As with last quarter, Ford's (NYSE: F ) first-quarter profits were, in many ways, better than they looked at first glance. Ford earned $1.4 billion in the first quarter, down significantly from $2.6 billion in the year-ago period, with the drop due largely to a tax rate change and losses overseas.
But that drop was expected -- in fact, it was a little better than expected. Excluding one-time items, Ford's profit of $0.39 a share came in a bit ahead of the $0.35 a share predicted by analysts.
And as has so often been the case in recent times, Ford's results at home were particularly strong.
Strength at home, challenges elsewhere
New CFO Bob Shanks, who replaced the recently retired Lewis Booth, gave analysts and media some highlights of the quarter during a conference call on Friday morning. In a nutshell:
- North America: Sales at home continued to be the "engine" of Ford's profits. Ford North America's pre-tax profit of $2.1 billion was up $289 million from a year ago, and was its highest profit in North America since Ford started reporting the division's result separately in 2000. Strong sales and high margins -- helped by stinginess on incentives -- continue to validate the company's "One Ford" product strategy, which is now bearing fruit in a big way at home.
- South America: Ford South America made $54 million, down from $210 million a year ago. Higher costs and unfavorable exchange rates were the key challenges here, though Ford remains optimistic about the region going forward.
- Europe: Ford Europe's results stunk, but that's no surprise. The unit lost $149 million during the quarter, down from a $293 million profit a year ago, about in line with expectations (and far better than key rivals like General Motors (NYSE: GM ) and Fiat (OTC: FIATY) have fared, as Ford resisted the temptation to offer huge discounts). The short story is that sales are down, production is down, and automakers are competing for a smaller, stingier pool of buyers as rough economic conditions continue to discourage consumers from spending.
- Asia-Pacific and Africa: Another small loss, but again it wasn't unexpected: This region posted a $95 million loss versus a $33 million profit a year ago. Sales volumes in places like China were down a bit, and costs were up due to Ford's aggressive push to build new factories. The region's long-term prospects remain bright, Shanks said.
- Ford Motor Credit: The Blue Oval's captive financing unit reported a profit of $456 million, down from $706 million a year ago. The decline was expected, and related to a drop in lease terminations -- in a nutshell, the company had fewer just-off-lease cars to resell during the quarter than it did a year ago.
Total global production was down a bit from the year-ago period, mostly due to decreased demand in Europe. Ford executives continue to emphasize their goal of "matching production to demand" to keep inventories from growing excessively and costs in line. Happily for them (and for shareholders), that means adding production capacity in Asia and North America to keep up with strong demand.
Big action on pensions, continued growth of cash
Ford's "automotive cash" -- its cash on hand attributable to its core business, rather than it financing arm -- was $23 billion as of the end of the quarter, up slightly from its year-end total. Automotive debt was $13.7 billion, up a bit from $13.1 billion at year end, as the company drew down a Department of Energy line of credit and issued new bonds in Hong Kong in March. And, of course, the company's credit rating was boosted to investment grade earlier this week by one of the three major credit agencies.
Ford said last quarter that its global pensions were underfunded by $15.4 billion, a number that may be weighing on the company's share price. But it's taking action on a surprising scale: Shanks said on Friday that Ford will offer lump-sum pension payouts to about 90,000 current and retired salaried employees, a voluntary program that is expected to lower the company's liability significantly. The payouts will be funded by plan assets; they won't impact Ford's cash or revenues. Ford expects to complete the payout process sometime next year. The voluntary nature of the program makes results hard to predict, but this could go a long way toward reducing Ford's pension risk.
Ford's outlook: Strength in challenging conditions
Mulally said that Ford expects overall global economic growth around 3%. That includes an assumption of 2%-3% growth in the US, some easing in emerging markets, and continued troubles in Europe. Ford's CEO also expects total global auto sales to be somewhat up from 2011, but expects Ford's market share to be somewhat lower "as planned capacity increase will lag demand." Ford's capital spending will be in the range of $5.5 billion-$6 billion, up significantly from last year.
Mulally also said that, in contrast to the company's pattern in recent years, he expects Ford's second-half profits to be slightly higher than its results in the first half of 2012. That's due to the timing of Ford's upcoming product launches, and the added production capacity that Ford expects to have in operation later this year.
The upshot? A full-year profit about the same as 2011's, Mulally said. Increases in North America will be offset by economic challenges in Europe and the company's spending to expand in Asia. While shareholders would surely prefer growing profits, it's hard to fault Ford's execution or its continued determination to invest for future growth.
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