Ford's SUVs help drive transaction prices and profits. Image source: Ford Motor Company.
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"We achieved a solid 2016 net income of $4.6 billion, as well as an adjusted pre-tax company profit of $10.4 billion, which was our second best ever building on the all-time record we had set the year before," said Ford CEO Mark Fields in a press release.
It certainly was a solid year for the folks at Ford Motor Co. (NYSE: F), excluding one-time items, but there were also quite a few interesting data points from the automaker's fourth quarter and full year that are worth pointing out.
Show me the money
During Q4, Ford's average retail transaction prices were $1,400 higher per vehicle year over year, which was almost four times the industry's average gain. A lot of points factor into that figure, including Ford's SUV sales accounting for more of its total U.S. sales figure; increasing premium trim sales; and the F-Series posting its best annual sales figure since 2005.
Ford gets a gold star
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As recently as 2012, Ford's pension plan was underfunded by more than $18 billion. At the end of 2016, its underfunded status was down to $8.9 billion, a dramatic improvement in only a few years that reflects a large sum of voluntary payments. Ford's funded status remains at 96%, despite lower discount rates, which cause pension obligations to rise.
Ford Credit: The good
Ford Credit checked in with a full-year pre-tax profit of $1.9 billion; while that was $207 million below last year's incredibly strong result, it still easily remained Ford's most profitable entity outside its North America region. During Q4, Ford Credit more than doubled its contract volume in China, which suggests an intriguing catalyst going forward, as Chinese consumers have often shied away from financing. If that continues to change in the world's largest automotive market, it will boost Ford Credit's bottom line. Net receivables were up 7% to $130 billion and average placement FICO scores remained a healthy 741.
Ford Credit: The bad
While Ford's finance division will again be profitable in 2017, it's going to take a rather significant step back due to lower U.S. auction values. Basically, when Ford Credit leases a vehicle, it makes an assumption about what its residual value will be upon its return; if residual values decline more steeply than anticipated, it takes a bite out of the finance arm's bottom line. During 2015, the number of vehicles coming off lease was 2.3 million. That number increased to 3.1 million in 2016, and it's expected to rise to 3.4 million this year and again to 3.7 million in 2018. That doesn't spell certain doom for Ford Credit's profits, but it will mean management must be diligent about lessening its reliance on leasing contracts and effectively assuming values of to-be-returned vehicles.
Due for a speed bump?
Ford's record full-year pre-tax profit of $1.2 billion in Europe was rivaled only by the amount of uncertainty that remains in the region as the fallout from Brexit looms. Its Q4 was the seventh consecutive profitable quarter, and operating margins moved 25% higher compared to the prior year. Unfortunately, the automaker won't duplicate last year's strong results in Europe as it braces for a delayed currency impact of roughly $600 million from Brexit.
Light at the end of the tunnel?
As many Ford investors remember, operations in Europe were a profit-burning dumpster fire for years, and it took the company long efforts to douse the flames. However, though Europe has returned to profitability, Ford's South America and Middle East and Africa regions have been hit hard in recent years. In 2016 Ford's pre-tax result in South America was a dismal $1.1 billion loss -- $277 million worse than 2015. Middle East and Africa also posted a pre-tax loss of $302 million. On the bright side, this is hopefully as bad as it gets; management expects profitability to improve in both regions thanks to lower costs, higher net pricing, and other improving market factors.
Celebrate good times
Thanks to another strong full year of pre-tax profits, Ford is spreading the wealth to its eligible hourly United Automobile Workers-represented employees. The more than 56,000 employees will receive the company's second-best profit-sharing payment yet, roughly $9,000 apiece -- not a bad little bonus.
Image source: Ford Motor Company's Q4 presentation.
Although 2016 was a strong full year, there's no question the company faced increased margin and profit pressure during Q4 as sales peaked and costs from manufacturing the all-new Super Duty were felt. That pressure is going to continue in 2017 as Ford accelerates investments in smart mobility projects, emerging markets, and electric and autonomous vehicles.
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