Ford takes $1.9 billion hit in second quarter, but that's far better than expected

Jordyn Grzelewski
The Detroit News

Dearborn — Ford Motor Co. took a $1.9 billion hit to its pretax earnings during the second quarter — far better than the $5 billion the automaker had warned it might lose during the eight-week pandemic shutdown.

But by recording a one-time $3.5 billion gain on its investment with self-driving software Argo AI, the automaker managed to post an overall $1.1 billion profit. That gain was recorded as a "special item" on Ford's balance sheet, chief financial officer Tim Stone told investors Thursday. The automaker would have posted a loss without that item.

An eight-week shutdown due to the pandemic hurt Ford's bottom line, but it fared better than expected.

After a $2 billion net loss and $632 million pretax earnings loss in the first quarter, the automaker had signaled that it expected the second quarter — which bore the brunt of an industry-wide North American manufacturing shutdown that went through mid-May — to be even worse. At that time, Ford projected it would lose $5 billion in the April through June period.

But the Blue Oval, not counting the Argo investment, posted a 35-cent per share loss, beating Wall Street's prediction of a $1.17 per share loss. Ford shares rose 3.1% to $6.95 on the news in after-hours trading. Shares are down more than 25% so far this year.

Ford executives attributed the better-than-expected results to strong operational execution, the automaker's focus on safely restarting manufacturing plants, efforts to reduce costs and a favorable pricing environment, among other factors.

“I could not be prouder of the Ford team’s optimism and effectiveness as we manage through this pandemic,” Ford President and CEO Jim Hackett said in a statement. “We delivered a strong Q2 while keeping each other safe, caring for customers and neighbors, and assuring tomorrow.”

For the full year, however, Ford expects to post a net loss. The automaker is projecting a profit of $500 million to $1.5 billion in the third quarter, but a net loss in the fourth quarter, due in part to costs associated with the changeover to the next generation of the new F-150 that launches later this year. 

Ford said it burned through $5.3 billion in the second quarter amid the coronavirus pandemic. The Blue Oval's revenue was down to $19.4 billion from $38.9 billion in the second quarter of 2019.

Ford has taken a number of steps to shore up its balance sheet and preserve cash to get through the crisis, including drawing down $15.4 billion from existing credit lines, issuing $8 billion in bonds, temporarily suspending its quarterly dividend and share buybacks, lowering operating costs, reducing capital expenditures and deferring portions of executive salaries.

The automaker announced Thursday that it paid off $7.7 billion on its revolving credit facilities earlier this week, and extended $4.8 billion of its three-year revolving credit lines. Ford executives said Thursday the company is in a strong position with more than $39 billion in cash. 

The company said that should be enough to meet a target cash balance of $20 billion through the rest of the year, even if demand drops off or plants have to close again.

The Blue Oval's sales in the second quarter were down 33% from the previous year, it reported earlier this month. Sales for all of the Detroit Three were down by at least one-third.

One bright spot for U.S. automakers, including Ford, is that retail sales of profit-rich SUVs and trucks have held up relatively well. Sales of Ford's F-Series truck lineup were down only 22.7%. And Ford's Explorer SUV was the best-selling midsize SUV in the second quarter, posting a 12% sales increase over last year.

Industry analysts noted other bright spots for the automaker, including upping its average transaction price and increasing its market share, to 14.9%.

But the onset of the pandemic amid an $11 billion global restructuring by Ford and ahead of numerous new product launches "put a damper on what should have been flashy and exciting new introductions," Jessica Caldwell, executive director of insights for Inc. said in a pre-earnings statement.

"After struggling with an aging product lineup for quite some time, the upcoming year was poised to be a bright one for Ford," she said. "And although the product launches are still happening, it's unfortunate that they're happening amidst uncertain consumer demand and the other challenges that COVID-19 has brought to Ford's production facilities around the world."

Key to Ford's financial recovery will be numerous new products that are slated to roll off assembly lines in the coming months, including its next-generation F-150 scheduled to go on sale later this year and the much-anticipated Bronco SUV that will return to production next year after a nearly quarter-century absence. Analysts and investors have said it is critical these launches go off without a hitch — especially after the botched launch of the 2020 Explorer, which was delayed by months with faulty seats, loose wiring harnesses and digital displays with buggy software.

Ford executives announced Thursday that the company so far has gotten 150,000 reservations for the Bronco, far exceeding what it had expected. Demand has been so strong, the company is looking at how to scale up production at the Michigan Assembly Plant in Wayne where the full-size Bronco will be built. Jim Farley, Ford chief operating officer, said a third shift may be added — but, he cautioned, "We have a lot of work to do, because these are reservations, not orders yet."

It is crucial for Ford to have a smooth rollout of the Bronco, said David Kudla, CEO of Grand Blanc-based financial advisory firm Mainstay Capital Management. "After a bruising Explorer launch last year, the execution of the Bronco, one of the most anticipated and talked about product releases for the company in recent memory, has got to be flawless," he said in a pre-earnings note.

And, because Ford is in the middle of a global overhaul of its business, it "will continue to face obstacles, even more so than other automakers," he said.

Ford executives said Thursday that the company is on track with the global redesign, and so far has achieved about $1 billion in structural cost improvements since the plan went into effect in late 2018.

Additionally, executives said the Blue Oval remains committed to investing $11 billion in electric-vehicle development by 2022, and is about halfway through that plan. 

Asked on a call with investors Thursday why Ford has not opted to produce its own electric-vehicle batteries, as GM has, Hackett said the company did a deep dive into that question months ago but concluded the supply chain is strong enough that it would not make sense for Ford to operate its own battery plant.

The Detroit Three have been scrambling to fill dealership inventories, which were depleted during the production shutdown, as retail demand — buoyed by significant incentives — rebounded more robustly than had been expected at the outset of the pandemic. All three have returned to pre-shutdown production levels, but have struggled with high rates of absenteeism and other disruptions at manufacturing plants. 

At the end of the second quarter, Ford had a 75-day supply of vehicles on dealer lots, down 5.2% from last year, according to Edmunds data. This month, Ford has more than 90 days' supply, according to Cox Automotive.

Looking out at the rest of the year, analysts are forecasting further recovery in the vehicle market, but an uncertain one, given the unknowns surrounding the economy and the trajectory of the coronavirus.

GM on Wednesday reported that in the second quarter it burned through $7.8 billion and lost $758 million in net income on revenue of $16.8 billion. The Detroit automaker outlined plans to get back on track in the third and fourth quarters by halting salary cuts, paying back by year's end a $16 billion revolving credit line and generating $7 billion to $9 billion in cash. GM's liquidity was $30.6 billion, as of the end of June.

Fiat Chrysler Automobiles NV will report its second-quarter financial results Friday.

Twitter: @JGrzelewski

Staff writer Kalea Hall contributed.