Ford Motor Company — Q1 2017 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Ford reports Automotive, Financial Services, and All Other activities. The interim financial statements received an accountant’s review, not an audit.
Financial performance and position
- Revenue: $39.1 billion, up $1.4 billion (about 4%) from $37.7 billion. Automotive revenue was $36.5 billion; Financial Services revenue was $2.7 billion.
- Profit: Net income attributable to Ford was $1.587 billion, or $0.40 diluted EPS, versus $2.452 billion, or $0.61, a year earlier. Adjusted pre-tax profit was $2.2 billion, down $1.6 billion year over year; adjusted EPS was $0.39, down $0.29.
- Segment results: Automotive pre-tax profit was $1.965 billion versus $3.464 billion; its operating margin was 5.4%. Financial Services pre-tax profit was $466 million versus $499 million, including Ford Credit profit of $481 million. All Other recorded a $212 million loss, compared with a $126 million loss.
- Cash flow and investment: Operating cash flow was $4.336 billion, compared with $4.149 billion. Investing cash outflow was $3.639 billion and financing cash inflow was $1.120 billion. Capital spending was $1.706 billion. Automotive segment operating cash flow, a non-GAAP measure, was $2.016 billion versus $2.727 billion.
- Liquidity: Cash and cash equivalents were $17.823 billion and marketable securities were $22.166 billion at quarter-end. Automotive cash was $28.0 billion and Automotive liquidity was $38.9 billion.
- Debt and balance sheet: Automotive debt was $16.210 billion; Financial Services debt was $129.767 billion, for total debt of $145.977 billion. Total assets were $244.094 billion, total liabilities $213.356 billion, and Ford-attributable equity $30.619 billion. Ford Credit’s managed leverage was 9.1:1, above its 8:1–9:1 target range.
- Dividend: Ford declared $0.20 per share, versus $0.40 in Q1 2016. Q1 2017 distributions included a $200 million supplemental dividend.
Material changes versus Q1 2016
- Revenue increased, but net income attributable to Ford fell by $865 million. Management attributed the lower adjusted pre-tax result primarily to weaker Automotive results, especially in North America.
- Automotive results faced higher warranty and recall costs, engineering investment, product and commodity costs, lower volume, and adverse exchange effects. Favorable mix and pricing partly offset these pressures.
- Global market share was 7.1%, down 0.3 percentage points. Automotive revenue rose 3%, while wholesale volumes and other key metrics declined.
- Ford Credit receivables grew, while its profit declined as expected. U.S. lease residual performance weakened, prompting higher supplemental depreciation.
- The Q1 2017 cash-flow comparison reflects a reclassification of certain share-based compensation tax payments from operating to financing activities following adoption of a new accounting standard.
Outlook, risks, and unusual items
- 2017 outlook: Ford maintained guidance for full-year adjusted pre-tax profit to decline from 2016; management said essentially all of the expected decline occurred in Q1. The balance of the year was expected to be flat to somewhat better than the comparable 2016 period in aggregate. Management expected Q3 to be the lowest-profit quarter, partly due to seasonality and launches of the Expedition and Lincoln Navigator.
- Ford expected 2017 adjusted pre-tax profit of about $9 billion and said it anticipated a stronger 2018, supported by new high-margin vehicles and lower Ford Credit supplemental depreciation. Ford Credit expected about $1.5 billion of 2017 pre-tax profit.
- Regional expectations included continued strong but lower North America results; improved South America losses, mainly in the second half; profitable but lower European results; and higher Asia Pacific profit. Management flagged rising commodity headwinds, particularly steel, and increased focus on cost efficiencies.
- Ford expected about $7 billion of 2017 capital spending and $8–$9 billion annually through 2020. It expected about $2.7 billion of 2017 shareholder distributions and approximately $1.3 billion in 2017 pension contributions and unfunded-plan benefit payments.
- Contingencies: Ford estimated reasonably possible losses above accruals for material matters, principally indirect tax and customs matters, at up to about $2.8 billion. Rental-vehicle resale guarantees had maximum potential payments of $1.2 billion; Ford recorded $374 million as its best estimate of amounts payable. Warranty and field-service liabilities were $5.237 billion.
- Key risks: Industry demand and market-share declines, pricing pressure, commodities and currencies, recalls and warranty costs, lower used-vehicle residual values and higher lease returns, credit losses and funding access, pension obligations, regulation, litigation, supplier disruptions, and cybersecurity. The filing also notes that future results may differ materially from forward-looking statements.
- Ford adopted ASC 606 revenue accounting in 2017. The company estimated a $27 million increase in Q1 net income from the standard, while stating its ongoing net-income impact is expected to be immaterial. Adoption of accounting standards increased opening retained earnings by $566 million for stock-compensation accounting and $36 million for revenue accounting.
Important facts for investors to verify
- Reconcile the $2.2 billion adjusted pre-tax profit and $0.39 adjusted EPS to GAAP results and review the special-item treatment.
- Track whether Ford’s expected full-year profit decline was concentrated in Q1 and whether commodity, warranty, recall, and launch costs evolved as management anticipated.
- Monitor Automotive cash and liquidity, capital spending, debt, dividends, and planned pension contributions; distinguish Automotive debt from Ford Credit’s funding debt.
- Assess Ford Credit’s lease residual assumptions, supplemental depreciation, credit-loss trends, liquidity, and progress toward its managed-leverage target.
- Follow developments in indirect tax and customs matters, rental resale guarantees, warranty liabilities, and other litigation or regulatory exposures.
- Consider that the filing’s interim financial statements were reviewed but not audited, and that management’s guidance and forecasts are subject to the risks described in the filing.