Ford’s Earnings Nosedive on Recalls, Product Launch Costs

Revenue fell 6% Y-o-Y to $35.9 billion due to an 8% revenue decline in North America

f1The Ford Motor Co. (NYSE: F), one of the automobile majors making up the “Detroit 3”, announced its Q3 FY16 financial results on October 27th, 2016.

The Dearborn, Michigan-based company engages in the manufacture, distribution, and sale of automobiles and commercial vehicles under the Ford brand and luxury cars under the Lincoln brand. It operates through the Automotive and Financial Services business segments. The Automotive segment operates through four sub-segments: North America, South America, Europe, Middle East & Africa, and Asia Pacific. The Financial Services segment operates through Ford Credit and Other Financial Services sub-segments. Read more about Ford’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Ford’s overall revenue fell 6% Y-o-Y to $35.9 billion, mainly due to an 8% fall in its North American operations revenue to $21.8 billion.

Source: Ford
Source: Ford

Ford’s Q3 FY16 pretax operating margins were down by about half at 5.8% in North America and 3.3% worldwide. Ford’s North American pretax profit fell by a massive $1.6 billion mainly due to higher costs of ramping up the new Super Duty pickup truck, which has an average price of about $62,000; a door-latch recall charge of $600 million; and lower profits from the company’s F-150 pickup truck. During the reporting quarter, Ford stated that a larger portion of F-150 sales were to fleet customers, which are less profitable on average. During Q4 FY16, Ford is cutting production of the F-150 and will idle one shift for a week at a plant in Kansas City, Missouri, to reduce inventories of the truck. The F-150 is Ford’s best-selling vehicle and one of its most profitable models.

On the other hand, Ford’s pretax profit in Europe jumped to $138 million from $9 million during Q3 FY16. However, the falling value of the British pound would cost Ford $140 million in H2 FY16 and $600 million in 2017. Ford is 80% hedged against the currency for 2017.

Source: Ford
Source: Ford

Income from Ford’s Chinese joint ventures rose 26% to $320 million. Despite beating expectations for most metrics in Q3 FY16, Ford’s operating margins took a huge hit due to recall charges and launch expenses of the new Super Duty pickup truck.

Consequently, Ford’s Q3 FY16 net income nosedived 55%, or $1.2 billion, to $961 million, or $0.24 per share, from $2.2 billion, or $0.55 per share, a year earlier, hurt by lower sales in its North American business, higher recall costs, and a complicated introduction of the new pickup truck. Excluding one-time items, earnings came in slightly higher at $0.26 per share, beating average estimates of $0.20 per share. Ford reported negative cash flow of $2 billion during the reporting quarter.

Segmental highlights

Automotive segment: During Q3 FY16, this segment’s revenue fell by $2.5 billion to $33.3 billion, while pre-tax profit fell $1.7 billion to $1.1 billion. In North America, pre-tax profit fell by $1.6 billion to $1.3 billion, with a decline in operating margin to 5.8%. Wholesale volume was down 11% compared to the year-ago period. Lower pre-tax profit was driven by the launch impact of all-new Super Duty and the dealer stock reduction for F-150 versus the increase from a year ago.

Source: Ford
Source: Ford

In South America, Ford reported a decline in all key metrics from a year ago, where the results were negatively impacted by high inflation and unfavorable exchange in Argentina, and lower industry volumes in Brazil. Top-line came in lower with wholesales down 13% and revenue down 15%, reflecting lower industry and share, and unfavorable exchange rates.

In Europe, Ford posted a pre-tax profit of $138 million during Q3 FY16, the best since 2007 and the sixth consecutive profitable quarter. In the Middle East & Africa, Ford reported weaker top-line, profit, and margin metrics due to external factors and performance in the Middle East as well as unfavorable market mix.

Source: Ford
Source: Ford

The lone bright spot in an otherwise dismal earnings report was Asia/Pacific, where Ford earned $131 million in pre-tax profits, helped by the strength of its joint ventures in China. China joint ventures contributed $320 million to pre-tax profit, up $67 million from last year.

Financial Services: Ford Credit, the automaker’s finance arm, contributed $567 million in pre-tax profit, helped by a rich mix of pickups and higher-priced models, including Ford’s Lincoln brand. Ford Credit also offered fewer leases. Leases accounted for 18% of the company’s retail sales in the third quarter, compared to an industry average of 29%, and down from the 22% level Ford Credit reached in the year-ago period.

Source: Ford
Source: Ford

 

Source: Ford
Source: Ford

Ford revealed new automotive financing trends in the U.S., where lower auction values reflect higher supply and higher new vehicle incentives. The reduced lease share reflects the outlook on used vehicles values. More importantly, longer term financing remains a small part of Ford’s business, which augers well for the company in the long-term.

Other highlights

Dividends: Ford distributed $600 million to shareholders in a regular quarterly dividend during Q3 FY16.

Acquisitions: Ford Smart Mobility LLC invested in Zoomcar, the car-sharing leader in India. Ford Smart Mobility also acquired Chariot, a San Francisco-based crowd-sourced shuttle service that serves as the foundation to grow Ford’s dynamic shuttle services globally. The service will provide affordable and convenient transportation to at least five additional markets in the next 18 months.

Driverless car launch: Ford announced its intention to offer a high-volume, fully autonomous SAE level 4-capable vehicle in commercial operation in 2021 in a ride-hailing or ride-sharing service. Ford also is investing in or collaborating with four startups to enhance its autonomous vehicle development and doubling its Silicon Valley team and Palo Alto campus.

New product launches: Launched first all-new F-Series Super Duty in 18 years, as well as the flagship Lincoln Continental. Ford is on track for 12 global product launches in 2016. Lincoln marked the return of its flagship nameplate with the all-new Continental that provides an elegant, effortlessly powerful and serene experience. Technologies include the innovative E-Latch door systems, Lincoln’s Perfect Position seats and a host of rear seat amenities.

With its first-ever major redesign, the 2017 Ford F-Series Super Duty is Ford’s best-selling heavy-duty pickup truck with a new high-strength, military-grade, and aluminum-alloy body. It also features multiple new chassis, powertrain and technology features, it is the toughest, smartest, most capable Super Duty ever.

Software deal with Blackberry: Ford has signed a deal with BlackBerry Ltd (NASDAQ: BBRY) to expand the use of BlackBerry’s QNX secure operating system in its driverless automated vehicles. The deal with Ford is the first BlackBerry has done directly with a major automaker, though it currently sells its technology to auto industry suppliers. Panasonic Automotive currently uses QNX software in the Sync 3 infotainment console that it supplies to Ford. Ford is ramping up its driverless vehicle efforts and plans to offer a fully automated vehicle for commercial ride-sharing in 2021. QNX software is certified for use in autonomous driving and active safety systems.

Outlook for full year FY16

For the full year FY16, Ford expects pre-tax earnings of $10.2 billion and a return to positive cash flow. Adjust EPS is expected to come in lower than $1.46 owing to product recalls and spending on new product launches.

Source: Ford
Source: Ford

Stock Performance

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Ford’s stock finished the day at $11.61, falling 1.11%, at the close on Tuesday, November 1st, 2016, having vacillated between an intraday high of $11.84 and a low of $11.50 during the session. The stock’s trading volume was at 35,587,758 for the day. The Company’s market cap was at $46.01 billion as of Tuesday’s close.

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