Last week's earnings report from Ford Motor Company (NYSE:F) mostly confirmed what we knew: The Blue Oval has hit a rough patch.
Ford's net income fell by more than half in 2018, though a big chunk of that was due to a one-time accounting charge that didn't burn any of the company's cash. But even after we factor that out, Ford's earnings per share -- generally a pretty good indicator of the company's situation -- fell sharply from the levels that it delivered in the three years prior.
In fact, if we set aside Ford's result from 2014, when the company's earnings were dented by the massive spending required to launch its all-new 2015 F-150 pickup, the 2018 adjusted EPS represented its worst showing since 2009.
The simple answer is that Ford's full-year result was hurt by sharply lower sales in China and several external factors -- or "headwinds" in Ford-speak -- that hit its operations around the world. Let's take a closer look.
The 3 headwinds that Ford faced in 2018
During Ford's earnings call, CFO Bob Shanks explained that Ford's 2018 operating result was hit by three separate headwinds that together had an impact of about $3.3 billion.
- Roughly $1.8 billion in higher commodity costs. Global prices for key commodities like aluminum and steel have been rising -- but Shanks noted that about $750 million of the impact felt by Ford was a direct result of tariffs imposed by the Trump administration.
- Unfavorable exchange-rate movements, resulting from devaluations in some South American markets and from Brexit-related effects on the British pound. The impact on 2018 operating profit, net of some pricing adjustments that Ford was able to make during the year, was about $750 million, Shanks said.
- About $775 million in spending related to recalls of vehicles equipped with defective airbag inflators made by now-defunct Japanese supplier Takata. (Ford is far from the only automaker affected by the defective inflators from Takata: More than 30 million vehicles around the world have been recalled.)
Those headwinds hit Ford's results in all of its regional business units, aside from its (tiny) Middle East and Africa unit.
Ford's efforts to offset these headwinds had more success in some parts of the world than others:
- North America absorbed about $1.9 billion of the total impact of the headwinds. But the region's earnings before interest and tax (EBIT) declined only $450 million from 2017, thanks largely to a year-over-year improvement in product mix: Ford sold a greater percentage of higher-profit trucks and SUVs in North America in 2018 versus 2017.
- South America took a roughly $400 million hit, but its EBIT loss improved by about $75 million year over year, thanks to an aggressive cost-reduction effort and price increases that more than offset the headwinds and the (substantial) impact of inflation in some South American countries.
- Ford's EBIT in Europe fell from a $367 million profit in 2017 to a $398 million loss in 2018, a decline of $765 million. About $600 million of that was due to the headwinds, Shanks said -- roughly $200 million in higher commodity costs, the remainder due to exchange-rate effects. Ford Europe's result was also hit by the costs of launching an important product (the all-new Focus) and unfavorable year-over-year changes in product mix, offset somewhat by improved pricing.
- Ford's Asia-Pacific region absorbed about $400 million of the headwinds' impact, including about $200 million from unfavorable swings in the value of the Thai baht and Australian dollar. But the region's full-year EBIT swung from a $659 million profit in 2017 to a $1.1 billion loss in 2018, a decline of about $1.76 billion that was almost entirely explained by Ford's ongoing woes in China.
Ford's sales in China: Way down
Ford's wholesale shipments in China fell 42% in 2018, a result of a 37% decline in retail sales and a deliberate push to clear out excess dealer inventories. The effect on Ford's profit was more drastic:
- Ford's equity income from its joint ventures with Chinese automakers swung from a $916 million profit in 2017 to a $110 million loss in 2018, a decline of just over $1 billion.
- Ford's royalty payments from those joint-venture partners fell by an additional $266 million.
- Lower pricing and sales volumes for the vehicles Ford exports to China (notably the Explorer and all Lincoln models) added $498 million to the decline.
Ford was able to make some relatively minor cost cuts to offset all of those declines, but the total impact from China was about $1.7 billion.
The upshot: Ford has work to do, but external factors played a role
Ford executives frankly acknowledge that the company has work to do, containing costs and improving profitability around the world -- not just in China, but in Europe and North America as well. That work is underway, and I think that shareholders can be reasonably confident that improvements are on the way. But whether Ford can make gains in 2019 will depend in large part on external factors (like Brexit and tariffs) that Ford can't control.
That's why Ford's guidance for 2019 is vague, and it's why Ford shareholders will have to be patient for a while longer.