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What’s Holding Down Ford’s Profitability?

Demitrios Kalogeropoulos
February 15, 2013

There's no denying that Ford (NYSE: F) saw stellar results in its North America region last year.

The car manufacturer boosted revenue by 6.5% in the area, or a full $5 billion over 2011's sales. And profits rose at an even faster clip. Operating margin in the fourth quarter was the highest since 2000. For the year, profits leapt to 10.4% of sales, much better than the 8.3% operating margin it logged the year before.

And Ford is expecting conditions to keep improving in the U.S. The company thinks total market volume should jump from 14.8 million cars and trucks to about 15.5 million this year. It also sees itself grabbing a bigger piece of that expanding pie, and surpassing the 15.2% market share it managed last year.

Yet, despite calling for a solid year ahead, Ford's outlook doesn't include any profitability growth at all. Instead, margins are expected to stay flat, or even dip a bit to 10%, for 2013. What's keeping that profit level from expanding along with the rest of Ford's results?

No help from bonuses
For one, the company will be up against a tough comparison from last year. Remember, that outsized profit growth in the fourth quarter of 2012 wasn't solely powered by the carmaker's rising pricing power. Price advantages played a big role. In fact, strong pricing trends were responsible for about half of the $1 billion increase in North America's profits over the year-ago quarter.

But the earnings improvement was also aided by a one-time benefit related to union ratification bonuses, which had depressed profits at the end of 2011. The tailwind from the reversal of that charge won't be around in 2013, so Ford has to contend with lapping a somewhat inflated profit figure from last year.

No discount from rates
On top of that, Ford's pension costs are set to rise significantly this year. The ultra-low interest rate environment has the company now looking to lose about $2 billion related to its pension fund in 2013.

Ford is by no means alone here among major U.S companies. Low rates forced Verizon (NYSE: VZ) to toss an extra $1.7 billion into its pension plan last quarter. Ditto for Dow Chemical (NYSE: DOW). The company says its dealing with a "massive pension headwind" that added another $2.2 billion to its pension liability.

Having company in this struggle is no consolation to Ford, which plans to contribute upwards of $5 billion to its pension in 2013. That should help it chip away at a funding gap that now sits at $19 billion, or $3.3 billion higher than the year-ago quarter. Bizarrely, Ford is also in a position to benefit if and when rates do rise, by at least removing the need to pony up for these pension outlays each year.

A boost in structural cos