FORD MOTOR CO quarterly report, Q2 FY2017

Business context and reporting period

Ford Motor Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, compared with the same 2016 periods. Its principal businesses are Automotive and vehicle financing and leasing through Financial Services (primarily Ford Credit). Interim results are not necessarily indicative of full-year performance.

Financial performance and position

Amounts are in U.S. dollars; financial amounts are in billions unless otherwise stated.

• Management’s non-GAAP adjusted pre-tax profit was $2.5 billion in Q2, down $486 million year over year; adjusted EPS was $0.56, up $0.04. The Automotive segment earned $2.19 billion pretax, Financial Services $603 million, and All Other lost $287 million. Management separately cited Ford Credit pretax profit of $619 million, its strongest quarter since 2011.
• Automotive operating margin was 5.9% in Q2, lower year over year. Automotive wholesale volume fell 3% while revenue was approximately flat. Financial Services revenue increased to $2.74 billion from $2.55 billion.
• First-half investing cash outflow was $8.86 billion, including $3.26 billion of capital spending. Financing cash outflow was $1.04 billion. Cash and cash equivalents ended June at $16.22 billion.
• At June 30, total cash, cash equivalents, and marketable securities were $39.1 billion. Automotive cash was $28.4 billion and Automotive liquidity was $39.3 billion. Ford Credit reported $28.5 billion of liquidity available for use.
• Automotive debt was $16.2 billion and Financial Services debt was $129.8 billion, for total reported debt of $146.0 billion, up from $143.0 billion at December 31, 2016. Ford Credit managed leverage was 8.8:1; its target range is 8:1 to 9:1.

Material changes versus the prior comparable period

• Q2 revenue rose $368 million and Ford-attributable net income rose $72 million, but adjusted pre-tax profit fell $486 million. The earnings increase therefore did not reflect stronger adjusted pretax performance; the quarter also benefited from a $421 million foreign tax credit benefit.
• Automotive pretax profit declined $641 million. Management attributed the decline mainly to higher commodity costs, particularly steel, unfavorable exchange, and the non-repeat of a prior-year North America asset-sale gain. Favorable mix and net pricing partly offset these pressures.
• First-half revenue increased, while pretax income and Ford-attributable net income declined. First-half operating cash flow also fell by $1.94 billion year over year.
• Ford Credit’s Q2 pretax result improved by $219 million year over year, supported by receivables growth, credit-loss performance, and favorable derivatives valuation.
• Automotive cash rose from $27.2 billion at the end of Q2 2016 to $28.4 billion at June 2017; total debt increased over the first half of 2017.

Outlook, commentary, and risks

• Ford’s 2017 adjusted EPS guidance is $1.65–$1.85. Management cited a roughly 15% adjusted effective tax rate for 2017, reflecting planned foreign tax credit actions, and expects a return to approximately 30% after 2017. The filing says the improved EPS range versus prior implied guidance of $1.58 is more than explained by the lower tax rate.
• Management expects second-half adjusted pretax profit below first-half results and Q3 to be the year’s lowest-profit quarter, citing seasonality and launches of the Expedition and Lincoln Navigator. 2018 guidance was under reassessment.
• For North America, Ford expected full-year 2017 operating margin and profit below 2016, mainly due to commodities, engineering expense, and unfavorable exchange. Europe was expected to remain profitable but below 2016; South America’s loss was expected to improve; and Asia Pacific and Middle East & Africa results were expected to improve.
• Ford expected 2017 capital spending of about $7 billion and shareholder distributions of about $2.7 billion. Ongoing annual capital spending to support development, growth, restructuring, and infrastructure was expected to be about $8 billion through 2020.
• Ford Credit expected full-year pretax profit above $1.5 billion, but second-half profit below the first half. It continued to plan for three-year used-vehicle auction values to fall about 6% for the year at constant mix, despite recent performance exceeding expectations.
• Key exposures include weaker vehicle demand, shifts away from larger vehicles, price competition, currency and commodity movements, production or supplier disruptions, pension funding, recalls and warranty costs, regulatory changes, cybersecurity, and Ford Credit credit losses, used-vehicle residual values, and funding access.
• Warranty and field-service accruals increased to $5.18 billion from $4.96 billion at year-end. Estimated reasonably possible loss in excess of accruals for material legal matters included indirect tax and customs exposure of up to approximately $2.8 billion. Daily-rental resale guarantees had $1.5 billion maximum potential payments and a recorded estimate of $459 million.
• Accounting changes affected comparability: Ford adopted ASC 606 using the modified retrospective method, without restating prior periods. Adoption increased reported Q2 revenue by $312 million and net income by $13 million, and first-half revenue by $734 million and net income by $40 million, versus balances without adoption. Ford said the ongoing net-income impact should be immaterial.

Important facts for investors to verify

• How much of the reported earnings and 2017 adjusted EPS outlook depends on foreign tax credits, and what tax rate may apply after 2017.
• Whether Automotive margins and cash generation can withstand commodity, engineering, warranty, exchange-rate, and demand pressures.
• Ford Credit’s used-vehicle residual values, credit losses, receivables growth, liquidity, and leverage relative to its targets.
• Developments in the indirect tax and customs matters, warranty and recall costs, and rental-vehicle resale guarantees.
• Cash flow, debt, pension funding, capital spending, and shareholder distributions against management’s stated plans.