | 5.6 | % | 3.7 | % | (1.9) ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2017 Full Year EBIT | $ | 8,084 | ||
| Volume / Mix | 1,032 | |||
| Net Pricing | 1,971 | |||
| Cost | (3,965 | ) | ||
| Exchange | (1,010 | ) | ||
| Other | (690 | ) | ||
| 2018 Full Year EBIT | $ | 5,422 |
North America more than explained the Automotive segment’s full year 2018 profitability. Automotive EBIT benefited from the largest improvement in market factors since 2015. Volume / Mix as well as net pricing were improved compared to 2017. This benefit was more than offset by cost, including higher net product costs as we were entering a major product refresh cycle, higher tariff-related effects of $750 million, higher commodities costs of $1.1 billion unrelated to tariff effects, and higher warranty costs, including $775 million of costs related to the Takata recalls announced in 2017 in North America. Exchange was unfavorable and other adverse impacts included lower joint venture equity income in China. Compared to 2017, the decline in Automotive EBIT was essentially due to China and Europe.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
North America
| 2017 | 2018 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 13.9 | % | 13.4 | % | (0.5) ppts | |||||||
| Wholesale Units (000) | 2,967 | 2,920 | (47 | ) | ||||||||
| Revenue ($M) | $ | 93,481 | $ | 96,617 | $ | 3,136 | ||||||
| EBIT ($M) | 8,057 | 7,607 | (450 | ) | ||||||||
| EBIT Margin (%) | 8.6 | % | 7.9 | % | (0.7) ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2017 Full Year EBIT | $ | 8,057 | ||
| Volume / Mix | 1,587 | |||
| Net Pricing | 425 | |||
| Cost | (3,046 | ) | ||
| Exchange | (11 | ) | ||
| Other | 595 | |||
| 2018 Full Year EBIT | $ | 7,607 |
North America’s 2018 EBIT declined $450 million year-over-year, driven by higher net product costs, tariff-related effects, commodities costs, and warranty costs described above under “Automotive Segment.”
South America
| 2017 | 2018 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 8.9% | 8.3% | (0.6) ppts | |||||||||
| Wholesale Units (000) | 373 | 365 | (8 | ) | ||||||||
| Revenue ($M) | $ | 5,841 | $ | 5,288 | $ | (553 | ) | |||||
| EBIT ($M) | (753 | ) | (678 | ) | 75 | |||||||
| EBIT Margin (%) | (12.9)% | (12.8)% | 0.1 ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2017 Full Year EBIT | $ | (753 | ) | |
| Volume / Mix | 61 | |||
| Net Pricing | 821 | |||
| Cost | (423 | ) | ||
| Exchange | (451 | ) | ||
| Other | 67 | |||
| 2018 Full Year EBIT | $ | (678 | ) |
In 2018, South America delivered an EBIT improvement of $75 million compared to 2017.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Europe
| 2017 | 2018 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 7.5% | 7.2% | (0.3) ppts | |||||||||
| Wholesale Units* (000) | 1,582 | 1,533 | (49 | ) | ||||||||
| Revenue ($M) | $ | 29,637 | $ | 31,272 | $ | 1,635 | ||||||
| EBIT ($M) | 367 | (398 | ) | (765 | ) | |||||||
| EBIT Margin (%) | 1.2% | (1.3)% | (2.5) ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2017 Full Year EBIT | $ | 367 | ||
| Volume / Mix | (299 | ) | ||
| Net Pricing | 916 | |||
| Cost | (770 | ) | ||
| Exchange | (418 | ) | ||
| Other | (194 | ) | ||
| 2018 Full Year EBIT | $ | (398 | ) |
| * | Includes Ford brand vehicles produced and sold by our unconsolidated affiliate in Turkey (about 78,000 units in 2017 and 44,000 units in 2018). Revenue does not include these sales. |
Europe saw a year-over-year EBIT decline of $765 million in 2018.
China
| 2017 | 2018 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 4.2% | 2.9% | (1.3) ppts | |||||||||
| Wholesale Units* (000) | 1,235 | 732 | (503 | ) | ||||||||
| Revenue ($M) | $ | 6,709 | $ | 4,619 | $ | (2,090 | ) | |||||
| EBIT ($M) | 152 | (1,545 | ) | (1,697 | ) | |||||||
| EBIT Margin (%) | 2.3% | (33.4)% | (35.7) ppts |
| * | Wholesale units include Ford brand and JMC brand vehicles produced and sold in China by our unconsolidated affiliates. Revenue does not include these sales. |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2017 Full Year EBIT | $ | 152 | ||
| Volume / Mix | (213 | ) | ||
| Net Pricing | (285 | ) | ||
| Cost | 72 | |||
| Joint Ventures | (1,025 | ) | ||
| Exchange | 63 | |||
| Other | (309 | ) | ||
| 2018 Full Year EBIT | $ | (1,545 | ) |
China’s 2018 EBIT declined $1.7 billion from 2017. The decline was driven by a $1.3 billion reduction in net equity income and royalties from our China joint ventures and lower net pricing on Explorer and Lincoln imports.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Asia Pacific Operations
| 2017 | 2018 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 2.0 | % | 1.9 | % | (0.1) ppts | |||||||
| Wholesale Units* (000) | 331 | 323 | (8 | ) | ||||||||
| Revenue ($M) | $ | 7,346 | $ | 7,811 | $ | 465 | ||||||
| EBIT ($M) | 507 | 443 | (64 | ) | ||||||||
| EBIT Margin (%) | 6.9 | % | 5.7 | % | (1.2) ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2017 Full Year EBIT | $ | 507 | ||
| Volume / Mix | (146 | ) | ||
| Net Pricing | 35 | |||
| Cost | 106 | |||
| Exchange | (262 | ) | ||
| Other | 203 | |||
| 2018 Full Year EBIT | $ | 443 |
Asia Pacific Operations’ 2018 EBIT declined $64 million from 2017. The decline was driven by adverse exchange, primarily the Thai baht and Australian dollar.
Middle East & Africa
| 2017 | 2018 | H / (L) | ||||||||||
| Key Metrics | ||||||||||||
| Market Share (%) | 3.8% | 3.0% | (0.8) ppts | |||||||||
| Wholesale Units* (000) | 119 | 109 | (10 | ) | ||||||||
| Revenue ($M) | $ | 2,639 | $ | 2,688 | $ | 49 | ||||||
| EBIT ($M) | (246 | ) | (7 | ) | 239 | |||||||
| EBIT Margin (%) | (9.3 | )% | (0.3)% | 9.0 ppts |
| Change in EBIT by Causal Factor (in millions) | ||||
| 2017 Full Year EBIT | $ | (246 | ) | |
| Volume / Mix | 42 | |||
| Net Pricing | 59 | |||
| Cost | 96 | |||
| Exchange | 68 | |||
| Other | (26 | ) | ||
| 2018 Full Year EBIT | $ | (7 | ) |
Middle East & Africa was nearly breakeven in 2018, with a year-over-year EBIT improvement of $239 million.
Mobility Segment
In our Mobility segment, our 2018 EBIT loss was $674 million, a $375 million higher loss than in 2017, due to increased investments for autonomous vehicle business development and mobility services.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Ford Credit Segment
The tables below provide full year 2018 key metrics and the change in full year 2018 EBT compared with full year 2017 by causal factor for the Ford Credit segment.
| 2017 | 2018 | H / (L) | ||||||||||
| GAAP Financial Measures | ||||||||||||
| Net Receivables ($B) | $ | 143 | $ | 146 | 3 | % | ||||||
| Loss-to-Receivables* (bps) | 62 | 55 | (7 | ) | ||||||||
| Auction Values** | $ | 17,815 | $ | 18,540 | 4 | % | ||||||
| EBT ($M) | 2,310 | 2,627 | $ | 317 | ||||||||
| ROE (%) | 22 | % | 14 | % | (8) ppts | |||||||
| Other Balance Sheet Metrics | ||||||||||||
| Debt ($B) | $ | 138 | $ | 140 | 2 | % | ||||||
| Net Liquidity ($B) | 30 | 27 | (7 | )% | ||||||||
| Financial Statement Leverage (to 1) | 8.7 | 9.4 | 0.7 |
| * | U.S. retail and lease, previously included both retail financing and operating leases. |
| ** | U.S. 36-month off-lease auction values at full year 2018 mix. |
| 2017 | 2018 | H / (L) | |||||||||
| Non-GAAP Financial Measures | |||||||||||
| Managed Receivables* ($B) | $ | 151 | $ | 155 | 3 | % | |||||
| Managed Leverage** (to 1) | 8.0 | 8.8 | 0.8 |
| * | See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. |
| ** | See Liquidity and Capital Resources - Ford Credit Segment section for reconciliation to GAAP. |
| Change in EBT by Causal Factor (in millions) | ||||
| 2017 Full Year EBT | $ | 2,310 | ||
| Volume / Mix | 262 | |||
| Financing Margin | (69 | ) | ||
| Credit Loss | 57 | |||
| Lease Residual | 320 | |||
| Exchange | (9 | ) | ||
| Other | (244 | ) | ||
| 2018 Full Year EBT | $ | 2,627 |
Ford Credit generated a full year 2018 EBT of $2.6 billion, $317 million higher than 2017. Ford Credit’s EBT improvement was led by favorable lease residual performance and favorable volume and mix. This was offset, in part, by unfavorable derivatives market valuation.
Corporate Other
Our full year 2018 Corporate Other results were a $373 million loss, compared with a $457 million loss in 2017. This year-over-year improvement was driven by higher interest income and net gains on cash equivalents and marketable securities, offset partially by an increase in corporate governance costs.
Interest on Debt
Our full year 2018 interest expense on Automotive and Other debt was $1.2 billion, $38 million higher than in 2017, reflecting primarily higher foreign debt interest expense.
Taxes
Our provision for income taxes for full year 2018 was $650 million, resulting in an effective tax rate of 15.0%. Our full year 2018 adjusted effective tax rate, which excludes special items, was 9.7%.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2019, total balance sheet cash, cash equivalents, marketable securities, and restricted cash (including Ford Credit) was $34.9 billion.
We consider our key balance sheet metrics to be: (i) Company cash, which includes cash equivalents, marketable securities, and restricted cash, excluding Ford Credit’s cash, cash equivalents, marketable securities, and restricted cash; and (ii) Company liquidity, which includes Company cash (less restricted cash) and total available committed credit lines, excluding Ford Credit’s total available committed credit lines.
Company excluding Ford Credit
| December 31, 2018 | December 31, 2019 | |||||||
| Balance Sheet ($B) | ||||||||
| Company Cash | $ | 23.1 | $ | 22.3 | ||||
| Liquidity | 34.2 | 35.4 | ||||||
| Debt | $ | (14.1 | ) | $ | (15.3 | ) | ||
| Cash Net of Debt | 8.9 | 7.0 | ||||||
| Pension Funded Status ($B) | ||||||||
| Funded Plans | $ | (0.3 | ) | $ | (0.4 | ) | ||
| Unfunded Plans | (6.0 | ) | (6.4 | ) | ||||
| Total Global Pension | $ | (6.3 | ) | $ | (6.8 | ) | ||
| Total Funded Status OPEB | $ | (5.6 | ) | $ | (6.1 | ) |
Liquidity. One of our key priorities is to maintain a strong balance sheet, while at the same time having resources available to invest in and grow our business. Based on our planning assumptions, we believe we have sufficient liquidity and capital resources to continue to invest in new products and services, pay our debts and obligations as and when they come due, pay a regular dividend, and provide protection within an uncertain global economic environment. We will continue to be opportunistic in evaluating sources of capital while maintaining strong balance sheet discipline.
At December 31, 2019, we had $22.3 billion of Company cash, with 90% held by consolidated entities domiciled in the United States. To be prepared for an economic downturn, we target an ongoing Company cash balance at or above $20 billion. We expect to have periods when we will be above or below this amount due to: (i) future cash flow expectations, such as for investments in future opportunities, capital investments, debt maturities, pension contributions, or restructuring requirements, (ii) short-term timing differences, and (iii) changes in the global economic environment.
Our Company cash investments primarily include U.S. Department of Treasury obligations, federal agency securities, bank time deposits with investment-grade institutions, investment-grade corporate securities, investment-grade commercial paper, and debt obligations of a select group of non-U.S. governments, non-U.S. governmental agencies, and supranational institutions. The average maturity of these investments is approximately one year and adjusted based on market conditions and liquidity needs. We monitor our Company cash levels and average maturity on a daily basis.
In addition to our Company cash target, we also target to maintain an additional $10 billion of liquidity available under our corporate credit facility to further protect our Automotive business against a more severe economic downturn and other potential exogenous shocks. We regularly evaluate the appropriate long-term target for total Company liquidity, which is presently $30 billion including Company cash and the Automotive portion of the corporate credit facility, an amount we believe is sufficient to support our business priorities and to protect our business. At December 31, 2019, we had $35.4 billion of Company liquidity, an increase of $1.2 billion from December 31, 2018, reflecting the addition of our supplemental credit facility (described below in Available Credit Lines). We may reduce our Company cash and liquidity targets over time, based on improved operating performance and changes in our risk profile.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Changes in Company Cash. In managing our business, we classify changes in Company cash into operating and non-operating items. Operating items include: Company adjusted EBIT excluding Ford Credit EBT, capital spending, depreciation and tooling amortization, changes in working capital, Ford Credit distributions, and all other and timing differences. Non-operating items include: Global Redesign (including separation payments), changes in Automotive and Other debt, contributions to funded pension plans, shareholder distributions, and other items (including acquisitions and divestitures and other transactions with Ford Credit).
With respect to “Changes in working capital,” in general we carry relatively low Automotive segment trade receivables compared with our trade payables because the majority of our Automotive wholesales are financed (primarily by Ford Credit) immediately upon sale of vehicles to dealers, which generally occurs shortly after being produced. In contrast, our Automotive trade payables are based primarily on industry-standard production supplier payment terms generally ranging between 30 days to 45 days. As a result, our cash flow tends to improve as wholesale volumes increase, but can deteriorate when wholesale volumes sharply decrease. These working capital balances generally are subject to seasonal changes that can impact cash flow. For example, we typically experience cash flow timing differences associated with inventories and payables due to our annual summer and December shutdown periods when production, and therefore inventories and wholesale volumes, are usually at their lowest levels, while payables continue to come due and be paid. The net impact of this typically results in cash outflows from changes in our working capital balances during these shutdown periods.
Changes in Company cash excluding Ford Credit are summarized below (in billions):
| December 31, 2017 | December 31, 2018 | December 31, 2019 | ||||||||||
| Company Excluding Ford Credit | ||||||||||||
| Company Adjusted EBIT* excluding Ford Credit | $ | 7.3 | $ | 4.4 | $ | 3.4 | ||||||
| Capital spending | $ | (7.0 | ) | $ | (7.7 | ) | $ | (7.6 | ) | |||
| Depreciation and tooling amortization | 5.0 | 5.4 | 5.5 | |||||||||
| Net spending | $ | (2.0 | ) | $ | (2.4 | ) | $ | (2.1 | ) | |||
| Changes in working capital | — | (0.9 | ) | (0.6 | ) | |||||||
| Ford Credit distributions | 0.4 | 2.7 | 2.9 | |||||||||
| All other and timing differences | (1.5 | ) | (1.1 | ) | (0.8 | ) | ||||||
| Company adjusted free cash flow* | $ | 4.2 | $ | 2.8 | $ | 2.8 | ||||||
| Global Redesign (including separations) | (0.3 | ) | (0.2 | ) | (0.9 | ) | ||||||
| Changes in debt | (0.4 | ) | (1.8 | ) | 1.1 | |||||||
| Funded pension contributions | (1.4 | ) | (0.4 | ) | (0.7 | ) | ||||||
| Shareholder distributions | (2.7 | ) | (3.1 | ) | (2.6 | ) | ||||||
| All other (including acquisitions and divestitures) | (0.3 | ) | (0.7 | ) | (0.3 | ) | ||||||
| Change in cash | $ | (1.0 | ) | $ | (3.4 | ) | $ | (0.8 | ) |
| * | See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. |
| * | Note: Numbers may not sum due to rounding. |
As reported on our Consolidated Statement of Cash Flows, our full year 2019 Net cash provided by/(used in) operating activities was up $2.6 billion year-over-year more than explained by higher Ford Credit operating cash flows. Company adjusted free cash flow was flat year-over-year, primarily reflecting improvement in working capital, lower capital spending, and higher distributions from Ford Credit, offset by UAW contract-related bonuses.
Capital spending of $7.6 billion in 2019 was down 2 percent compared with the prior year. Ongoing capital spending to support product development, growth, and infrastructure is expected to decline further and be in the range of $6.8 billion to $7.3 billion in 2020.
Full year 2019 working capital was $617 million negative, more than explained by lower trade payables.
Full year 2019 all other and timing differences were negative $825 million, reflecting assorted timing differences, interest payments on Automotive and Other debt, and cash taxes.
Shareholder distributions (including dividends and anti-dilutive share repurchases) were $2.6 billion in 2019.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Available Credit Lines. Total Company committed credit lines excluding Ford Credit at December 31, 2019 were $14.9 billion, consisting of $10.4 billion of our corporate credit facility, $3.5 billion of our supplemental credit facility, and $1 billion of local credit facilities. At December 31, 2019, the utilized portion of the corporate credit facility was $27 million, representing amounts utilized for letters of credit. At December 31, 2019, the utilized portion of the local credit facilities was $200 million. The utilized portion of our supplemental credit facility is described below.
Lenders under our corporate credit facility have commitments to us totaling $13.4 billion, with 25% of the commitments maturing on April 30, 2022 and 75% of the commitments maturing on April 30, 2024. We have allocated $3 billion of commitments to Ford Credit on an irrevocable and exclusive basis to support its liquidity. We would guarantee any borrowings by Ford Credit under the corporate credit facility.
The corporate credit facility is unsecured and free of material adverse change conditions to borrowing, restrictive financial covenants (for example, interest or fixed-charge coverage ratio, debt-to-equity ratio, and minimum net worth requirements), and credit rating triggers that could limit our ability to obtain funding. The corporate credit facility contains a liquidity covenant that requires us to maintain a minimum of $4 billion in aggregate of domestic cash, cash equivalents, and loaned and marketable securities and/or availability under the facility. If our senior, unsecured, long-term debt does not maintain at least two investment grade ratings from Fitch, Moody’s, and S&P, the guarantees of certain subsidiaries will be required.
In 2019, we entered into a $3.5 billion supplemental credit facility, further strengthening our liquidity and providing additional financial flexibility. The terms and conditions of the supplemental credit facility are consistent with our corporate credit facility; however, unlike our corporate credit facility, the supplemental facility is intended to be utilized and includes a $2 billion revolving facility maturing on April 30, 2022 and a $1.5 billion delayed draw term loan facility maturing on December 31, 2022. We drew all $1.5 billion under the term loan facility in 2019, and all $2 billion under the supplemental revolving facility was available for use as of December 31, 2019.
Debt. As shown in Note 20 of the Notes to the Financial Statements, at December 31, 2019, Company debt excluding Ford Credit was $15.3 billion, including Automotive debt of $14.7 billion. Both balances were $1.1 billion higher than at December 31, 2018, and include the $1.5 billion drawn under the term loan facility described above and our $750 million and $800 million unsecured debt (retail bond) issuances in the second quarter and fourth quarter of 2019, respectively. The impact of these transactions is leverage neutral after taking into consideration debt reduction actions we took in late 2018 and in 2019 to repay higher-cost affiliate debt as well as automotive debt maturities over the next several quarters in 2020.
U.S. Department of Energy (“DOE”) Advanced Technology Vehicle Manufacturer (“ATVM”) Incentive Program. See Note 20 of the Notes to the Financial Statements for information regarding the ATVM loan.
Leverage. We manage Company debt (excluding Ford Credit) levels with a leverage framework to maintain investment grade credit ratings through a normal business cycle. The leverage framework includes a ratio of total company debt (excluding Ford Credit), underfunded pension liabilities, operating leases, and other adjustments, divided by Company adjusted EBIT (excluding Ford Credit EBT), and further adjusted to exclude depreciation and tooling amortization (excluding Ford Credit).
Ford Credit’s leverage is calculated as a separate business as described in the Liquidity - Ford Credit Segment section of Item 7. Ford Credit is self-funding and its debt, which is used to fund its operations, is separate from our Automotive and Other debt.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Ford Credit Segment
Funding Overview. Ford Credit’s primary funding objective is to be well capitalized with a strong balance sheet and ample liquidity to support its financing activities and growth under a variety of market conditions, including short-term and long-term market disruptions. Ford Credit’s funding strategy remains focused on diversification, and it plans to continue accessing a variety of markets, channels, and investors.
Ford Credit’s liquidity profile continues to be diverse, robust, and focused on maintaining liquidity levels that meet its business and funding requirements. Ford Credit annually stress tests its balance sheet and liquidity to ensure that it can continue to meet its financial obligations through economic cycles.
Funding Sources. Ford Credit’s funding sources include primarily unsecured debt and securitization transactions (including other structured financings). Ford Credit issues both short-term and long-term debt that is held by both institutional and retail investors, with long-term debt having an original maturity of more than 12 months. Ford Credit sponsors a number of securitization programs that can be structured to provide both short-term and long-term funding through institutional investors and other financial institutions in the United States and international capital markets.
Ford Credit obtains short-term unsecured funding from the sale of demand notes under its Ford Interest Advantage program, through the Retail Deposit program at FCE Bank plc (“FCE”), and by issuing unsecured commercial paper in the United States and other international markets. At December 31, 2019, the principal amount outstanding of Ford Interest Advantage notes, which may be redeemed at any time at the option of the holders thereof without restriction, and FCE Deposits was $7 billion. At December 31, 2019, the principal amount outstanding of Ford Credit’s unsecured commercial paper was $4 billion, which primarily represents issuance under its commercial paper program in the United States. Ford Credit maintains multiple sources of readily available liquidity to fund the payment of its unsecured short-term debt obligations.
The following table shows funding for Ford Credit’s managed receivables (in billions):
| December 31, 2017 | December 31, 2018 | December 31, 2019 | ||||||||||
| Funding Structure | ||||||||||||
| Term Debt (incl. Bank Borrowings) | $ | 75 | $ | 70 | $ | 73 | ||||||
| Term Asset-Backed Securities | 53 | 60 | 57 | |||||||||
| Commercial Paper | 5 | 4 | 4 | |||||||||
| Ford Interest Advantage / Deposits | 5 | 6 | 7 | |||||||||
| Other | 9 | 10 | 9 | |||||||||
| Equity | 16 | 15 | 14 | |||||||||
| Adjustments for Cash | (12 | ) | (10 | ) | (12 | ) | ||||||
| **Total Managed Receivables *** | $ | 151 | $ | 155 | $ | 152 | ||||||
| Securitized Funding as Percent of Managed Receivables | 35 | % | 39 | % | 38 | % |
| * | See Non-GAAP Financial Measure Reconciliations section for reconciliation to GAAP. |
Managed receivables were $152 billion at December 31, 2019 and were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of managed receivables was 38%. Ford Credit targets a mix of securitized funding between 35% and 40%. The calendarization of the funding plan will result in quarterly fluctuations of the securitized funding percentage.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Public Term Funding Plan. The following table shows Ford Credit’s issuances for full-year 2017, 2018, and 2019, and planned issuances for full-year 2020, excluding short-term funding programs (in billions):
| 2017 Actual | 2018 Actual | 2019 Actual | 2020 Forecast | ||||||||||||
| Unsecured - Currency of issuance (USD equivalent) | |||||||||||||||
| USD | $ | 10 | $ | 6 | $ | 11 | $ 7 - 10 | ||||||||
| CAD | 2 | 1 | 1 | 1 - 2 | |||||||||||
| EUR / GPB | 3 | 4 | 5 | 3 - 4 | |||||||||||
| Other | 1 | 1 | 1 | 1 | |||||||||||
| Total unsecured | $ | 16 | $ | 13 | $ | 17 | $ 12 - 17 | ||||||||
| Securitizations* | 15 | 14 | 14 | 12 - 14 | |||||||||||
| Total public | $ | 32 | $ | 27 | $ | 31 | $ 24 - 31 |
| * | See “Ford Credit Segment” section for definitions. |
| * | Note: Numbers may not sum due to rounding. |
Ford Credit’s total unsecured public term funding plan is categorized by currency of issuance.
In 2019, Ford Credit completed $31 billion of public term funding. For 2020, Ford Credit projects full-year public term funding in the range of $24 billion to $31 billion. Ford Credit plans to continue issuing its eurocurrency-denominated (e.g., euro and sterling) public unsecured debt from the United States. Through February 3, 2020, Ford Credit has completed $3.5 billion of public term issuances.
Liquidity. The following table shows Ford Credit’s liquidity sources and utilization (in billions):
| December 31, 2017 | December 31, 2018 | December 31, 2019 | ||||||||||
| Liquidity Sources* | ||||||||||||
| Cash | $ | 11.8 | $ | 10.2 | $ | 11.7 | ||||||
| Committed asset-backed facilities | 33.4 | 35.4 | 36.6 | |||||||||
| Other unsecured credit facilities | 3.3 | 3.0 | 3.0 | |||||||||
| Ford corporate credit facility allocation | 3.0 | 3.0 | 3.0 | |||||||||
| Total liquidity sources | $ | 51.5 | $ | 51.6 | $ | 54.3 | ||||||
| Utilization of Liquidity* | ||||||||||||
| Securitization cash | $ | (3.8 | ) | $ | (3.0 | ) | $ | (3.5 | ) | |||
| Committed asset-backed facilities | (17.2 | ) | (20.7 | ) | (17.3 | ) | ||||||
| Other unsecured credit facilities | (1.1 | ) | (0.7 | ) | (0.8 | ) | ||||||
| Ford corporate credit facility allocation | — | — | — | |||||||||
| Total utilization of liquidity | $ | (22.1 | ) | $ | (24.4 | ) | $ | (21.6 | ) | |||
| Gross liquidity | $ | 29.4 | $ | 27.2 | $ | 32.7 | ||||||
| Adjustments | 0.1 | 0.1 | 0.4 | |||||||||
| Net liquidity available for use | $ | 29.5 | $ | 27.3 | $ | 33.1 |
| * | See Definitions and Information Regarding Ford Credit Causal Factors section. |
Ford Credit’s net liquidity available for use will fluctuate quarterly based on factors including near-term debt maturities, receivable growth, and timing of funding transactions. Ford Credit targets liquidity of about $25 billion. At December 31, 2019, Ford Credit’s net liquidity available for use was $33.1 billion, $5.8 billion higher than year-end 2018.
Ford Credit’s sources of liquidity include cash, committed asset-backed facilities, unsecured credit facilities, and the corporate credit facility allocation. At December 31, 2019, Ford Credit’s liquidity sources including cash totaled $54.3 billion, up $2.7 billion from year-end 2018.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Ford Credit’s balance sheet is inherently liquid because of the short-term nature of its finance receivables, investment in operating leases, and cash. Ford Credit ensures its cumulative debt maturities have a longer tenor than its cumulative asset maturities. This positive maturity profile is intended to provide Ford Credit with additional liquidity after all of its assets have been funded.
Leverage. Ford Credit uses leverage, or the debt-to-equity ratio, to make various business decisions, including evaluating and establishing pricing for finance receivable and operating lease financing, and assessing its capital structure.
The table below shows the calculation of Ford Credit’s financial statement leverage and managed leverage (in billions):
| December 31, 2017 | December 31, 2018 | December 31, 2019 | ||||||||||
| Leverage Calculation | ||||||||||||
| Debt* | $ | 137.8 | $ | 140.1 | $ | 140.0 | ||||||
| Adjustments for cash | (11.8 | ) | (10.2 | ) | (11.7 | ) | ||||||
| Adjustments for derivative accounting* | — | 0.2 | (0.5 | ) | ||||||||
| Total adjusted debt | $ | 126.0 | $ | 130.1 | $ | 127.8 | ||||||
| Equity** | $ | 15.9 | $ | 15.0 | $ | 14.3 | ||||||
| Adjustments for derivative accounting* | (0.1 | ) | (0.2 | ) | — | |||||||
| Total adjusted equity | $ | 15.8 | $ | 14.8 | $ | 14.3 | ||||||
| Financial statement leverage (to 1) (GAAP) | 8.7 | 9.4 | 9.8 | |||||||||
| Managed leverage (to 1) (Non-GAAP) | 8.0 | 8.8 | 8.9 |
| * | Related primarily to market valuation adjustments to derivatives due to movements in interest rates. Adjustments to debt are related to designated fair value hedges and adjustments to equity are related to retained earnings. |
| ** | Total shareholder’s interest reported on Ford Credit’s balance sheet. |
Ford Credit plans its managed leverage by considering market conditions and the risk characteristics of its business. At December 31, 2019, Ford Credit’s financial statement leverage was 9.8:1, and managed leverage was 8.9:1. Ford Credit targets managed leverage in the range of 8:1 to 9:1.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Total Company
Pension Plan Contributions and Strategy. Our strategy is to reduce the risk of our funded defined benefit pension plans, including minimizing the volatility of the value of our pension assets relative to pension liabilities and the need for unplanned use of capital resources to fund the plans. The strategy reduces balance sheet, cash flow, and income exposures and, in turn, reduces our risk profile. Going forward, we expect to:
| • | Limit our pension contributions to offset ongoing service cost or meet regulatory requirements, if any; |
| • | Maintain target asset allocation of about 80% fixed income investments and 20% growth assets, which better matches plan assets to the characteristics of the liabilities, thereby reducing our net exposure; and |
| • | Evaluate strategic actions to reduce pension liabilities, such as plan design changes, curtailments, or settlements |
| 2018 | 2019 | 2019 B / (W) 2018 | ||||||||||
| Pension Funded Status ($B) | ||||||||||||
| U.S. Plans | $ | (2.5 | ) | $ | (1.4 | ) | $ | 1.1 | ||||
| Non-U.S. Plans | (3.8 | ) | (5.4 | ) | (1.6 | ) | ||||||
| Total Global Pension | $ | (6.3 | ) | $ | (6.8 | ) | $ | (0.5 | ) | |||
| Year-End Discount Rate (Weighted Average) | ||||||||||||
| U.S. Plans | 4.29% | 3.32% | (0.97) ppts | |||||||||
| Non-U.S. Plans | 2.48% | 1.74% | (0.74) ppts | |||||||||
| Actual Asset Returns | ||||||||||||
| U.S. Plans | (3.72)% | 20.43% | 24.15 ppts | |||||||||
| Non-U.S. Plans | (0.10)% | 10.72% | 10.82 ppts | |||||||||
| Pension - Funded Plans Only ($B) | ||||||||||||
| Funded Status | $ | (0.3 | ) | $ | (0.4 | ) | $ | (0.1 | ) | |||
| Contributions for Funded Plans | 0.4 | 0.7 | 0.3 |
Worldwide, our defined benefit pension plans were underfunded by $6.8 billion at December 31, 2019, a deterioration of $536 million from December 31, 2018, primarily as a result of lower discount rates, offset partially by higher asset returns. Of the $6.8 billion underfunded status at year-end 2019, $6.4 billion is associated with our unfunded plans. These are “pay as you go,” with benefits paid from Company cash. These unfunded plans primarily include certain plans in Germany, and U.S. defined benefit plans for senior management.
The fixed income mix in our U.S. plans at year-end 2019 was 81%, three percentage points higher than year-end 2018. The fixed income mix in our non-U.S. plans at year-end 2019 was 86%, three percentage points higher than year-end 2018.
In 2019, we contributed $730 million (including $140 million in discretionary contributions in the United States) to our global funded pension plans, an increase of $293 million compared with 2018. During 2020, we expect to contribute between $600 million and $800 million of cash to our global funded pension plans. We also expect to make about $300 million of benefit payments to participants in unfunded plans. Based on current assumptions and regulations, we do not expect to have a legal requirement to fund our major U.S. plans in 2020. Our global funded plans remain fully funded in aggregate, demonstrating the effectiveness of our de-risking strategy and our commitment to a strong balance sheet.
For a detailed discussion of our pension plans, see Note 18 of the Notes to the Financial Statements.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Return on Invested Capital. We analyze total Company performance using an adjusted Return on Invested Capital (“ROIC”) financial metric based on an after-tax rolling four quarter average. The following table contains the calculation of our ROIC for the years shown (in billions):
| December 31, 2017 | December 31, 2018 | December 31, 2019 | ||||||||||
| Adjusted Net Operating Profit After Cash Tax | ||||||||||||
| Net income attributable to Ford | $ | 7.7 | $ | 3.7 | $ | 0.0 | ||||||
| Add: Noncontrolling interest | 0.0 | 0.0 | 0.0 | |||||||||
| Less: Income tax | (0.4 | ) | (0.7 | ) | 0.7 | |||||||
| Add: Cash tax | (0.6 | ) | (0.8 | ) | (0.6 | ) | ||||||
| Less: Interest on debt | (1.2 | ) | (1.2 | ) | (1.0 | ) | ||||||
| Less: Total pension / OPEB income / (cost) | 0.6 | (0.4 | ) | (2.6 | ) | |||||||
| Add: Pension / OPEB service costs | (1.1 | ) | (1.2 | ) | (1.0 | ) | ||||||
| Net operating profit after cash tax | $ | 7.0 | $ | 4.0 | $ | 1.4 | ||||||
| Less: Special items (excl. pension / OPEB) pre-tax | (0.5 | ) | (0.6 | ) | (3.5 | ) | ||||||
| Adjusted net operating profit after cash tax | $ | 7.5 | $ | 4.6 | $ | 4.8 | ||||||
| Invested Capital | ||||||||||||
| Equity | $ | 35.6 | $ | 36.0 | $ | 33.2 | ||||||
| Redeemable noncontrolling interest | 0.1 | 0.1 | 0.0 | |||||||||
| Debt (excl. Ford Credit) | 16.5 | 14.1 | 15.3 | |||||||||
| Net pension and OPEB liability | 12.8 | 11.9 | 12.9 | |||||||||
| Invested capital (end of period) | $ | 65.0 | $ | 62.1 | $ | 61.4 | ||||||
| Average invested capital | $ | 63.4 | $ | 64.0 | $ | 61.7 | ||||||
| ROIC* | 11.0 | % | 6.2 | % | 2.2 | % | ||||||
| Adjusted ROIC (Non-GAAP)** | 11.8 | % | 7.1 | % | 7.8 | % |
| * | Calculated as the sum of net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters. |
| ** | Calculated as the sum of adjusted net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters. |
| * | Note: Numbers may not sum due to rounding. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
CREDIT RATINGS
Our short-term and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical rating organizations (“NRSROs”) by the U.S. Securities and Exchange Commission: DBRS, Fitch, Moody’s, and S&P.
In several markets, locally-recognized rating agencies also rate us. A credit rating reflects an assessment by the rating agency of the credit risk associated with a corporate entity or particular securities issued by that entity. Rating agencies’ ratings of us are based on information provided by us and other sources. Credit ratings are not recommendations to buy, sell, or hold securities, and are subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency may have different criteria for evaluating company risk and, therefore, ratings should be evaluated independently for each rating agency.
The following rating actions were taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.
| • | On October 25, 2019, S&P downgraded the credit ratings for Ford and Ford Credit (to BBB- from BBB) and revised the outlook to stable from negative. |
The following table summarizes certain of the credit ratings and outlook presently assigned by these four NRSROs:
| NRSRO RATINGS | |||||||||||||
| Ford | Ford Credit | NRSROs | |||||||||||
| Issuer Default / Corporate / Issuer Rating | Long-Term Senior Unsecured | Outlook / Trend | Long-Term Senior Unsecured | Short-Term Unsecured | Outlook / Trend | Minimum Long-Term Investment Grade Rating | |||||||
| DBRS | BBB | BBB | Negative | BBB | R-2M | Negative | BBB (low) | ||||||
| Fitch | BBB | BBB | Negative | BBB | F2 | Negative | BBB- | ||||||
| Moody’s | N/A | Ba1 | Stable | Ba1 | NP | Stable | Baa3 | ||||||
| S&P | BBB- | BBB- | Stable | BBB- | A-3 | Stable | BBB- |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
OUTLOOK
We provided 2020 Company guidance in our earnings release furnished on Form 8-K dated February 4, 2020. The guidance is based on our expectations as of February 4, 2020 and assumes no material change in the current economic environment, including commodities, foreign exchange, and tariffs, and does not include any assumptions for the effects of the coronavirus. Our actual results could differ materially from our guidance due to risks, uncertainties, and other factors, including those set forth in “Risk Factors” in Item 1A of Part I.
| 2020 Guidance | ||
| Total Company | ||
| Adjusted Free Cash Flow* | $2.4 - $3.4 billion | |
| Adjusted EBIT* | $5.6 - $6.6 billion | |
| Adjusted EPS* | $0.94 - $1.20 | |
| Capital spending | $6.8 - $7.3 billion | |
| Pension contributions | $0.6 - $0.8 billion | |
| Regular Dividend** | $0.15 / quarter | |
| Adjusted Effective Tax Rate* | Mid-to-High Teens | |
| Global Redesign EBIT charges | $(0.9) - $(1.4) billion | |
| Global Redesign cash effects | $(0.8) - $(1.3) billion | |
| Ford Credit | ||
| Ford Credit auction values | Down about 5% *** |
| * | When we provide guidance for Adjusted Free Cash Flow, Adjusted EBIT, Adjusted EPS, and Adjusted Effective Tax Rate, we do not provide guidance for the most comparable GAAP measures because, as described in more detail below in “Non-GAAP Measures That Supplement GAAP Measures,” they include items that are difficult to predict with reasonable certainty. |
| ** | Subject to approval by our Board of Directors. |
| *** | On average compared with full year 2019 at constant mix. |
Our guidance assumes at least nominal growth in Automotive, offset by lower EBT from Ford Credit and a modest investment increase in Mobility.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Cautionary Note on Forward-Looking Statements
Statements included or incorporated by reference herein may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on expectations, forecasts, and assumptions by our management and involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those stated, including, without limitation:
| • | Ford’s long-term competitiveness depends on the successful execution of global redesign and fitness actions; |
| • | Ford’s vehicles could be affected by defects that result in delays in new model launches, recall campaigns, or increased warranty costs; |
| • | Ford may not realize the anticipated benefits of existing or pending strategic alliances, joint ventures, acquisitions, divestitures, or new business strategies; |
| • | Operational systems, security systems, and vehicles could be affected by cyber incidents; |
| • | Ford’s production, as well as Ford’s suppliers’ production, could be disrupted by labor issues, natural or man-made disasters, financial distress, production difficulties, or other factors; |
| • | Ford’s ability to maintain a competitive cost structure could be affected by labor or other constraints; |
| • | Ford’s ability to attract and retain talented, diverse, and highly skilled employees is critical to its success and competitiveness; |
| • | Ford’s new and existing products and mobility services are subject to market acceptance; |
| • | Ford’s results are dependent on sales of larger, more profitable vehicles, particularly in the United States; |
| • | With a global footprint, Ford’s results could be adversely affected by economic, geopolitical, protectionist trade policies, or other events, including tariffs and Brexit; |
| • | Industry sales volume in any of our key markets can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event; |
| • | Ford may face increased price competition or a reduction in demand for its products resulting from industry excess capacity, currency fluctuations, competitive actions, or other factors; |
| • | Fluctuations in commodity prices, foreign currency exchange rates, interest rates, and market value of our investments can have a significant effect on results; |
| • | Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors; |
| • | Ford’s receipt of government incentives could be subject to reduction, termination, or clawback; |
| • | Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles; |
| • | Economic and demographic experience for pension and other postretirement benefit plans (e.g., discount rates or investment returns) could be worse than Ford has assumed; |
| • | Pension and other postretirement liabilities could adversely affect Ford’s liquidity and financial condition; |
| • | Ford could experience unusual or significant litigation, governmental investigations, or adverse publicity arising out of alleged defects in products, perceived environmental impacts, or otherwise; |
| • | Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations that may change in the future; |
| • | Ford and Ford Credit could be affected by the continued development of more stringent privacy, data use, and data protection laws and regulations as well as consumer expectations for the safeguarding of personal information; and |
| • | Ford Credit could be subject to new or increased credit regulations, consumer protection regulations, or other regulations. |
We cannot be certain that any expectation, forecast, or assumption made in preparing forward-looking statements will prove accurate, or that any projection will be realized. It is to be expected that there may be differences between projected and actual results. Our forward-looking statements speak only as of the date of their initial issuance, and we do not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events, or otherwise. For additional discussion, see “Item 1A. Risk Factors” above.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
NON-GAAP FINANCIAL MEASURES THAT SUPPLEMENT GAAP MEASURES
We use both generally accepted accounting principles (“GAAP”) and non-GAAP financial measures for operational and financial decision making, and to assess Company and segment business performance. The non-GAAP financial measures listed below are intended to be considered by users as supplemental information to their comparable GAAP financial measures, to aid investors in better understanding our financial results. We believe that these non-GAAP financial measures provide useful perspective on underlying business results and trends, and a means to assess our period-over-period results. These non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. These non-GAAP financial measures may not be the same as similarly titled measures used by other companies due to possible differences in method and in items or events being adjusted.
| • | Company Adjusted EBIT (Most Comparable GAAP Measure: Net Income Attributable to Ford) – Earnings before interest and taxes (EBIT) excludes interest on debt (excl. Ford Credit Debt), taxes, and pre-tax special items. This non-GAAP measure is useful to management and investors because it allows users to evaluate our operating results aligned with industry reporting. Pre-tax special items consist of (i) pension and OPEB remeasurement gains and losses, (ii) significant personnel expenses, dealer-related costs, and facility-related charges stemming from efforts to match production capacity and cost structure to market demand and changing model mix, and (iii) other items that we do not necessarily consider to be indicative of earnings from ongoing operating activities. When we provide guidance for adjusted EBIT, we do not provide guidance on a net income basis because the GAAP measure will include potentially significant special items that have not yet occurred and are difficult to predict with reasonable certainty prior to year-end, including pension and OPEB remeasurement gains and losses. |
| • | Company Adjusted EBIT Margin (Most Comparable GAAP Measure: Company Net Income Margin) – Company Adjusted EBIT margin is Company adjusted EBIT divided by Company revenue. This non-GAAP measure is useful to management and investors because it allows users to evaluate our operating results aligned with industry reporting. |
| • | Adjusted Earnings Per Share (Most Comparable GAAP Measure: Earnings Per Share) – Measure of Company’s diluted net earnings per share adjusted for impact of pre-tax special items (described above), tax special items, and restructuring impacts in noncontrolling interests. The measure provides investors with useful information to evaluate performance of our business excluding items not indicative of the underlying run rate of our business. When we provide guidance for adjusted earnings per share, we do not provide guidance on an earnings per share basis because the GAAP measure will include potentially significant special items that have not yet occurred and are difficult to predict with reasonable certainty prior to year-end, including pension and OPEB remeasurement gains and losses. |
| • | Adjusted Effective Tax Rate (Most Comparable GAAP Measure: Effective Tax Rate) – Measure of Company’s tax rate excluding pre-tax special items (described above) and tax special items. The measure provides an ongoing effective rate which investors find useful for historical comparisons and for forecasting. When we provide guidance for adjusted effective tax rate, we do not provide guidance on an effective tax rate basis because the GAAP measure will include potentially significant special items that have not yet occurred and are difficult to predict with reasonable certainty prior to year-end, including pension and OPEB remeasurement gains and losses. |
| • | Company Adjusted Free Cash Flow (Most Comparable GAAP Measure: Net Cash Provided By / (Used In) Operating Activities) – Measure of Company’s operating cash flow excluding Ford Credit’s operating cash flows. The measure contains elements management considers operating activities, including Automotive and Mobility capital spending, Ford Credit distributions to its parent, and settlement of derivatives. The measure excludes cash outflows for funded pension contributions, global redesign (including separations), and other items that are considered operating cash flows under GAAP. This measure is useful to management and investors because it is consistent with management’s assessment of the Company’s operating cash flow performance. When we provide guidance for Company adjusted free cash flow, we do not provide guidance for net cash provided by/(used in) operating activities because the GAAP measure will include items that are difficult to quantify or predict with reasonable certainty, including cash flows related to the Company's exposures to foreign currency exchange rates and certain commodity prices (separate from any related hedges), Ford Credit's operating cash flows, and cash flows related to special items, including separation payments, each of which individually or in the aggregate could have a significant impact to our net cash provided by/(used in) our operating activities. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
| • | Adjusted Free Cash Flow Conversion (Most Comparable GAAP Measure: Net Cash Provided By / (Used In) Operating Activities divided by Net Income Attributable to Ford) – Adjusted Free Cash Flow Conversion is Company adjusted free cash flow divided by Company Adjusted EBIT. This non-GAAP measure is useful to management and investors because it allows users to evaluate how much of Ford's Adjusted EBIT is converted into cash flow. |
| • | Adjusted ROIC – Calculated as the sum of adjusted net operating profit after cash tax from the last four quarters, divided by the average invested capital over the last four quarters. Adjusted Return on Invested Capital (“ROIC”) provides management and investors with useful information to evaluate the Company’s after-cash tax operating return on its invested capital for the period presented. Adjusted net operating profit after cash tax measures operating results less special items, interest on debt (excl. Ford Credit Debt), and certain pension/OPEB costs. Average invested capital is the sum of average balance sheet equity, debt (excl. Ford Credit Debt), and net pension/OPEB liability. |
| • | Ford Credit Managed Receivables (Most Comparable GAAP Measure: Net Finance Receivables plus Net Investment in Operating Leases) – Measure of Ford Credit’s total net receivables and held-for-sale receivables, excluding unearned interest supplements and residual support, allowance for credit losses, and other (primarily accumulated supplemental depreciation). The measure is useful to management and investors as it closely approximates the customer’s outstanding balance on the receivables, which is the basis for earning revenue. |
| • | Ford Credit Managed Leverage (Most Comparable GAAP Measure: Financial Statement Leverage) – Ford Credit’s debt-to-equity ratio adjusted (i) to exclude cash, cash equivalents, and marketable securities (other than amounts related to insurance activities), and (ii) for derivative accounting. The measure is useful to investors because it reflects the way Ford Credit manages its business. Cash, cash equivalents, and marketable securities are deducted because they generally correspond to excess debt beyond the amount required to support operations and on-balance sheet securitization transactions. Derivative accounting adjustments are made to asset, debt, and equity positions to reflect the impact of interest rate instruments used with Ford Credit’s term-debt issuances and securitization transactions. Ford Credit generally repays its debt obligations as they mature, so the interim effects of changes in market interest rates are excluded in the calculation of managed leverage. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
NON-GAAP FINANCIAL MEASURE RECONCILIATIONS
The following tables show our Non-GAAP financial measure reconciliations. The GAAP reconciliation for Ford Credit Managed Leverage can be found in the Ford Credit Segment section of “Liquidity and Capital Resources.”
Net Income Reconciliation to Adjusted EBIT ($M)
| 2017 | 2018 | 2019 | ||||||||||
| Net income / (loss) attributable to Ford (GAAP) | $ | 7,731 | $ | 3,677 | $ | 47 | ||||||
| Income / (Loss) attributable to noncontrolling interests | 26 | 18 | 37 | |||||||||
| Net income / (loss) | $ | 7,757 | $ | 3,695 | $ | 84 | ||||||
| Less: (Provision for) / Benefit from income taxes | (402 | ) | (650 | ) | 724 | |||||||
| Income / (Loss) before income taxes | $ | 8,159 | $ | 4,345 | $ | (640 | ) | |||||
| Less: Special items pre-tax | (289 | ) | (1,429 | ) | (5,999 | ) | ||||||
| Income / (Loss) before special items pre-tax | $ | 8,448 | $ | 5,774 | $ | 5,359 | ||||||
| Less: Interest on debt | (1,190 | ) | (1,228 | ) | (1,020 | ) | ||||||
| Adjusted EBIT (Non-GAAP) | $ | 9,638 | $ | 7,002 | $ | 6,379 | ||||||
| Memo: | ||||||||||||
| Revenue ($B) | $ | 156.8 | $ | 160.3 | $ | 155.9 | ||||||
| Net income margin (%) | 4.9 | % | 2.3 | % | 0.0 | % | ||||||
| Adjusted EBIT margin (%) | 6.1 | % | 4.4 | % | 4.1 | % |
Earnings per Share Reconciliation to Adjusted Earnings per Share
| 2017 | 2018 | 2019 | ||||||||||
| Diluted After-Tax Results ($M) | ||||||||||||
| Diluted after-tax results (GAAP) | $ | 7,731 | $ | 3,677 | $ | 47 | ||||||
| Less: Impact of pre-tax and tax special items | 608 | (1,517 | ) | (4,676 | ) | |||||||
| Less: Noncontrolling interests impact of Russia restructuring | — | — | (35 | ) | ||||||||
| Adjusted net income - Diluted (Non-GAAP) | $ | 7,123 | $ | 5,194 | $ | 4,758 | ||||||
| Basic and Diluted Shares (M) | ||||||||||||
| Basic shares (average shares outstanding) | 3,975 | 3,974 | 3,972 | |||||||||
| Net dilutive options, unvested restricted stock units, and restricted stock | 23 | 24 | 32 | |||||||||
| Diluted shares | 3,998 | 3,998 | 4,004 | |||||||||
| Earnings per share - diluted (GAAP) | $ | 1.93 | $ | 0.92 | $ | 0.01 | ||||||
| Less: Net impact of adjustments | 0.15 | (0.38 | ) | (1.18 | ) | |||||||
| Adjusted earnings per share - diluted (Non-GAAP) | $ | 1.78 | $ | 1.30 | $ | 1.19 |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Effective Tax Rate Reconciliation to Adjusted Effective Tax Rate
| 2017 | 2018 | 2019 | ||||||||||
| Pre-Tax Results ($M) | ||||||||||||
| Income / (Loss) before income taxes (GAAP) | $ | 8,159 | $ | 4,345 | $ | (640 | ) | |||||
| Less: Impact of special items | (289 | ) | (1,429 | ) | (5,999 | ) | ||||||
| Adjusted earnings before taxes (Non-GAAP) | $ | 8,448 | $ | 5,774 | $ | 5,359 | ||||||
| Taxes ($M) | ||||||||||||
| (Provision for) / Benefit from income taxes (GAAP) | $ | (402 | ) | $ | (650 | ) | $ | 724 | ||||
| Less: Impact of special items | 897 | (88 | ) | 1,323 | ||||||||
| Adjusted (provision for) / benefit from income taxes (Non-GAAP) | $ | (1,299 | ) | $ | (562 | ) | $ | (599 | ) | |||
| Tax Rate (%) | ||||||||||||
| Effective tax rate (GAAP) | 4.9 | % | 15.0 | % | 113.1 | % | ||||||
| Adjusted effective tax rate (Non-GAAP) | 15.4 | % | 9.7 | % | 11.2 | % |
Net Cash Provided by/(Used in) Operating Activities Reconciliation to Company Adjusted Free Cash Flow ($M)
| 2017 | 2018 | 2019 | ||||||||||
| Net cash provided by / (used in) operating activities (GAAP) | $ | 18,096 | $ | 15,022 | $ | 17,639 | ||||||
| Less: Items not included in Company Adjusted Free Cash Flows | ||||||||||||
| Ford Credit operating cash flows | 9,300 | $ | 8,171 | $ | 11,531 | |||||||
| Funded pension contributions | (1,434 | ) | (437 | ) | (730 | ) | ||||||
| Global Redesign (including separations) | (281 | ) | (196 | ) | (911 | ) | ||||||
| Other, net | (52 | ) | 82 | 390 | ||||||||
| Add: Items included in Company Adjusted Free Cash Flows | ||||||||||||
| Automotive and Mobility capital spending | (7,004 | ) | (7,737 | ) | (7,580 | ) | ||||||
| Ford Credit distributions | 406 | 2,723 | 2,900 | |||||||||
| Settlement of derivatives | 217 | 132 | 107 | |||||||||
| Pivotal conversion to a marketable security | — | 263 | — | |||||||||
| Company adjusted free cash flow (Non-GAAP) | $ | 4,182 | $ | 2,781 | $ | 2,785 | ||||||
| Cash conversion (GAAP) | 234 | % | 409 | % | 37,530 | % | ||||||
| Adjusted free cash flow conversion (Non-GAAP) | 43 | % | 40 | % | 44 | % |
| * | Note: Numbers may not sum due to rounding. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Ford Credit Net Receivables Reconciliation to Managed Receivables ($B)
| 2017 | 2018 | 2019 | ||||||||||
| Ford Credit finance receivables, net (GAAP)* | $ | 108.4 | $ | 109.9 | $ | 107.4 | ||||||
| Net investments in operating leases (GAAP)* | 26.7 | 27.4 | 27.6 | |||||||||
| Consolidating adjustments** | 7.6 | 8.9 | 7.0 | |||||||||
| Total net receivables | $ | 142.7 | $ | 146.2 | $ | 142.0 | ||||||
| Held-for-sale receivables (GAAP) | — | — | 1.5 | |||||||||
| Ford Credit unearned interest supplements and residual support | 6.1 | 6.8 | 6.7 | |||||||||
| Allowance for credit losses | 0.6 | 0.6 | 0.5 | |||||||||
| Other, primarily accumulated supplemental depreciation | 1.1 | 1.2 | 1.0 | |||||||||
| Total managed receivables (Non-GAAP) | $ | 150.5 | $ | 154.9 | $ | 151.7 |
| * | Includes finance receivables (retail and wholesale) sold for legal purposes and net investment in operating leases included in securitization transactions that do not satisfy the requirements for accounting sale treatment. These receivables and operating leases are reported on Ford Credit’s balance sheet and are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations of Ford Credit or the claims of Ford Credit’s other creditors. |
| ** | Primarily includes Automotive segment receivables purchased by Ford Credit which are classified to Trade and other receivables on our consolidated balance sheet. Also includes eliminations of intersegment transactions. |
| * | Note: Numbers may not sum due to rounding. |
Previous: Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. · Next: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)