Ford's (NYSE: F ) first-quarter profits fell 39%, as higher warranty costs and rough winter weather in many parts of the U.S. weighed on earnings.
Ford reported net income of $989 million, or $0.24 a share. That's down significantly from the $1.6 billion, or $0.40 a share, that the company reported in the first quarter of last year
It's also less than Wall Street had expected. Excluding one-time items, Ford's profit was $0.25 a share, below the $0.31 consensus analyst estimate reported by Bloomberg.
A closer look under Ford's hood
Ford was hit by a bunch of one-time expenses during the quarter, as you'll see below. But beyond those expenses, Ford had some good news to report, particularly in Europe and Asia.
The best way to understand Ford's financial reports is to take a look under Ford's hood, looking at each of the company's regional business units in turn. Note that all of the profit and loss numbers for Ford's regions are pre-tax numbers.
CEO Alan Mulally often says that North America is the "engine" of Ford's business, its primary profit center. But as we know, Ford's engine sputtered a bit in the harsh winter weather we saw during the quarter.
Ford North America made $1.5 billion during the first quarter, down $892 million from a record profit in the first quarter of 2013. Wholesale sales were down 2%, and revenues were down 5% -- mostly due to the tough winter conditions that hit many automakers' U.S. sales during the quarter.
Ford says the harsh weather raised its costs by about $100 million, and it took an accounting charge of about $400 million to account for a change to the reserves it holds for potential warranty and recall costs on vehicles it has sold in the past.
But Ford did lose some market share in the U.S. during the quarter, 0.6 of a percentage point. Part of that was due to a planned reduction in Ford's sales to rental-car fleets, which tend to be low-profit sales. But Ford also lost some retail market share, particularly in small cars, as models like the Focus lost ground to vehicles like Toyota's (NYSE: TM ) new Corolla.
Ford did note that the total market share held by its F-Series pickups, its best-selling and most profitable product in the U.S., was unchanged from a year ago.
Ford South America remains a work in progress -- but it got hit by a couple of hard shocks during the quarter. The region lost $510 million during the quarter, down $292 million from a year ago. The big issue: Currency devaluations in Venezuela and Argentina led to about $380 million in one-time charges. Meanwhile, a general economic slowdown in much of the region, including key markets like Brazil, hit Ford's sales volumes.
But Ford is continuing the work of overhauling its South American product line, gradually replacing older local products with models from its current global lineup. As that process continues, margins and profits in the region should improve significantly -- enough that Ford expects it to roughly break even, or possibly post a small loss, for the full year.
Ford lost $194 million before taxes in Europe during the quarter, a significant improvement from the $462 million loss it posted in the first quarter of last year. Europe has been a problem for Ford for a while, as recessions in many European nations sent new-vehicle sales to lows not seen in nearly 20 years last year.
But things have been improving in recent months, and Ford's sales gains have outpaced the overall market's. Ford's wholesale volumes were up 11% in the quarter, and -- reflecting its increased focus on high-margin retail and commercial vehicle sales -- revenues were up 18%.
Ford incurred a one-time charge of $122 million related to restructuring costs, mostly severance payments for laid-off factory workers. There will be more charges like that in the next few quarters, the company said. But Ford says it still expects Europe to turn a profit in 2015.
Middle East and Africa
Ford used to report this region's results as part of a larger "Asia Pacific Africa" unit. But it's now separate, the company says, in order to reflect "Ford's increased focus on this important growth region".
Profits are small right now, though: Ford made $54 million in the region during the quarter, up $7 million from a year ago. Margins were up, but sales volumes and revenue were down a bit. For the full year, Ford expects this region to roughly break even.
Ford's Asia Pacific region includes its big (and rapidly growing) joint ventures in China, as well as its operations in India, in Australia, and throughout southeast Asia. And those operations -- particularly in China -- are doing very well: Ford Asia Pacific made $291 million during the quarter, up $319 million from a loss a year ago. Ford says that's its all-time highest profit for any quarter in the region.
Nearly everything looks good. Sales volumes were up 32%, thanks to booming Ford sales in China (up 45% in the quarter). Net revenues (which don't include income from Ford's Chinese joint ventures) were up 19%. Ford's market share in China is up by 0.9 of a percentage point to 4.5%, as new models -- the EcoSport, Kuga, and Mondeo -- all continue to gain traction.
Ford Motor Credit Company
Ford's in-house financing arm made $499 million during the quarter, down a hair from the $507 it made a year ago. Volumes were up, which helped; but "residual values", the values of Ford models as used cars, fell a bit. (Here's why that matters: When your lease on a Ford vehicle ends, you turn the vehicle in -- and Ford Credit, which provided the lease, sells it. If the value of your car is less than Ford Credit expected, that hurts its bottom line.)
For the full year, Ford expects Ford Credit's profits to be about the same or a bit higher than 2013's.
The upshot: Ford is healthier than its profit decline makes it look
All of those one-time charges added up to a big hit to Ford's bottom line during the quarter. Rough winter weather that increased costs in the U.S. and kept sales sluggish didn't help.
But the winter weather has passed, and Ford's sales should pick up along with the wider industry's as the second quarter unfolds. That said, this will be an expensive year for Ford: It plans to launch 23 new products around the world this year, its highest number of launches ever in a year.
New-product launches come with some big costs, from expensive new factory tooling to big TV ads. Back in December, CFO Bob Shanks warned Ford investors that the company's profits in 2014 would likely come in a bit lower than the $8.6 billion it made in 2013, and its margins in North America would be lower as well -- mostly because of those launch costs.
But there's some genuine good news for Ford investors in today's numbers. Rising sales and profits in Asia show that Ford's expensive Chinese expansion is already paying off. And Ford's efforts to turn around Europe are showing real progress, and appear to be well on track. And Ford's all-important F-Series pickups didn't lose ground in the U.S., despite the fact that an all-new model is due later this year.
Those are all big parts of the case for owning Ford stock.
As long as North America picks up in coming quarters, and Ford expects that it will, Ford -- and its stock -- should be in good shape as the year unfolds.
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