Ford Motor Company (F 3.89%) said on Thursday, April 28 that it earned $2.5 billion in net income in the first quarter, a record result powered by continued strong sales in the U.S. and China and a long-awaited recovery in Europe.
Excluding one-time items, the Blue Oval earned $0.68 per share, more than doubling its year-ago result, on revenue of $37.7 billion. That trounced Wall Street's estimates: Analysts polled by Thomson Reuters had expected earnings of $0.46 per share on revenue of $35.76 billion.
Ford shares rose over 3% in early trading after the news was released on Thursday.
The key numbers
|Q1 2016||Q1 2015|
|Pre-tax profit margin||9.8%||4.8%|
|Automotive-related cash flow||$2.7B||$0.5B|
Ford's calculation of "pre-tax income" differs from GAAP operating income in that Ford excludes special items from its calculation. Special items totaled $186 million in the first quarter of 2016, versus zero in the year-ago period. See below for details.
A look under Ford's hood: How the business units performed
The best way to understand Ford's quarterly earnings reports is to look at results from each of its regional business units. Note that all profit and loss numbers for these units are pre-tax and exclude one-time items.
In North America, Ford earned $3.1 billion, nearly double the $1.6 billion it earned a year ago. The big difference: A year ago, Ford was still ramping up production of its then-new F-150 pickup, and supplies were very tight. Now, with a full pipeline, low gas prices, and low interest rates, Ford and its dealers have been able to make a lot of profitable sales of both its pickups and its SUVs.
Buyers are choosing well-optioned, high-profit versions of these already-profitable products, helping Ford North America to an outstanding 12.9% operating profit margin -- a profit level more commonly associated with luxury brands. While some analysts had expressed concern about a jump in Ford's sales to rental-car fleets in the quarter, traditionally a low-margin sales channel, Ford officials were pleased to address those concerns by noting that its rental-fleet sales are now good, profitable business.
After years of losses, Ford managed a $259 million profit in Europe in 2015 thanks to a strong restructuring effort modeled on the One Ford plan that transformed its North American operation. Now with an improved cost structure and an expanded product lineup, Ford Europe is hitting its stride: The unit earned $434 million in the first quarter, posting an operating profit margin of 6.3%. Going forward, Ford is targeting an operating margin of 6% to 8% in the region, a welcome development for shareholders.
Ford's Asia Pacific region includes its vast and growing operation in China, the world's largest auto market. Ford Asia Pacific earned $220 million in the first quarter, more than doubling its year-ago result, with a solid 8.2% operating profit margin. Ford's equity income from its Chinese joint ventures totaled $443 million, up $83 million from a year ago. While pricing pressures have increased as the Chinese new-car market has slowed, Ford has been able to more than offset that pressure with improvements in "mix" -- or put another way, Ford is selling more of its more-profitable SUVs in China.
The good results in Asia Pacific and Europe are heartening, but South America continues to be a trouble spot for Ford (and in fairness, for most of its rivals as well.) Despite hard-earned improvements in costs, Ford South America lost $256 million in the first quarter as a severe decline in Brazil's new-car market hammered results. Ford is determined to ride out the storm in Brazil and notes that things are looking up elsewhere in South America: Shanks said Ford is encouraged by recent policy decisions in Argentina and hopes for gains there in coming quarters.
Ford Credit, the company's in-house financing arm, earned $514 million in the first quarter, up $31 million from a year ago. Analysts have raised industrywide concerns about lower-quality and longer-term auto loans, but Ford Credit has long been a conservatively run operation and its exposures to subprime and long-term loans remain minimal. It's in good health.
Net cash, debt, and special items
Ford ended the quarter with $24.3 billion in cash, up about $700 million from year-end. Adding in another $10.9 billion in available credit lines, the Blue Oval had $35.2 billion in total liquidity as of quarter-end. On the other side of the ledger, it had just $13 billion in well-structured long-term debt.
Ford took charges of $186 million in one-time items, including charges related to the recent U.S. labor agreement with the United Auto Workers and charges related to its decisions to withdraw from the Japanese and Indonesian markets.
Ford's guidance for 2016
Ford's guidance for the full year remains unchanged. It expects an operating margin in North America of 9.5% or better (versus 10.2% in 2015), a greater loss in South America as noted above, a better profit in Europe than last year's $259 million, a better profit in Asia Pacific than last year's $765 million, and a better profit for Ford Credit than last year's $2.09 billion result.
Fields and Shanks expressed some caution about the second half of 2016, saying that a couple of factors will likely make Ford's second-half results look a bit less impressive. First, costs in North America will rise as Ford ramps up to the launch of its new-for-2017 Super Duty pickups. Second, it expects profits in Europe to be somewhat thinner in the second half because of the natural rhythms of the region's business: European auto factories have long shut-downs for summer vacation and around the winter holidays.
The upshot: Ford is hitting its stride
Simply put, this was an excellent quarter for Ford. After years of overhauls and restructuring efforts, we're finally seeing the results: strong and (hopefully) sustainable profits from Europe and China combined with outstanding profit margins in North America. As long as the U.S. new-car market continues to be strong, I think shareholders can look forward to more outstanding results from the Blue Oval.