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| NAV > SEC Filings for NAV > Form 10-Q on 9-Sep-2009 | All Recent SEC Filings |
9-Sep-2009
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, our consolidated financial statements and the accompanying notes contained in the "Financial Statements and Supplementary Data" section of our Annual Report on Form 10-K for the year ended October 31, 2008. Information in this Item is intended to assist the reader in obtaining an understanding of our condensed consolidated financial statements, information about our business segments and how the results of those segments impact our results of operations and financial condition as a whole, and how certain accounting principles affect the company's condensed consolidated financial statements. Our results for interim periods are not necessarily indicative of results for a full year.
Executive Summary
Our Truck, Engine, and Parts segments are heavily influenced by the overall performance of the medium and heavy truck retail markets within the U.S. and Canada (our "Traditional" market), which consists of vehicles in weight classes 6 through 8, including school buses. The "Traditional" market is typically cyclical in nature and cycles can span several years. The current recession has adversely impacted the industry and the market demand for our products remains stagnant with significantly lower volumes than previously expected. Every part of our business, excluding sales to the U.S. military, has been affected by the global recession. We expect 2009 industry volumes to be in the range of 165,000 to 185,000 units. We expect 2010 industry volumes to be gradual and in the range of 175,000 to 215,000 units. Although the industry outlook remains challenging, we have taken actions to mitigate some of these adverse effects through strategic and tactical initiatives that we believe will be key contributors to our future success. Some examples of our initiatives include: extending our commercial product lines to meet military requirements; developing innovative products by pursuing opportunities with emerging technologies to provide our customers with fuel savings and "green" environmental benefits; development of our MaxxForce 15 liter engine; continued enhancement of our MaxxForce engines by improving our exhaust gas recirculation ("EGR") and other technologies to meet 2010 EPA emissions regulations; purchasing businesses and creating alliances to become more competitive worldwide; streamlining our business processes; and continuing to leverage existing structures and facilities.
Recently, there have been some signs of recovery in the economic and financial markets which have stabilized industry demand for our products. In line with industry volumes, for the remainder of fiscal year 2009 we expect:
• Nominal accelerated purchases of vehicles ("pre-buy") in 2009 in anticipation of higher prices due to stricter emissions standards imposed by the U.S. Environmental Protection Agency ("EPA") effective January 1, 2010;
• Lower finance revenues and continued challenges for the customers we finance;
• Significantly higher postretirement benefit expense for the full year 2009 due to a lower expected return resulting from the decline in the asset base during 2008 and increased amortization of cumulative losses; and
• Lower military revenues due to fulfillment of contracts for mine resistant ambush protected ("MRAP") vehicles, partially offset by higher sales to the military of service parts and lower content militarized commercial trucks ("MILCOT").
During the quarter and nine months ended July 31, 2009, the weak "Traditional" truck retail industry has resulted in a lack of customer demand reflected by a decrease of 21,600 and 43,600 units in the third quarter and year-to-date 2009, respectively, as compared to the same periods in 2008. Worldwide Truck segment unit volumes that have been invoiced to customers ("chargeouts") decreased by 37% for the third quarter as compared to the prior year primarily due to a decrease in customer demand. Worldwide Truck segment unit chargeouts decreased by 28% for the year-to-date 2009 as compared to 2008, primarily due to a decrease in customer demand partially offset by chargeouts to the U.S. military. Total Engine segment unit volumes invoiced declined
by 15,700 units and 89,200 units in the quarter and nine months ended July 31, 2009, respectively, when compared to the same periods in 2008, primarily driven by lack of customer demand driven by the global recession. Our Engine segment continues to focus on customer diversification to increase our overall engine volumes. Because of the loss of the future business with Ford, we continue to resolve commercial disputes with certain suppliers and evaluate alternatives to improve our ongoing cost structure. Such actions to improve our ongoing cost structure may subject us to additional discrete charges in future periods, which could be material.
We achieved consolidated Sales and revenues, net ("sales and revenues") of $2.5 billion and $8.3 billion for the quarter and nine months ended July 31, 2009, respectively, as compared to $4.0 billion and $10.9 billion for the same respective periods in 2008. U.S. military sales included in our consolidated sales and revenues were $432 million and $2.3 billion for the quarter and nine months ended July 31, 2009, respectively, as compared to $1.2 billion and $2.8 billion for the same respective periods in 2008. Our overall decline in U.S. military sales is primarily due to lower sales of MRAP units partially offset by higher sales of proprietary parts for the quarter and year-to-date 2009 as compared to the prior periods in 2008. Our Income before income tax, minority interest, and extraordinary gain declined by $339 million in the third quarter of 2009 as compared to the same period in 2008 in line with the decrease in sales. Our Income before income tax, minority interest, and extraordinary gain for year-to-date 2009 decreased by $246 million as compared to the same period in 2008, primarily due to a decline in sales partially offset by the Ford Settlement net of restructuring and related charges and improved performance in our Parts segment primarily due to U.S. military sales.
Our Income (loss) before income tax, minority interest, and extraordinary gain included the following items:
Three Months Ended
July 31,
2009 2008 Change
(in millions of net benefit/(expense))
Ford Settlement net of restructuring and related charges $ 18 $ (10 ) $ 28
Nine Months Ended
July 31,
2009 2008 Change
(in millions of net benefit/(expense))
Ford Settlement net of restructuring and related charges(A) $ 176 $ (10 ) $ 186
Reduction in net postretirement benefits expense due to UAW settlement and curtailment(B) - 42 (42 )
Personnel costs for employee terminations(C) (12 ) - (12 )
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(A) Exclusive of the $385 million recognized in the fourth quarter of 2008 related to impairment and other charges due to lower expected Ford diesel engine volumes.
(B) Postretirement costs of $16 million, related to our commitment to close ICC and IEP, are included in the Ford Settlement net of restructuring and related charges of $176 million.
(C) Severance and other costs representing a reduction in salaried personnel to align with current market conditions.
In the third quarter of 2009, we completed the purchase of certain assets of the recreational vehicle ("RV") manufacturing business of Monaco Coach Corporation. For our new RV business related to the Monaco brands, we created a wholly owned affiliate called Monaco RV, LLC ("Monaco"). Due to the fair market value of the assets acquired exceeding the purchase price, we recognized an extraordinary gain of $23 million. The new Monaco business line will benefit from our purchasing scale with suppliers, leverages our manufacturing and service parts expertise, and extends the reach of our MaxxForce engines. We expect to be in a position to capitalize on the strength of the Monaco products and brand as the RV industry recovers from its lowest point in 30 years.
For the quarter and nine months ended July 31, 2009, we recognized a net loss of $12 million and net income of $234 million, respectively, compared to a net income of $331 million and $477 million for the respective periods in 2008. Our diluted loss per share was $0.16 and diluted earnings per share was $3.27 for the quarter and nine months ended July 31, 2009, respectively, compared to diluted earnings per share of $4.47 and $6.52 for the same respective periods in 2008. For the quarter and nine months ended July 31, 2009, we incurred an expense of $30 million and $32 million, respectively, of state, local, and foreign income taxes compared to an expense of $10 million and $19 million in the same respective periods in 2008.
Results of Operations and Segment Results of Operations
Results of Operations
Three Months Ended
July 31, Percentage
2009 2008 Change Change
(in millions, except per share data and
percentage change)
Sales and revenues, net $ 2,506 $ 3,951 $ (1,445 ) (37 )
Costs of products sold 2,119 3,052 (933 ) (31 )
Selling, general and administrative
expenses 309 386 (77 ) (20 )
Engineering and product development costs 101 108 (7 ) (6 )
Interest expense 56 88 (32 ) (36 )
Other income, net (56 ) (6 ) (50 ) (833 )
Total costs and expenses 2,529 3,628 (1,099 ) (30 )
Equity in income of non-consolidated
affiliates 25 18 7 39
Income before income tax, minority
interest, and extraordinary gain 2 341 (339 ) (99 )
Income tax expense 30 10 20 200
Income (loss) before minority interest and
extraordinary gain (28 ) 331 (359 ) (108 )
Minority interest in net income of
subsidiaries, net of tax (7 ) - (7 ) N.M.
Income (loss) before extraordinary gain (35 ) 331 (366 ) (111 )
Extraordinary gain, net of tax 23 - 23 N.M.
Net income (loss) $ (12 ) $ 331 $ (343 ) (104 )
Diluted earnings per share:
Income (loss) before extraordinary gain $ (0.49 ) $ 4.47 $ (4.96 ) (111 )
Extraordinary gain, net of tax 0.33 - 0.33 N.M.
Net income (loss) $ (0.16) $ 4.47 $ (4.63 ) (104 )
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Not meaningful ("N.M.")
Nine Months Ended
July 31, Percentage
2009 2008 Change Change
(in millions, except per share data and
percentage change)
Sales and revenues, net $ 8,284 $ 10,854 $ (2,570 ) (24)
Costs of products sold 6,737 8,715 (1,978 ) (23)
Restructuring charges 55 - 55 N.M.
Selling, general and administrative
expenses 985 1,071 (86 ) (8)
Engineering and product development
costs 339 289 50 17
Interest expense 206 357 (151 ) (42)
Other income, net 232 11 221 N.M.
Total costs and expenses 8,090 10,421 (2,331 ) (22)
Equity in income of non-consolidated
affiliates (56 ) (63 ) 7 11
Income before income tax, minority
interest, and extraordinary gain 250 496 (246 ) (50)
Income tax expense 32 19 13 68
Income before minority interest and
extraordinary gain 218 477 (259 ) (54)
Minority interest in net income of
subsidiaries, net of tax (7 ) - (7 ) N.M.
Income before extraordinary gain 211 477 (266) (56)
Extraordinary gain, net of tax 23 - 23 N.M.
Net income $ 234 $ 477 $ (243 ) (51)
Diluted earnings per share:
Income before extraordinary gain $ 2.95 $ 6.52 $ (3.57 ) (55)
Extraordinary gain 0.32 - (0.32) N.M.
Net income $ 3.27 $ 6.52 $ (3.25 ) (50)
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Sales and Revenues, net
Our sales and revenues are comprised of the following:
Three Months Ended
July 31, Percentage
2009 2008(A) Change Change
(in millions, except percentage change)
Sales of manufactured products, net-U.S.
and Canada $ 2,072 $ 3,012 $ (940 ) (31 )
Sales of manufactured products, net-Rest
of world ("ROW") 361 864 (503 ) (58 )
Total sales of manufactured products,
net 2,433 3,876 (1,443 ) (37 )
Finance revenues 73 75 (2 ) (3 )
Sales and revenues, net $ 2,506 $ 3,951 $ (1,445 ) (37 )
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(A) In the second quarter of 2009, we changed our methodology of reporting the categorization of sales based on the "selling" location to a "sold to" location. Prior period amounts have been recast to reflect this change in methodology.
Nine Months Ended
July 31, Percentage
2009 2008(A) Change Change
(in millions, except percentage change)
Sales of manufactured products, net-U.S.
and Canada $ 7,106 $ 8,382 $ (1,276 ) (15 )
Sales of manufactured products, net-"ROW" 963 2,207 (1,244 ) (56 )
Total sales of manufactured products, net 8,069 10,589 (2,520 ) (24 )
Finance revenues 215 265 (50 ) (19 )
Sales and revenues, net $ 8,284 $ 10,854 $ (2,570 ) (24 )
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(A) In the second quarter of 2009, we changed our methodology of reporting the categorization of sales based on the "selling" location to a "sold to" location. Prior period amounts have been recast to reflect this change in methodology.
Sales by Segment
Three Months Ended
July 31, Percentage
2009 2008 Change Change
(in millions, except percentage change)
Truck $ 1,505 $ 2,919 $ (1,414 ) (48 )
Engine 633 808 (175 ) (22 )
Parts 491 444 47 11
Financial Services 92 95 (3 ) (3 )
Corporate and Eliminations (215 ) (315 ) 100 N.M.
Sales and revenues, net $ 2,506 $ 3,951 $ (1,445 ) (37 )
Nine Months Ended
July 31, Percentage
2009 2008 Change Change
(in millions, except percentage change)
Truck $ 5,340 $ 7,519 $ (2,179 ) (29 )
Engine 1,734 2,533 (799 ) (32 )
Parts 1,608 1,283 325 25
Financial Services 273 328 (55 ) (17 )
Corporate and Eliminations (671 ) (809 ) 138 N.M.
Sales and revenues, net $ 8,284 $ 10,854 $ (2,570 ) (24 )
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Our Truck segment sales decline for the quarter and year-to-date 2009 was the result of the economic recession in the U.S. and Canada markets as well as a decline in MRAP chargeouts, which resulted in a severe decline in sales in our "Traditional" market. Notwithstanding the decline in our "Traditional" market volumes, we have increased our "Traditional" market share in most of our classes. The increase in our "Traditional" market share was primarily the result of a combination of our deliveries to the U.S. military and increased market penetration of our commercial products. Sales this quarter were also affected by product and customer mix. Our decrease in "ROW" sales for the third quarter and year-to-date 2009 as compared to the same periods in 2008 was primarily due to a decrease in Mexico and Latin America sales as a result of the poor economic conditions, weakening of the local currencies, and dealers delaying purchase of new vehicles for inventory.
Our Engine segment sales were likewise adversely affected by the economic recession in the U.S. and Canada markets which reduced engine sales for the year-to-date 2009 to Ford as well as sales for use in our own vehicles. Diesel engines shipped to Ford in North America increased by 3,900 units and decreased by 46,400 units in the quarter and year-to-date 2009, respectively, as compared to prior periods. We will continue to be the exclusive
producer of diesel engines for Ford F-Series and E-Series vehicles through December 31, 2009, in the U.S. and Canada. The decline in demand for school bus and class 6 and 7 medium trucks was partially offset by expansion of our MaxxForce engines used in our class 8 trucks. Our "ROW" sales declined in the third quarter and year-to-date 2009 as compared to the prior periods in 2008 due to a decrease in demand in South America for our engines as a result of the weak economy, combined with unfavorable exchange rate impact.
Our Parts segment sales were driven by U.S. military MRAP and other military orders, which more than offset the adverse impacts from the economic recession. We have experienced a decline in service repair demand as a result of poor economic conditions which has resulted in a sales decline of our commercial products. The lower tonnage hauled by freight carriers and declining margins has reduced our customers need and ability to buy service parts.
Our Financial Services segment revenues decreased primarily due to a decline in average finance receivables by $906 million and $857 million for the quarter and nine months ended July 31, 2009 as compared to the same period in 2008. The decline in average finance receivables was due to customer payments and a reduction in new financing opportunities resulting from fewer sales of vehicles and components due to reduced customer demand, all driven by the difficult economic environment in the U.S. and Mexico markets. The decline in Financial Services segment revenues for the quarter and year-to-date 2009 as compared to the same periods in 2008 was offset by an increase in securitization income driven by a decrease in discount rates.
Costs and Expenses
Costs of products sold decreased in the third quarter of 2009 as compared to the same period in 2008, primarily due to lower unit volumes and lower direct material commodity costs partially offset by higher warranty costs and lower manufacturing efficiencies. In the third quarter of 2009, we recognized $10 million of additional costs due to MRAP all terrain vehicles (M-ATV) that did not result in a substantial award from the U.S. military and $27 million low volume penalty related to our BDT affiliate for the quarter ended July 31, 2009. Cost of products sold decreased year-to-date 2009, as compared to the same period in 2008 primarily due to lower unit volumes partially offset by higher warranty costs, higher direct material commodity costs and lower manufacturing efficiencies.
Product warranty costs, including extended warranty program costs and net of vendor recoveries ("product warranty costs"), were $63 million and $156 million for the quarter and year-to-date 2009, respectively, as compared to $47 million and $134 million for the same respective periods in 2008. The increase in the third quarter of 2009 versus the same period in 2008 was primarily due to a higher costs per-unit and an increase in pre-existing warranty adjustments of $3 million which was partially offset by lower volumes. The increased year-to-date 2009 warranty expense compared to the same period in 2008 was primarily driven by pre-existing warranty adjustments of $77 million and higher costs per-unit partially offset by a reversal of $75 million of warranty costs related to the Ford Settlement and lower volumes. The increase in pre-existing warranty adjustments and higher costs per-unit were primarily driven by new EPA regulations, which have resulted in rapid product development cycles and have included significant changes from previous engine models. The new emission compliant products are more complex, contain higher material costs and, consequently, repair costs have exceeded those we have historically experienced. In the past, our engines typically had a longer model lifecycle that afforded us the opportunity to refine both the design and manufacturing of the product to reduce both the volume and the severity of warranty claims.
Direct material costs have been impacted by recent industry-wide decreases in commodities, and this is the first quarter we have had the benefit of this decline, although year-to-date 2009 our Truck and Engine segments were not able to fully capitalize on some of these cost savings due to existing contractual obligations. Costs related to steel, precious metals, resins, and petroleum products decreased by $6 million and increased by $58 million during the quarter and nine months ended July 31, 2009, respectively, as compared to an increase of $22 million and $42 million for the same respective periods in 2008 and a total increase of $97 million during the 12 months
ended October 31, 2008. We have continued our efforts to contain direct material costs through a combination of design changes, material substitution, alternate supplier resourcing, global sourcing, and price performance to mitigate direct material price increases we have experienced.
Restructuring charges relate to restructuring activities at our IEP and ICC locations. In the first quarter of 2009, with the changes in Ford's strategy, we announced our intention to close IEP and ICC. In the third quarter of 2009, we announced that at IEP we will continue certain quality control and manufacturing engineering activities and there will be no other business activities aside from these after July 31, 2009. In addition, we announced that we expect to close ICC by December 31, 2009. For the nine months ended July 31, 2009, we recognized $55 million of restructuring charges for contractual obligations, personnel costs for employee termination and related benefits, and charges for postretirement contractual terminations benefits, and a plan curtailment.
Selling, general and administrative expenses, including certain key items, are highlighted in the following table:
Three Months Ended
July 31, Percentage
2009 2008 Change Change
(in millions, except percentage change)
Selling, general and administrative
expenses, excluding items presented
separately below $ 195 $ 248 $ (53 ) (21 )
Professional consulting and auditing fees
related to the SEC filings 6 33 (27 ) (82 )
Postretirement benefits expense allocated
to selling, general and administrative
expenses 52 3 49 N.M.
. . .
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