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Ford Motor Company: Profit Drops 56% as North America Slips

By John Rosevear – Updated Oct 27, 2016 at 4:14PM

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Pre-tax profits in Ford's North America unit were down $1.6 billion from a year ago, on lower shipments, a costly recall, and the costs of launching a new truck.

Ford's all-new 2017 Super Duty pickups will be very profitable in time. But the costs of their launch, including a revamp of this Kentucky factory, weighed on the Blue Oval's third-quarter results. Image source: Ford Motor Company.

Ford Motor Company (F -2.05%) said on Oct. 27 that its third-quarter net income was $957 million, down 56% from a year ago

That was roughly in line with the expectations that Ford executives had set for investors. Ford said that its third-quarter profit would be relatively thin due to the costs of launching its all-new 2017 Super Duty pickups in the U.S. 

But other factors, including a dip in sales, weighed on Ford's third-quarter earnings as well.

The key numbers

Image source: Ford Motor Company.

How Ford's business units fared during the third quarter

Ford's North America unit earned $1.3 billion before taxes. That was down a significant $1.6 billion from a year ago, largely because of four factors: 

  • As expected, a major door-latch recall added about $600 million in costs. 
  • The launch of Ford's all-new 2017 Super Duty pickups required an expensive factory revamp; those launch-related costs were booked during the quarter. 
  • Ford's F-150 was still new a year ago, and production and sales were skewed toward high-profit high-trim retail models. Production and sales have since "normalized," Ford said, making for an unfavorable year-over-year comparison.
  • Wholesale shipments were down 4% year over year as the U.S. market plateaued, and Ford took steps to reduce inventories of slower-selling car and SUV models.

Ford's operating profit margin in North America was an uncharacteristically thin 3.3%, down from 7.7% a year ago. In an early morning interview on Oct. 27, CFO Bob Shanks said that excluding the recall costs, Ford's operating margin in North America would have been 8.4% in the third quarter. 

Ford's South America unit lost $295 million before taxes, versus a $163 million loss a year ago. Weak economic conditions and currency inflation in key South American markets has made for tough going for Ford. $176 million of the year-over-year decline was due to inflation and currency effects, despite higher net pricing. But there was some good news, too: Ford's team in the region found $96 million in cost reductions to help offset the deterioration. 

Looking ahead to next year, Shanks said that Ford is cautiously optimistic about the outlook for Brazil in particular, and it's possible that Ford's performance in South America will begin to improve from here.

Ford Europe earned $138 million before taxes, up from a $9 million profit a year ago. Wholesale shipments were down 15% during the quarter, and Ford's market share in the region was flat -- but its share of the profitable commercial-vehicle market was up sharply. Shanks said that Ford took steps to reduce dealer stocks in the U.K. in expectation of weaker sales following the "Brexit" decision, but sales have so far remained steady. 

Improvements in pricing and a net $75 million in cost reductions were more than enough to offset the effects of lower sales volumes. 

Ford's Middle East and Africa unit is small, but expected to grow over the next decade. It lost $152 million before taxes, down from a $15 million loss a year ago, on weakness in key Middle East markets such as Saudi Arabia. Shanks said that the market factors driving this quarter's loss would likely abate somewhat in the fourth quarter. 

Ford's Asia-Pacific region includes its sizable Chinese operation. The unit earned $131 million before taxes, up from $22 million a year ago. Revenue increased 16% to $3.1 billion on a 30% jump in wholesale shipments. 

After underperforming in the first half of 2016, Ford's sales in China were up sharply in the third quarter. Price cuts helped boost sales, but Ford was able to more than offset the profit effects of the price cuts with cost reductions. Ford's joint ventures with Chinese automakers generated $320 million in equity income in the third quarter, up 26% from a year ago, with a margin of 13.4%. 

Ford Credit, the Blue Oval's in-house financing unit, earned $567 million before taxes, up 5% from a year ago. Net receivables were up 9% from a year ago, in line with expectations, and credit performance remained solid. But lease residuals deteriorated slightly, on expectations of a decline in auction values for vehicles coming off lease as automakers increase incentives on new cars.

Cash flow, debt, and available liquidity

Ford had negative $2 billion in operating cash flow related to its automaking business, down from a positive $2.8 billion a year ago. The difference was due to lower pre-tax profits, $1.7 billion in capital spending, and unfavorable timing of supplier payments versus a year ago. Ford paid about $600 million in dividends during the third quarter, and contributed another $200 million to its pension funds. 

As of Sept. 30, Ford's automotive business had $24.3 billion in cash on hand and $10.9 billion in available credit lines, for total liquidity of $35.2 billion. Its debt stood at $13.1 billion, up slightly from $12.8 billion at the end of 2015.

Looking ahead: Ford's full-year guidance

Ford stood by its full-year overall profit guidance as revised in September. 

Image source: Ford Motor Company.

Ford still expects to earn about $10.2 billion in adjusted pre-tax profits in 2016. That's down from $10.8 billion in 2015, but it would still be one of the most profitable years in Ford's history. Through the first three quarters, the company has earned $8.2 billion on that basis. 

John Rosevear owns shares of Ford. The Motley Fool owns shares of and recommends Ford. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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