Big Costs Hit Ford Motor Company's Profits Hard

Ford's first-quarter profits fell 39% and missed Wall Street estimates. Here's what happened.

Apr 25, 2014 at 11:02AM

Images

Harsh winter weather raised costs and hurt Ford's sales and profits during the first quarter. Photo credit: Ford Motor Company

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.

North America
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. 

South America
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.

Europe
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.

Asia Pacific
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.

Special free report: The top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

 

John Rosevear owns shares of Ford. The Motley Fool recommends Ford and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers