The initial headline numbers looked solid: Ford (NYSE: F ) posted a pre-tax operating profit of $8.8 billion for 2011, its third straight annual profit and a sign that the company's turnaround remains solidly on track.
But as far as the fourth quarter went, the news wasn't so good: Ford missed, plain and simple.
Excluding one whopper of a special item (more on that below), Ford earned $1.1 billion, or $0.20 a share, in the last quarter of 2011. That's significantly below analysts' estimate of $0.26 a share, a number that was in line with Ford's own guidance as of a couple of weeks ago.
It's the second year in a row that Ford has posted a big miss in the fourth quarter. But despite the challenging quarter, 2011 as a whole was a good year for the company and that aforementioned special item shows that Ford's managers expect continued profitability going forward.
The nuts and bolts of a challenging quarter
As usual, there's good news and less-good news. The good news is that results from Ford's core operations were pretty strong:
- North America, the "engine" of Ford's global business, reported a pre-tax operating profit of $889 million, up from $670 million a year ago. Operating margin was up to 4.5% from 3.9%, a sign of continued pricing strength. CFO Lewis Booth said Friday that the increase in profits "was explained by higher volume and mix and net pricing." Translated, that means that Ford sold more cars and trucks (volume), more of those were vehicles that generate bigger profits (mix), and it did it with fewer incentives (net pricing). On the downside, commodity and freight costs were up, which was no surprise, as were warranty costs, something that will bear watching in coming quarters, as rising warranty costs can suggest a decline in an automaker's initial quality. Some labor costs were up as well, as the company made payments called for in its new agreement with the United Auto Workers. Those were expected, and not major.
- Ford Motor Credit, the company's in-house financing arm, reported profits of $506 million for the quarter. That's down from the $572 million it posted a year ago, but the decline was expected and due mostly to a decline in lease terminations (when leases are terminated, the vehicles are then sold by Ford Credit; last year, this resulted in a gain.)
But those strengths -- which, to be fair, represent arguably the most important parts of Ford's business at the moment -- were offset by challenges elsewhere:
- Europe. As predicted, Ford Europe posted a loss for the quarter and for the full-year period. For the quarter, the unit lost $190 million, up from a loss of $51 million a year ago. Sales were down a little, and costs were up, but "structural cost improvements" and favorable net pricing helped, Booth said. The pricing strength is a good sign, as General Motors (NYSE: GM ) and others have seen European margins whacked by the need to boost incentives to keep sales volumes up in tough market conditions.
- South America. Ford posted a $108 million profit in the region, down from $281 million a year ago on unfavorable exchange-rate shifts and increased commodity costs. Booth said Ford plans to overhaul its product line in the region over the next two years, introducing more products from its global portfolio and bringing South America in line with the "One Ford" plan. That, as CEO Alan Mulally pointed out, will reduce costs while increasing Ford's competitiveness in the region.
- Asia Pacific Africa. Ford's "rest of the world" unit lost $83 million, down from a small profit ($23 million a year ago). This was expected, a result of production losses due to flooding in Thailand, which hit key competitors Honda (NYSE: HMC ) and Toyota (NYSE: TM ) hard as well. It was also due to increased investments in new models and additional production capacity, particularly in China. Booth said the company expects the unit to be profitable in 2012, though investments in additional capacity will continue.
The special item: "A significant milestone in our restructuring"
As predicted, Ford released almost all -- $12.4 billion worth -- of its "valuation allowance," a reserve created on Ford's books back in 2006 as a way to preserve the tax advantages of losses until the company had profits to apply them against.
I explained the implications of this yesterday. The gist is that while it doesn't actually add to Ford's cash on hand, the release does give Ford credits that will keep its taxes low for several more years. It also counts as a profitable special item, one that boosted Ford's full-year earnings total for 2011 to $20.2 billion, the best since 1998.
Booth indicated that the credits from the company's years of brutal losses would offset tax liabilities on Ford's profits, meaning that the company's actual cash tax payments would be minimal, for "a number of years." But more to the point, as he said, it's a "significant milestone" in Ford's restructuring and "a strong indication of the confidence we have in our future results."
That's a good thing. While Ford's operations overseas continue to struggle due to tough economic conditions, the company continues to execute at a high level and once those economic conditions improve, the Blue Oval should be in very good shape indeed.
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