Ford’s FY16 Profit Plunged on Pension Remeasurement

Net income plunged to $4.6 billion from $7.37 billion in 2015

The Ford Motor Co. (NYSE: F), one of the automobile majors making up the “Detroit 3”, announced its Q4 FY16 and full year FY16 financial results on January 26th, 2017.

The Dearborn, Michigan-based company has about 203,000 employees and 62 plants worldwide. Its core business includes designing, manufacturing, marketing and servicing a full line of Ford cars, trucks and SUVs, as well as Lincoln luxury vehicles. To expand its business model, Ford is aggressively pursuing emerging opportunities with investments in electrification, autonomy and mobility.

Ford 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.

Q4 FY16 financial highlights

During Q4 FY16, Ford’s overall revenue fell by $1.6 billion to $38.7 billion due to accounting changes and a $200 million hit for exiting from the small-car factory in San Luis Potosi, Mexico. Ford decided to cancel investments for a $1.6-billion factory in Mexico and expand an existing plant in Michigan, bowing to pressure from Donald Trump to create more domestic jobs. General Motors Company (NYSE: GM) also announced a $1 billion US investment plan involving new models and plant updates, as with Fiat Chrysler Automobiles N.V. (NYSE: FCAU).

Ford’s wholesale volume also fell by 68,000 to 1.7 billion during the reporting quarter. Automotive segment operating cash fell by $0.6 billion to $1.5 billion, while segment operating margin fell 0.4% to 5.7% during the reporting quarter. Despite the revenue fall, the Company was able to narrow its loss to $783 million, or $(0.20) per diluted share, from a loss of $2.65 billion, or $(0.67) per diluted share, in the year ago same period.

FY16 financial highlights

During FY16, Ford’s total revenue was $151.8 billion, up $2.2 billion. Costs and expenses increased to $147.6 billion versus $141.9 billion in the previous year. Ford’s earnings report lists a global market share of 7.6% for FY16, down a tenth from 2015. Ford’s European and Asia/Pacific markets posted their best and second best pre-tax profits, respectively. The South American, Middle East, and African markets all took hits because of unstable economies and other external factors.

As a result, net income plunged to $4.6 billion, or $1.15 per diluted share, from $7.37 billion, or $1.84 per diluted share, in 2015, due to a $3 billion 4Q FY16 pre-tax pension remeasurement. Ford offered its second-best profit sharing payments to more than 56,000 eligible hourly UAW-represented employees and approximately $9,000 for employees on a full-year basis.

Segmental highlights

Automotive segment: During Q4 FY16, this segment’s revenue fell 5% to $36 billion versus $37.9 billion in the year ago corresponding period. Ford’s wholesale volume also fell by 68,000 to 1.7 billion during the reporting quarter. Automotive segment operating cash fell by $0.6 billion to $1.5 billion, while segment operating margin fell 0.4% to 5.7% during the reporting quarter. Pre-tax profits nosedived 12% to $2.04 billion from $2.32 billion in the year ago comparable period.

For FY16, Ford’s Automotive’s revenues grew 1% to $141.5 billion from $140.6 billion in the prior year. Ford’s wholesale volume was almost flat at 6.6 billion during the year. Market share fell to 7.3% from 7.4% in the prior year, while segment operating margin fell 0.1% to 6.7% from 6.8% in the previous year. Pre-tax profits fell 2% to $9.42 billion from $9.56 billion in the year-ago same period.

For FY16, North America generated strong full-year operating margin of 9.7% and pre-tax profit of $9.0 billion, generating second-best profit sharing payments to more than 56,000 eligible hourly UAW-represented employees and approximately $9,000 for employees on a full-year basis. In Q4 FY16, within the US, average retail transaction prices were $1,400 per vehicle higher compared to a year ago, almost four times the industry average increase.

In South America, full year pre-tax losses widened $277 million to $1.1 billion due to a difficult economic environment. In 2017, losses are expected to narrow due to improving market factors. On the brighter side, in Europe, Ford reported record full-year pre-tax profit of $1.2 billion and record operating margin of 4.2%. In Q4 FY16, Ford delivered the 7th consecutive profitable quarter, with pre-tax profit and operating margin up more than 25% from a year ago. For 2017, Ford is expect to remain profitable, although at levels below 2016, mainly due to a weaker sterling and higher costs associated with launch of Fiesta and EcoSport.

In the Middle East & Africa, revenue fell by $0.4 billion to $3.6 billion due to challenging economic conditions. Pre-tax losses widened to $302 million, while market share fell to 4.5% during the year. In the Asia/Pacific, Ford reported its second-best full-year pre-tax profit of $627 million and operating margin of 5.2%. Revenue grew by $1.3 billion to $12 billion due to new vehicle introductions, especially in China. For 2017, Ford expects Asia/Pacific’s profit to improve Y-o-Y due to favorable volume and mix.

Financial Services: Ford Credit, the automaker’s finance arm, delivered solid full-year results, with $1.9 billion in pre-tax profit and continued receivables growth. In Q4 FY16, Ford more than doubled its China contract volume and led the J.D. Power mass-market and luxury US Consumer Financing Satisfaction Study 2016 rankings. For 2017, Ford continues to expect about $1.5 billion in pre-tax profit due to expected lower US auction values.

Ford revealed new automotive financing trends in the US, 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 $3.5 billion to shareholders in FY16, with a plan to provide another $2.8 billion in FY17.

Acquisitions: Ford Smart Mobility acquired Chariot, a San Francisco-based crowd-sourced shuttle service that serves as the foundation to grow Ford’s dynamic shuttle services globally. In Q4 FY16, Chariot was expanded to Austin, Texas and will expand to eight cities by the end of 2017, including at least one global city.

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.

In December 2016, Ford launched the next-generation Fusion Hybrid Autonomous Development Vehicle, bringing its test fleet size to 30 vehicles making it one of the largest in the auto industry. In 2017, the Company plans to triple the size of the fleet for a total of about 90 vehicles.

New product launches: Ford launched first all-new F-Series Super Duty in 18 years, as well as the flagship Lincoln Continental. 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. Lincoln’s sales jumped 24% globally, grew 17% in the US and nearly tripled in China, its largest market, where the Company sold 159,000 vehicles and received third-party recognition for product appeal, quality and customer satisfaction.

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.

Outlook for FY17

Ford expects to have another down year in 2017 as it invests in new and emerging markets and focuses more on its mobility projects, with adjusted EPS and pre-tax results projected lower than that in FY16. Automotive segment’s revenue is expected to remain flat compared to FY16.

Stock Performance

Ford’s stock finished the day at $12.49, gaining 0.97%, at the close on Friday, January 27th, 2017, having vacillated between an intraday high of $12.54 and a low of $12.38 during the session. The stock’s trading volume was at 34,550,165 for the day. The Company’s market cap was at $49.63 billion as of Friday’s close.

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