Ford Motor Company — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Ford reports Automotive, Financial Services (primarily Ford Credit), and All Other activities. Interim financial statements are unaudited; PwC conducted a review, not an audit.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $36.451B | $35.943B | $115.450B | $113.146B |
| Income before tax | $1.757B | $1.387B | $6.259B | $7.913B |
| Net income attributable to Ford | $1.564B | $0.957B | $5.193B | $5.379B |
| Diluted EPS | $0.39 | $0.24 | $1.30 | $1.35 |
- Q3 adjusted pre-tax profit was $2.0B, up $561M year over year; adjusted EPS was $0.43, up $0.17. These are non-GAAP measures.
- Q3 Automotive pre-tax profit was $1.668B, including a 5.0% operating margin; Financial Services earned $584M pre-tax. Nine-month segment pre-tax results were $5.824B Automotive and $1.653B Financial Services.
- Q3 revenue increased $508M year over year. Nine-month revenue rose, while pre-tax income and net income attributable to Ford declined from 2016.
- Consolidated operating cash flow for the first nine months was $14.949B, down from $17.052B. Investing cash outflow was $12.542B versus $18.058B; financing cash outflow was $1.165B versus $110M of inflow. Capital spending was $4.936B.
- Cash and cash equivalents were $17.589B and marketable securities $20.492B at September 30. Automotive cash was $26.1B; Automotive liquidity, including available credit lines, was $37B.
- Automotive debt was $16.184B, up $280M from year-end 2016. Financial Services debt was $132.928B, up from $127.063B. Total debt across the segments was $149.112B. Ford Credit’s managed leverage was 8.7:1, within its 8:1–9:1 target.
- Ford’s equity was $33.263B at September 30, up from $29.187B at year-end 2016. The declared dividend was $0.15 per share for Q3; year-to-date declared dividends were $0.50 per share.
Changes, outlook, and management commentary
- Automotive Q3 profit improved $584M year over year, chiefly from North America and Asia Pacific, favorable cost performance, and the non-repeat of a prior-year recall. Lower global share, adverse foreign exchange, and higher commodity costs were offsets. Asia Pacific posted a record Q3 pre-tax profit of $289M.
- Europe recorded an $86M Q3 pre-tax loss, its first quarterly loss since Q1 2015, amid Brexit-related effects, higher commodities, and Fiesta launch costs. Ford expected Europe to return to profitability in Q4 and remain profitable for full-year 2017, but below 2016.
- Ford tightened full-year 2017 adjusted EPS guidance to $1.75–$1.85, described as the upper half of its prior range. It expected North America profit and margin below 2016, South America losses to improve, and Asia Pacific profit to improve.
- Ford Credit expected full-year 2017 pre-tax profit to exceed $2B. It expected three-year auction values to decline about 3% from 2016 at constant mix, though the outlook had improved. Credit losses increased in Q3, primarily due to higher defaults and reserves.
- Management expected 2017 Automotive capital spending of about $7B and annual spending of about $8B through 2020. Expected 2017 funded pension contributions rose to about $1.5B; Ford planned to move about $500M of 2018 funding into Q4 2017 for a cash tax benefit.
- Q3 and nine-month 2017 GAAP effective tax rates were 10.6% and 16.7%. The company recognized $687M of year-to-date foreign tax credit benefit related to planned distributions from certain non-U.S. subsidiaries in anticipation of potential U.S. tax reform.
- Adoption of ASC 606 changed the timing and classification of some revenue and related items; management said ongoing net-income impact was not expected to be material. Ford also adopted share-based compensation and pension-cost presentation changes.
Risks, contingencies, and unusual items
- Ford estimated reasonably possible losses in excess of accruals for material matters, primarily indirect tax and customs matters, at up to approximately $2.8B. Outcomes are uncertain and could exceed amounts accrued or disclosed.
- Daily-rental vehicle resale guarantees had maximum potential payments of $1.2B; Ford recorded a $399M liability as its best estimate of expected payments. Warranty and field-service obligations totaled $5.031B.
- In the Transit Connect customs dispute, the U.S. Court of International Trade ruled for Ford, but Customs appealed in October 2017. If Ford prevails, it may receive a refund of contested duties plus interest.
- Key disclosed risks include weaker vehicle demand or product acceptance, competition and pricing pressure, currency and commodity volatility, recalls and warranty costs, pension exposure, production or supplier disruptions, litigation and regulation, and Ford Credit funding access, credit losses, and lease residual values.
Important facts for investors to verify
- Reconcile GAAP earnings with adjusted pre-tax profit and adjusted EPS, including the effects of special items and tax benefits.
- Track Automotive cash generation, working-capital seasonality, planned capital spending, pension funding, dividends, and the $37B reported Automotive liquidity.
- Monitor Ford Credit receivables growth, credit-loss trends, auction values, managed leverage, and funding needs; its debt is principally related to its financing business.
- Follow Europe’s return to profitability, North America’s year-over-year profit outlook, and the stated regional full-year guidance.
- Assess potential exposure from indirect tax/customs matters, resale guarantees, warranty obligations, and the Transit Connect appeal.