Ford made big money in 2013, thanks in part to strong pickup sales. But the costs of launching the all-new 2015 F-150, revealed earlier this month, will weigh on profits in 2014, the company said.
Why did Ford Motor Company's (NYSE: F ) stock jump when the market opened on Tuesday morning?
Here's why: Ford had a good year in 2013. The company said on Tuesday morning that it made $8.6 billion before taxes last year. That's up $603 million from its (strong) 2012 pre-tax profit.
That increase came from the kinds of things that investors in Ford stock like to see: Sales were up, profit margins were strong, and Ford executed well at home and overseas. Ford also made big progress on its pension liability, something that eased big investors' concerns.
But Ford's fourth quarter wasn't quite as impressive, despite a flashy $3 billion net-profit total that was aided by a big ($2.1 billion) one-time tax item. While the Blue Oval's pre-tax earnings of 31 cents a share were enough to beat the 28-cent Wall Street estimate, some bumps in the road kept Ford's profits a little lower than they could have been.
A closer look under Ford's hood
The best way to understand Ford's earnings reports is to look at results from each of the company's business units around the world.
Ford's automotive operations are divided into four regional business units; those four units, plus Ford Motor Credit, the company's in-house financing arm, each report results on a pre-tax basis. We'll look at each in tun below.
North America is often referred to by CEO Alan Mulally as the "engine" of Ford's profits. That engine hit a bump in the fourth quarter: Pre-tax profits were $1.7 billion, down about $200 million from the year-ago quarter.
A recall of Ford Escapes powered by the 1.6 liter engine dented Ford's fourth-quarter profits.
So what was the bump? The big Ford Escape recall. Ford said that the Escape recall accounted for much of the $300 million in higher warranty-related expenses dished out during the period. But there's some good news, too: Sales volumes and "mix" — the ratio of more profitable models to less-profitable ones — were both working in Ford's favor during the quarter. Those are both things that investors like to see.
South America has been a tough region for lots of automakers in recent times, as unfavorable exchange-rate moves and high local inflation have hurt profits. Ford is no exception: It lost $126 million in the fourth quarter, down from a $145 million profit a year ago. Sales were down, costs were up, and exchange rates moved the wrong way — but "net pricing" was up, meaning that Ford was able to get a little more money for the vehicles it did sell.
Europe has been a big money-loser for Ford in recent times, but the company has a turnaround plan under way that made promising progress in 2013. The bad news is that Ford lost $571 million in Europe in the fourth quarter, but the good news is that that was $161 million better than its result in the fourth quarter of 2012.
Here's the story of the quarter in a nutshell. Revenue was up and Ford's margins were better, but costs were also up, partly because of exchange-rate swings. It's a work in progress, and it'll continue to be a work in progress for several more quarters.
For the full year, Ford's loss in Europe was about $1.6 billion, considerably better than the $2 billion loss that the company — and most analysts — were predicting at this time last year. CFO Bob Shanks reiterated on Tuesday that Ford expects to lose less money in Europe in 2014, and expects to report a profit in 2015.
Asia Pacific Africa is Ford's catch-all region, covering the remainder of the world. The big stories here are China, India, and Southeast Asia, where Ford is investing in major expansions. The region made $106 million before taxes in the fourth quarter, up $67 million from a year ago. The expansion effort is expected to start paying off big in a couple of years, but right now, Ford's costs remain high — it's spending its profits on a slew of new factories and other facilities.
Sales of the tiny Ford EcoSport SUV have been growing in China, fueling Ford's market share growth.
The good news is that the company's sales growth continues to more than justify the expense: Ford's market share in China, the world's largest automotive marketplace, is up to 4.4% from 3.9% a year ago.
Ford Motor Credit, an in-house bank that provides lease programs and financing to car buyers and Ford dealers, made $368 million before taxes in the quarter. That's down $46 million from a year ago, a drop that Ford attributed in part to "unfavorable residual performance related to lower auction values."
When the lease is up on your Ford and you return it to the dealer, it gets sent to a used-car auction and sold. The money from that sale goes to Ford Motor Credit. "Unfavorable residual performance" means that Ford is getting less money from those auction sales than it did a year ago — or put another way, the value of used Fords has fallen a bit.
Is that a problem for Ford?
Not necessarily. Used-car values in general have fallen a bit as the economy has improved. When consumers are more confident, they tend to buy more new cars, and demand for used cars falls. But if Ford's residual values are falling more than competitors', it could become a problem by making Ford's lease offers less competitive (or more expensive for the company). It's something to watch.
About that big tax item
Typically, when we compare quarters, we talk about pre-tax earnings and exclude special one-time items. Ford's pre-tax earnings for the fourth quarter were about $1.28 billion, a somewhat soft number that was brought down by the Escape recall and some challenges overseas, as we saw.
But on a "net" basis, including the effects of taxes and some one-time charges, Ford made $3 billion during the quarter. Taxes aren't usually helpful to a company's bottom line, but in the fourth quarter they gave Ford a boost of over $2 billion. What was the deal?
I had a few minutes to speak to Ford CFO Bob Shanks on Tuesday morning, and I asked him for more details. Briefly, there are two parts to the tax boon.
About $1.5 billion of it is a favorable increase in deferred tax assets related to Ford's ongoing European restructuring, not a surprise.
The remainder is the last of Ford's "valuation allowance," an item that was created on Ford's books way back in 2006, when Ford was losing a ton of money. In a nutshell, the allowance was a way of preserving the tax value of Ford's losses until the company had profits to apply them against. (You can follow that link to learn more.)
The total value of that tax item ended up being around $14 billion. Ford "released" much of it at the end of 2011. But a small part, related to state and local taxes, was held back, and that's what Ford is now releasing. It's a tax credit, a "non-cash" item, that's worth about $440 million.
Good news on Ford's pensions, too
Shanks also told me that Ford has made big progress on funding its pension plans. Pension liabilities have been a big worry for Ford investors over the last few years. Here's the issue: The value of the investments in Ford's pension plans declined during the economic downturn, and the risk was that Ford would be required to cough up a substantial amount of cash to make up the difference.
Some analysts thought that Ford could find itself on the hook for a bill that could wipe out its cash hoard, which stood at $24.8 billion as of the end of 2013. That concern held Ford's stock price back for a while. But Ford has gradually added cash to its pension plans over the last couple of years, and the plans' investments have received some help from Mr. Market.
The upshot is that Ford has reached the point where its contributions to the plans are falling. The company contributed about $5 billion last year, up from $3.4 billion in 2012 — but it expects to contribute just $1.5 billion in 2014. That will leave more cash available to Ford's business, Shanks notes, and available to distribute to shareholders.
The all-new 2015 Mustang is just one of several new Fords set to be launched in 2014, which is shaping up to be a busy year for Ford.
The upshot: A good year in 2013, and a busy one ahead
Ford's outlook for 2014 hasn't changed. In a nutshell, profits are expected to be down a bit from 2013, somewhere between $7 billion and $8 billion. Ford expects its costs to rise in 2014 because it's launching a slew of new products — including all-new versions of its super-important F-Series pickups — and because stiffer competition might squeeze its profits on smaller cars.
I've said before that I don't think Ford's outlook for 2014 is a big deal for long-term investors. Those new products will help boost Ford's profits over the next several years. Meanwhile, the company continues to make good progress in Europe and Asia, and those efforts will also boost Ford's bottom line substantially — maybe not in 2014, but in the years that follow.
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