Ford Profits on Strong U.S. Results

All things considered, the third quarter was a good one for Ford (NYSE: F  ) : The Blue Oval reported net income of $1.63 billion on Tuesday, or $0.41 a share.

That solidly beats analysts' estimates, which averaged about $0.30 a share, and was roughly in line with year-ago results. It was an especially strong result for Ford's North American division, which reported record earnings for the quarter -- despite so-so sales growth.

Strength at home, but challenges abroad
As always with Ford, the company's earnings are best understood by looking at results from each of its five main operating divisions. Here's how things stacked up in the third quarter:

  • North America, which CEO Alan Mulally often calls the "engine" of Ford's earnings, came through in a big way again. Pre-tax earnings were $2.3 billion, up big from $1.55 billion a year ago, on very strong (12%) operating margins. Ford credited a number of factors for the increase, but a big one was "higher net pricing": Ford's much-improved vehicles are able to get good prices -- and Ford has been able to significantly reduce per-vehicle spending on incentives. To put some context around this result, Ford noted that North America's pre-tax profit through the first three quarters exceeded its (quite good) result for all of 2011, despite a decline in U.S. market share.
  • South America was a different story, as pre-tax profits fell to just $9 million from $276 million a year ago. Ford has been able to get better prices in the region, but higher costs, increased competition, and unfavorable exchange rates hurt the bottom-line result. But even then, it's not all bad: Some of those higher costs were due to new product launches, which should help drive better results in coming quarters.
  • Europe had a rough time, but that's no surprise. Ford Europe's pre-tax loss of $468 million was worse than the $306 million it lost a year ago, but not as bad as the $500-million-plus that some analysts had forecast for both Ford and General Motors (NYSE: GM  ) . Europe's problems are well-known: A deep recession has clobbered auto sales. Last week, Ford announced a plan to rework its European operation, closing three factories and adding several new products to its offerings in the region. Long term, Ford is targeting a margin of 6%-8% in the region -- but the structural changes will take time to have an effect, and losses are likely to continue for another year or more.
  • Asia Pacific Africa swung to a small pre-tax profit of $45 million from a small loss a year ago, but that's hardly the whole story. Ford said that it set market share records for China and the region as a whole during the quarter, as the company's $5-billion-plus investment in new facilities in the region started to bear fruit. Strong sales of the new Ranger pickup in the region, and of the Focus -- which has quickly become one of China's best-selling cars -- helped a lot. Those results were offset largely by continued big investments in product launches and increased capacity, both of which bode well for the future. Mulally reiterated on Tuesday that Ford China would be able to build 1.2 vehicles a year in the country by mid-decade -- about double its current capacity.
  • Ford Credit, the company's financing arm, reported a pre-tax profit of $388 million, down from $605 million a year ago. This was in-line with expectations and due largely to fewer lease terminations -- in a nutshell, Ford Credit had fewer used cars to sell. That's nothing to be concerned about: This is a business that ebbs and flows, and it has great strategic value to Ford overall.

Two more items of note: Ford's total debt is unchanged from last quarter, at about $14.2 billion. That's perhaps a little higher than investors might like, but it's well-managed and not an acute concern. And Ford's cash on hand is up to $24.1 billion from $23.7 billion a year ago, a modest increase, but still good news.

Outlook: Still strong, addressing challenges
Mulally and CFO Bob Shanks reiterated Ford's previous guidance in a call with analysts and media on Tuesday. They expect full-year results in North America to be very strong, with significantly higher pre-tax profit and margins versus 2011. Shanks made a point of saying that the company remains "committed to maintaining its competitive cost structure" as it ramps up production capacity in North America.

Elsewhere, the expectations are mixed. Ford expects a modest profit in South America, less than last year's. It expects losses in Europe to exceed $1.5 billion, as Mulally said last week while discussing the plans to restructure in the region. It expects a small loss in Asia Pacific Africa as it continues to aggressively invest in expansion in the region. And Ford Credit expects a full-year pre-tax profit of about $1.6 billion, down from last year, but still a good result.


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