Ford Motor Company (NYSE:F) said that its second-quarter net income increased 3.7% from a year ago, to $2.05 billion, on a reduction in its tax rate. But its pre-tax profit fell 16%, to $2.51 billion, largely because of unfavorable exchange-rate swings and higher steel costs. Revenue rose about 1%, to $39.6 billion.
Ford earnings: The raw numbers
Here are the key numbers from Ford's second-quarter earnings report.
|Metric||Q2 2017||Q2 2016||Change|
|Revenue||$39.9 billion||$39.5 billion||1%|
|Adjusted pre-tax profit||$2.5 billion||$3.0 billion||(16.2%)|
|Automotive operating margin||5.9%||7.7%||(1.8 ppts)|
|Net income||$2.05 billion||$1.96 billion||3.7%|
|Adjusted earnings per share||$0.56||$0.52||7.7%|
|Automotive operating cash flow||$1.3 billion||$3.2 billion||(59%)|
Ford's quarter in a nutshell
Ford's big profit drivers (SUVs, the F-Series pickups, commercial vehicles) continued to perform well during the second quarter. For the most part, other factors drove the year-over-year financial changes.
Ford's net income rose despite a drop in pre-tax income because of a favorable shift in its effective tax rate, to 15% from 30%. It expects the lower tax rate to be effective through the remainder of 2017.
Ford's $486 million year-over-year drop in pre-tax profit was more than explained by three factors, none a surprise. First, unfavorable movements in exchange rates (particularly in Britain and China) weighed by about $154 million. Second, higher steel prices added about $387 million in costs versus a year ago. Third, Ford sold an equity stake in a company called OEConnection LLC in the second quarter of 2016, realizing about $150 million in profit that wasn't repeated this time around. Those effects were offset somewhat by a strong result for Ford Credit.
Ford's wholesales dropped 3%, a drop that was more than explained by Europe's transition to an all-new version of the Fiesta. Supplies of the Fiesta, Ford's bestseller in the region, were tight during the quarter as a result of the changeover to an all-new 2018 model.
How Ford's business units performed
- Ford North America earned $2.2 billion, down from $2.7 billion a year ago. While wholesale volumes were down slightly, largely on a reduction in rental-fleet sales, Ford's pricing and product mix both improved year over year, and its approach to incentives continues to be well-disciplined. Higher steel costs and increased spending on future products both weighed on results, however, accounting for most of the year-over-year profit decline.
- Ford North America's operating margin was 9%, down from 11.3% a year ago.
- Ford South America lost $185 million, an improvement over a $265 million loss in the second quarter of last year, as the Brazilian new-car market began to recover from a deep recession. Revenue (up 18%, to $1.5 billion) and wholesale shipments (up 12%, to about 93,000) both improved year over year, and Ford's market share rose 0.5 percentage points, to 9.2%.
- Ford Europe earned $88 million, down sharply from a $467 million profit a year ago. The big story here is a 13% decline in sales volumes, but not for the reason you might think: Ford Europe is in the midst of transitioning to an all-new version of its bestselling vehicle, the subcompact Fiesta, and supplies of old and new Fiestas were very tight during the quarter. Unfavorable exchange-rate swings -- specifically, the weakness of the British Pound -- and higher steel costs also weighed.
- Ford Middle East and Africa lost $53 million, up from a $65 million loss a year ago. Wholesales fell 37%, to about 24,000, on weak results from the Middle East related to low oil prices.
- Ford Asia Pacific, which includes the Blue Oval's operations in China, earned $143 million, up from an $8 million loss a year ago. Revenue rose 21%, to $3.4 billion, on a 7% jump in wholesales -- to about 352,000.
- Ford's China joint ventures generated $195 million in equity income, down from $296 million a year ago, a drop that was more than explained by the timing of incentive payments from the Chinese government. Margin fell to 10.7% from 16.1% a year ago, for the same reason.
- Ford Credit earned $619 million, up 55% from a year ago. It's a good story: The business is growing, credit quality remains high (average FICO score of 744), delinquencies remain low at 0.13%, and the values of off-lease Fords at auction were stronger than expected during the quarter.
Special items, debt, and cash
Ford took a $248 million one-time charge against its second-quarter earnings. This reflects the costs of its decision to cancel its plans to produce the next-generation Focus in Mexico and Brazil. (Some of the work to reconfigure Ford's factories to produce the new Focus had begun when the decision was made.) The next Focus will be imported to North and South America from factories in China and Europe, Ford has said.
Ford ended the quarter with $28.4 billion in cash available to its automotive business, up by about $900 million from the beginning of the year. It has an additional $10.9 billion in available credit lines, for total automotive liquidity of $39.3 billion -- a stout reserve.
Against that cash reserve, Ford had $16.2 billion in well-structured long-term debt as of the end of the quarter, up by about $300 million from year-end.
Guidance: Ford cautiously raised its full-year outlook
Ford has decided to express its full-year guidance as adjusted earnings per share (EPS) rather than as full-year adjusted pre-tax profit. It said that it expects its full-year adjusted EPS to come in between $1.65 and $1.85 versus $1.76 in 2016. (Its prior guidance works out to about $1.58, CFO Bob Shanks said.)
That increase at the upper end of the range is a result of the tax-rate improvement. Ford also slightly increased its full-year guidance for Ford Credit on those better-than-expected used-car auction prices. It now expects Ford Credit's full-year adjusted pre-tax profit to be above $1.5 billion, its previous target.