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Why This $2.2 Billion Charge Shouldn't Worry Ford Investors

By John Rosevear - Jan 23, 2020 at 2:32PM

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Keep your eyes on the numbers that matter most. This isn't one.

Ford Motor Company (F 3.89%) said that it will take a one-time charge of about $2.2 billion against its fourth-quarter earnings related to its pension plans.

It's an accounting charge, meaning that it doesn't reflect cash burned. But the charge will put a big dent in Ford's 2019 net income total, and auto investors should understand what's going on. Here's the story. 

Ford's world headquarters building in Dearborn, Michigan.

Image source: Ford Motor Company.

What this charge is -- and what it isn't

Back in 2016, Ford changed the accounting method it uses to track the investments in its pension and retiree healthcare funds (or "OPEB," for "other post-retirement employee benefits"). The new method, called "mark-to-market," requires Ford to recognize the investment performance of its pension and OPEB funds at the end of each calendar year. (The old method allowed Ford to amortize the gains and losses over many years. Both methods are considered acceptable.) 

The investments in Ford's pension and OPEB funds aren't aggressive. The company undertook an intensive "de-risking" program after the 2008-2009 recession, shifting the portfolios toward more stable fixed-income investments and adding additional cash.

But despite that de-risking, the portfolios are still vulnerable to market forces to some extent, particularly interest rates -- and while stocks had a pretty good year in 2019, interest rates fell. Ford said that while its U.S. pension-plan portfolio had a gain of about $400 million last year, that was more than offset by $2.6 billion in interest rate-related losses in its pension plans outside of the U.S. and its global OPEB portfolios. 

The upshot: Ford will take a one-time charge of about $2.2 billion against its fourth-quarter pre-tax earnings. It expects the charge to reduce its net income for the quarter (and for the full year) by about $1.7 billion. 

What it means for Ford investors

Investors should note that because this is a one-time charge, it won't affect Ford's adjusted earnings before interest and tax (adjusted EBIT) or its adjusted earnings per share, the numbers we watch most closely. And because it's a non-cash charge -- Ford is just recognizing what happened to the portfolios in 2019 -- it won't have an impact on Ford's underlying business or cash position.

Also note that this isn't the first time that Ford has taken an end-of-year charge for its pensions. In fact, it's becoming an annual ritual -- and this isn't the worst hit it has taken. The Blue Oval took a $3 billion one-time charge at the end of 2016, a $162 million hit in 2017, and a charge of $877 million at the end of 2018. 

Long story short: Ford might well post a net loss for the fourth quarter, and if so, we can expect the usual media suspects to make a big fuss about it. But remember that this is just an accounting charge, and keep your eyes on the results that matter most: the adjusted figures that tell us about the underlying performance of Ford's business.  

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