Business context and reporting period
Ford Motor Company’s unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the first quarter of 2015. Ford reports Automotive and Financial Services, principally Ford Credit. Management said first-quarter 2016 company pre-tax profit was a record for any quarter.
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q1 2016 | Q1 2015 or comparison |
|---|---|---|
| Total revenue | $37,718 | $33,900 |
| Income before taxes, GAAP | $3,651 | $1,779 |
| Net income attributable to Ford | $2,452 | $1,153 |
| Diluted earnings per share | $0.61 | $0.29 |
| Operating cash flow, consolidated | $4,092 | $2,413 |
| Cash and marketable securities, consolidated, March 31 | $39,473 | $35,176 at December 31, 2015 |
| Automotive cash, March 31 | $24.3 billion | $23.6 billion at December 31, 2015 |
| Automotive debt / net cash, March 31 | $13.0 billion / $11.3 billion | $12.8 billion / $10.8 billion at December 31, 2015 |
| Financial Services debt, March 31 | $128.0 billion | $120.0 billion at December 31, 2015 |
Ford’s adjusted pre-tax results, excluding special items, were $3.837 billion for the company and $3.338 billion for Automotive; Financial Services pre-tax profit was $499 million. Automotive’s adjusted operating margin was a record 9.8%. These adjusted figures are non-GAAP measures; GAAP company pre-tax income was $3.651 billion after $186 million of Automotive special-item charges.
Automotive operating-related cash flow, Ford’s non-GAAP measure, was $2.7 billion versus $0.5 billion. Automotive GAAP operating cash flow was $3.567 billion versus $1.006 billion. Capital spending was $1.511 billion consolidated. Ford declared $0.40 per share in dividends in the quarter, compared with $0.15 a year earlier.
Material changes versus the prior comparable period
- Revenue rose about 11% and Ford-attributable net income more than doubled. Adjusted company pre-tax profit rose to $3.837 billion from $1.779 billion in GAAP pre-tax income in the prior-year quarter; prior-year special items were nil.
- Automotive pre-tax profit excluding special items increased $2.028 billion year over year. North America delivered record pre-tax profit of $3.1 billion; Europe earned $434 million, improving from a loss a year earlier. Asia Pacific pre-tax profit was $220 million, while South America recorded a $256 million loss.
- Automotive revenue increased 11%; wholesale volumes rose 10% and global market share improved 0.2 percentage point to 7.1%. Management attributed improved results primarily to higher volume, favorable mix, and lower costs; lower net pricing partially offset these gains.
- Financial Services pre-tax profit increased $30 million to $499 million. Its credit-loss and insurance provision rose to $141 million from $73 million. Ford Credit’s managed receivables were $132 billion, up 17% year over year.
- Consolidated cash and marketable securities increased from year-end, while Financial Services debt increased by about $8.0 billion. Inventories increased to $9.770 billion from $8.319 billion at year-end.
Outlook, commentary, risks and unusual items
- Ford said its 2016 company and business-unit guidance was unchanged, but the supplied filing text does not provide a clear value for the full-year guidance tables. It expected global GDP growth of 3.1%–3.5%, a strong U.S. dollar, low commodity and oil prices, and continued difficult conditions in Brazil and Russia.
- Ford expected 2016 capital spending of about $7.7 billion, rising to about $9 billion annually by 2020. It expected to contribute about $1.5 billion to funded pension plans and pay about $300 million in unfunded-plan benefits during 2016.
- Ford Credit projected year-end managed receivables of $134 billion–$139 billion and 2016 public term funding of $26 billion–$34 billion. Ford Credit liquidity was $35.1 billion, above its stated $25 billion minimum target; managed leverage was above its 8:1–9:1 target range.
- Credit and lease risks warrant attention: Ford Credit’s loss-to-receivables ratio rose to 44 basis points from 33 basis points, and lease residual performance was adversely affected by expected lower future auction values. Management said credit losses were normalizing toward expectations. Ford expected full-year negative China pricing of 5%–6%.
- Special items included $174 million for separation-related actions and $12 million for Japan and Indonesia market closures. The quarter also reflected a pension-cost estimation-method change that reduced first-quarter service and interest costs by about $145 million versus the prior method.
- Ford estimated reasonably possible losses in excess of accruals for material matters, principally indirect tax and customs matters, at up to about $2.4 billion. It cautioned that litigation outcomes are uncertain. Recorded liabilities for guarantees and limited indemnities were $23 million; maximum potential payments were $240 million. The warranty and field-service-action liability was $4.484 billion.
- Other disclosed risks include weaker vehicle demand or market share, pricing and currency pressure, supplier or production disruptions, pension obligations, recalls and warranty costs, regulation, litigation, and Ford Credit funding, credit-loss, and residual-value risks.
Important facts investors should verify
- Reconcile GAAP results with Ford’s adjusted pre-tax and operating-margin measures, including the $186 million special-item charge and the pension-cost methodology change.
- Review the complete 2016 guidance tables and assumptions: the supplied text says guidance was unchanged but does not show the numerical targets.
- Monitor Ford Credit’s rising receivables, credit-loss provision, loss ratio, residual values, debt, and leverage relative to its targets.
- Assess the potential cash and earnings effects of the disclosed up-to-$2.4 billion indirect tax and customs exposure, warranty obligations, and other litigation or contingencies.
- Evaluate regional performance and exposure, particularly the South America downturn, China pricing, foreign exchange, and Ford’s planned capital spending and pension contributions.