Ford's world headquarters in Dearborn, Michigan. Image source: Ford Motor Company.
Ford Motor Company (F +6.56%) reported its second-quarter earnings results on July 28. Here's what investors need to know.
The key numbers
| Metric | Q2 2016 | Q2 2015 |
|---|---|---|
| Revenue | $39.5 billion | $37.3 billion |
| Wholesale deliveries | 1,694,000 | 1,696,000 |
| Pre-tax income | $3.0 billion | $2.7 billion |
| Pre-tax automotive profit margin | 7.7% | 8.4% |
| Net income | $2.0 billion | $2.2billion |
| Earnings per share | $0.49 | $0.54 |
| Automotive cash flow | $4.2 billion | $1.9 billion |
"Automotive profit margin" and "automotive cash flow" include only results from Ford's core business of auto-making. Results from Ford Motor Credit, the company's financial services arm, are excluded from Ford's "automotive" calculations.
What happened at Ford during the quarter
Net income was down by $190 million from a year ago, even as revenue jumped $2.2 billion. Ford attributed the decline to increasing pricing pressures in China, rising incentives in the U.S., and increasing costs around the world that were somewhat offset by an aggressive effort to improve cost performance.
The North America unit earned $2.7 billion before taxes, with an operating margin of 11.3%. Both were down modestly from year-ago results, in part due to rising incentives. CFO Bob Shanks noted that industrywide incentive payouts have been rising modestly, and Ford has kept pace. However, the company's year-over-year increase looks larger than competitors' because its incentives on F-150 pickups were unusually low (due to tight supplies) in the year-ago period.
The South America unit posted a $265 million pre-tax loss for the second quarter, about 43% worse than its loss a year ago. Conditions in the region continue to be extremely challenging. Ford has resisted pressure to cut prices in order to try to preserve profitability, but that has cost the Blue Oval market share. Shanks noted that the regional team delivered $132 million in cost improvements during the quarter, helping to mitigate the loss.
Meanwhile, Ford Europe earned $467 million before taxes, its best second-quarter result ever and up 190% from year-ago results. This is a good story for Ford: Not only is Ford Europe benefiting from an industrywide rise in sales, but it's also benefiting from decisions made a few years ago to improve its "mix" of products. Shanks said that "mix" -- the ratio of more profitable products (SUVs, highly optioned models) to less profitable products -- drove about $182 million of the year-over-year gain.
The company's Middle East and Africa unit lost $65 million before taxes, 41% worse than its year-ago result, as sales dropped 14% amid adverse conditions. Low oil prices, weak currencies, political strife, and labor disruptions in South Africa all posed strong headwinds to Ford's ability to execute in the region during the quarter. Shanks noted that because most of the vehicles Ford sells in the region are imported from elsewhere, the regional team's ability to cut costs is very limited.
Ford Asia-Pacific lost $8 million before taxes, down from $194 million a year ago. Most of the story here is China: Soft second-quarter sales, unfavorable exchange-rate shifts, and a planned 12-week closure of a key China factory all led to a loss despite a 17% increase in revenue. Ford's China joint ventures delivered $296 million in equity income for the second quarter, down 28% from a year ago, as Ford's market share in China dropped to 4.4% from 5.3% a year ago. Shanks noted that the regional team has already begun work to turn things around, and Ford's monthly market share in China rose from 4.1% in April to 4.7% in June.
Ford Credit, the company's in-house financing arm, earned $400 million, down from $506 million a year ago, as declining auction values for smaller vehicles dented the unit's return from the sale of vehicles returned as leases ended. In addition, its credit losses have risen somewhat in the last year. Shanks argued that losses have been unusually low over the past few years and are now returning to levels that were normal before the 2008-2009 recession.
What Ford said
"Overall, it was a strong quarter -- in fact, it was one of our best second quarters ever," CEO Mark Fields said during the earnings call. "But at the same time, we now see a number of risks that the Ford team is working hard to mitigate in order to achieve our full-year guidance."
Looking ahead: Ford's full-year guidance
Ford didn't change its full-year guidance, but it did note that there are "net risks" to its ability to deliver on profit, revenue, and operating margin targets.
Its own guidance calls for adjusted pre-tax results, earnings per share, automotive revenue, and automotive operating margin to all be equal to or higher than its (very strong) 2015 results. While Ford is maintaining that guidance for now, Shanks was blunt: Ford will need to deliver additional cost reductions in the second half of the year in order to achieve its goals.
