Ford Motor Company — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are U.S. dollars. Interim statements are unaudited; the independent accountant performed a review, not an audit.
Business context
Ford operates its Automotive and Financial Services businesses and is investing in mobility, electrification, and autonomous vehicles. Beginning in Q2 2016, it reported Automotive, Financial Services, and All Other segments; prior-period segment data was retrospectively adjusted.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $35.9B | $38.1B | $113.1B | $109.3B |
| Income before taxes | $1.387B | $3.291B | $7.913B | $8.356B |
| Net income attributable to Ford | $957M | $2.192B | $5.379B | $5.505B |
| Diluted earnings per share | $0.24 | $0.55 | $1.35 | $1.38 |
- Q3 revenue fell about 6% year over year, while nine-month revenue rose about 4%. Q3 Ford-attributable net income declined about 56%; nine-month income declined about 2%.
- Q3 adjusted pre-tax profit, a non-GAAP measure, was about $1.4B, above management’s approximately $1B guidance. Favorable U.S. marketing-accrual timing and cost performance benefited the quarter; management said these effects would reverse in Q4.
- Automotive Q3 revenue was $33.3B and pre-tax profit was $1.084B, down about $1.7B year over year; reported operating margin was 3.3%. Financial Services pre-tax profit was $552M, including Ford Credit profit of $567M. All Other recorded a $223M pre-tax loss; special items were a $26M pre-tax loss.
- Automotive results reflected lower wholesales and dealer-stock reductions, particularly in North America and Europe, and higher warranty costs related to a recall. North America pre-tax profit fell $1.6B year over year. Europe delivered its best Q3 pre-tax profit since 2007; Asia Pacific reported a record Q3 pre-tax profit. South America remained pressured by inflation, currency weakness, and low industry volumes.
- Ford Credit reported strong Q3 earnings and receivables growth, but higher credit losses and weaker lease-residual performance partially offset favorable volume and mix. Management noted rising credit losses toward more normal levels and lower auction values.
Cash flow, balance sheet, debt, and liquidity
- For the first nine months, consolidated operating cash flow was $16.994B, versus $14.078B a year earlier. Investing cash outflow was $18.058B; financing cash flow was positive $168M. Cash and cash equivalents declined $932M to $13.340B.
- Automotive segment operating cash flow, a company-defined measure, was $4.917B for the nine months. Q3 Automotive operating cash flow was negative $1.954B, which management attributed mainly to lower production and dealer stocks affecting working capital and timing.
- At September 30, total cash, cash equivalents, and marketable securities were $34.165B. Automotive cash was $24.3B; Automotive liquidity, including available committed credit lines, was $35.2B.
- Total debt was $137.224B: $13.147B Automotive debt and $124.077B Financial Services debt. Automotive debt rose about $300M from year-end 2015. Financial Services debt principally funds Ford Credit and should be distinguished from Automotive debt.
- Total assets were $234.963B, total liabilities $203.368B, and Ford-attributable equity $31.484B. Inventories increased to $10.219B from $8.319B at year-end.
- Ford Credit liquidity available for use was $33.3B, above its stated $25B target. Ford Credit managed leverage was 9.2:1, above its 8:1–9:1 target range but trending toward it.
Outlook, risks, and unusual items
- Ford maintained full-year 2016 adjusted pre-tax profit guidance of about $10.2B, described as potentially its second-best result since 2000. It did not provide GAAP net income guidance, citing the difficulty of forecasting potentially significant pension and OPEB remeasurement items.
- Guidance included a North America operating margin of 9%–9.5% (above 9.5% excluding the door-latch recall), a greater South America loss than in 2015, significantly higher Europe profit, a Middle East & Africa loss, lower Asia Pacific profit, and Ford Credit pre-tax profit of about $1.8B.
- Management lowered its 2016 global GDP outlook to 2.9%, citing policy uncertainty, Brexit-related risks, and weakness in trade and business investment. It expected 2016 Automotive capital spending of about $7B and an increase to about $9B annually by 2020.
- Ford reported a $7B total-company pension underfunded status based on year-end 2015 assumptions updated for activity through September; it expected modest deterioration by year-end 2016. Planned 2016 pension contributions and unfunded-plan benefit payments totaled about $1.5B.
- For material non-pattern legal matters, Ford estimated reasonably possible loss in excess of accruals at up to about $2.8B, relating to indirect tax and customs matters. The filing cautions that outcomes can exceed estimates. Warranty and field-service-action obligations were $4.928B at September 30, up from $4.558B at year-end.
- Key stated risks include weaker vehicle demand or market share, pricing pressure, currency and commodity movements, recalls and warranty costs, supplier disruptions, pension obligations, litigation and regulation, cybersecurity, and Ford Credit funding access, credit losses, and lease residual values.
Important facts for investors to verify
- Whether full-year adjusted pre-tax profit guidance was achieved, and how special items affected reported GAAP earnings.
- Recall-related costs, warranty accrual revisions, and the development of the disclosed indirect-tax and customs exposure.
- Automotive cash generation and liquidity, separately from Ford Credit’s debt and funding requirements.
- Ford Credit’s credit-loss trends, used-vehicle auction values, lease residual assumptions, and progress toward its managed-leverage target.
- Changes in pension funding status and contributions, particularly given interest-rate and investment-return sensitivity.