Ford Motor Company — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Figures are unaudited; comparisons are with 2015 unless stated otherwise. Ford reports Automotive, Financial Services, and All Other; it changed its segment presentation in Q2 and retrospectively adjusted prior-period segment data.
Financial results and position
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $39.5 billion | $37.3 billion | $77.2 billion | $71.2 billion |
| Net income attributable to Ford | $1.97 billion | $2.16 billion | $4.42 billion | $3.31 billion |
| Diluted EPS | $0.49 | $0.54 | $1.11 | $0.83 |
| Income before taxes | $2.88 billion | $3.29 billion | $6.53 billion | $5.07 billion |
| Consolidated operating cash flow | Not provided for the quarter in the excerpt | $11.83 billion | $7.62 billion |
- Q2 adjusted pre-tax profit, a non-GAAP measure, was about $3.0 billion; Automotive operating margin was 7.7%. Automotive pre-tax profit was $2.8 billion, down $130 million year over year. Ford Credit reported $400 million of pre-tax profit.
- First-half revenue rose about 8%, while net income attributable to Ford rose about 33%. Q2 revenue rose about 6%, while net income attributable to Ford fell about 9%.
- At June 30, cash and cash equivalents were $17.1 billion and marketable securities were $22.2 billion. Automotive cash was $27.2 billion; Automotive liquidity, including available credit, was $38.2 billion. Automotive net cash was $14.1 billion.
- Total debt was $139.9 billion: $13.1 billion Automotive and $126.8 billion Financial Services. Financial Services debt funds its finance and leasing business and is distinct from Automotive debt.
- Automotive capital spending was $3.2 billion in the first half. Ford Credit managed receivables were $134 billion; available liquidity was $33.8 billion. Ford Credit managed leverage was 9.4:1, above its 8:1–9:1 target range.
Material changes and operating drivers
- Automotive revenue increased 5% in Q2, while wholesale volume was flat and global market share fell 0.3 percentage point to 7.5%. Higher incentives, unfavorable exchange and market factors pressured profit; improved costs partly offset these effects.
- North America remained profitable, but higher incentives and a tougher pricing environment reduced Q2 profit. U.S. retail demand showed signs of softening. South America weakened amid Brazil’s contraction, inflation and currency pressures. Europe improved substantially, with Q2 pre-tax profit of $467 million. Asia Pacific results declined, including lower China share and higher investment costs.
- Ford Credit’s Q2 profit was lower than a year earlier, reflecting weaker lease residuals, higher depreciation on smaller leased vehicles, and higher credit-loss provisions and charge-offs. Management said credit losses were moving up from historically low levels.
- Q2 included $118 million of pre-tax special-item losses; first-half special-item losses were $304 million. Other income included gains on changes in investments in affiliates, including a reported Q2 gain, and Ford cited first-half one-time gains that would not repeat.
- Ford declared $0.15 per share of Q2 dividends. First-half cash dividends paid were $2.18 billion.
Outlook, risks and contingencies
- Ford retained its 2016 guidance for adjusted pre-tax profit and Automotive operating margin to be equal to or better than 2015, but said the guidance was at risk. Management expected a weaker-than-normal second half, particularly Q3, due in part to the Super Duty launch, higher product investment, Brexit effects, commodity and exchange headwinds, and risks in U.S. and China markets. The excerpt does not provide a clear numerical full-year guidance target.
- Management reported $1.6 billion of cost improvements versus plan in the first half and described further actions on production matching, costs, go-to-market plans, and pricing and mix.
- Risks highlighted include U.S. and China pricing and incentives, softer U.S. retail demand, Brexit and sterling exposure, weaker yuan, difficult conditions in parts of the Middle East and Africa, and lower auction values for smaller U.S. lease vehicles. Ford expected China negative pricing for 2016 at the high end of its prior 5%–6% assumption.
- Ford estimated reasonably possible loss in excess of accruals for material matters, primarily indirect tax and customs matters, at up to about $2.8 billion. Warranty and field-service-action obligations were $4.47 billion at June 30. The filing describes other litigation and guarantees; outcomes and potential exposure may be uncertain.
- Global pension underfunding was reported at $7.4 billion and unfunded OPEB at $5.8 billion. Ford expected approximately $1.8 billion of 2016 pension contributions and unfunded-plan benefit payments combined.
- Ford updated its risk discussion for Brexit, including possible adverse effects from currency movements, trade arrangements, market uncertainty, and vehicle demand. The filing also identifies industry, product, supplier, regulatory, currency, credit, residual-value, and market-access risks.
Important facts for investors to verify
- Review the full guidance tables and non-GAAP reconciliations: the extracted filing text does not show the numerical 2016 adjusted pre-tax profit target.
- Track U.S. incentives, retail demand and pricing, China share and negative pricing, and the effect of the Super Duty launch on second-half results.
- Assess Ford Credit’s rising credit losses, lease residual assumptions, managed leverage above target, and funding needs.
- Monitor the $2.8 billion estimated range of reasonably possible losses above accruals for indirect tax and customs matters, warranty costs, and pension funding.
- Distinguish Automotive liquidity and debt from Ford Credit’s separately funded financing operations when evaluating cash, leverage and repayment capacity.