Ford (NYSE:F) reported on Thursday that it earned $1.3 billion in the second quarter, or $0.32 a share, as strong North America results and a profit in Europe were partially overshadowed by higher taxes.
Technically, Ford "missed" estimates: the automaker's result was below the consensus Wall Street estimate of $0.37 per share as reported by Bloomberg. But it includes $481 million of one-time charges related to restructuring and losses in foreign business units.
But there's some very good news here, including a phrase that shareholders have longed to hear: Ford turned a profit in Europe.
A closer look under Ford's hood
The best way to understand the Ford's financial reports is to look under the hood, assessing 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 figures.
Former Ford CEO Alan Mulally used to describe North America as the "engine" of Ford's global business, and it's still true. Ford earned $2.4 billion before taxes in North America in the second quarter, up $119 million from last year. That improvement came largely from lower costs: Ford's wholesale volume and revenue were down 5% and 3%, respectively, from year-ago totals.
Ford's market share fell 1.2 percentage points to 15.3%, a drop the company attributed to two factors. First, Ford has deliberately reduced sales to rental-car fleets; that's a good move as those sales generally bring slim profits. On the positive side, operating margin was an impressive 11.6%.
Second, Ford's most profitable product, the F-Series pickup line, has lost market share. That's also no surprise, and nothing to worry about: The company is winding down production of the current trucks and gearing up to produce the all-new 2015 model. Ford has warned that it will lose about 90,000 units of production -- roughly six weeks' worth of sales -- as a result of the complex factory changeovers required to produce the new aluminum-bodied F-150.
Ford's full-year guidance for the region is unchanged. The company still expects its pretax profit in North America to be lower than last year's. And its operating margin will fall in the second half; Ford expects the full-year operating margin to be "in the 8 percent to 9 percent range." As we've explained before, the culprit is simply the expense of the many new-product launches in 2014.
Ford lost $295 million in South America, a $446 million negative swing from the year-ago result -- but an improvement over the $510 million loss posted last quarter.
It's rough in South America right now, and not just for Ford: A weakening economy in Brazil, import restrictions in Argentina, and a very difficult political situation in Venezuela hit sales and revenue hard. Wholesale volumes were down 22%, and revenue dropped 30%.
Ford is in the midst of a product-line overhaul in the region, bringing it into line with the company's global model portfolio. An all-new version of the Ka minicar should help results in the second half of 2014; Ford says it now expects to run roughly breakeven or post a small loss for the rest of the year.
Ford reported a profit of $14 million in Europe for the quarter, an improvement of $320 million from a year ago and a welcome surprise after two-plus years of big losses on the continent.
The good news was pretty good: Favorable exchange-rate shifts helped, but reduced costs as Ford's restructuring moves started to pay off were also a big factor. On the downside, sales were down significantly for Ford's big joint venture in Russia. The upshot for Europe as a whole: wholesale volumes were roughly flat versus a year ago, but revenue was up 10%.
Ford has been working on an elaborate restructuring plan that it expects to return the region to sustainable profitability in 2015. But despite the small profit for the second quarter, Ford Europe isn't out of the woods yet. The company's total loss for the first half of 2014 was $180 million; it expects the total loss in the second half to be higher, but the full-year total should be well below last year's result.
Middle East and Africa
This is a new business unit for Ford, created "to better serve customers and expand in this fast-growing region." The company has hinted at ambitious plans for expansion in Africa over the next decade.
But right now, results are modest: The unit reported a profit of $23 million, up $10 million from a year ago. Wholesale volume and revenue fell slightly, but an improvement to operating margin yielded a positive result.
For the full year, Ford expects this region to roughly break even. It's a work in progress.
Ford earned $159 million in the Asia-Pacific region in the second quarter, up $29 million from a year ago, on a big jump in sales volume.
This region includes the huge and fast-growing Chinese market, where Ford's sales have been going gangbusters: wholesale volume in China was up 26% from a year ago. Revenue for the region -- which excludes the profits from Ford's joint ventures in China -- increased 9%. That increase was driven not only by the increased wholesale volume, but also by favorable "mix": The mix of products that Ford sold included more high-profit models.
This region is also a work in progress, but on a much bigger scale. Ford is making a massive investment for future growth in the Asia-Pacific, and those investments come out of the region's earnings. The company has five factories under construction in China and India, and is gearing up to launch the Lincoln brand in China -- a massive effort -- this fall.
That said, Ford's guidance for the region is unchanged: Profits for the full year should come in ahead of last year's result.
Ford Motor Credit Co.
Ford Credit is the company's in-house bank; it makes loans to customers, drives the company's leasing program, and provides various financing services to Ford dealers. It earned $434 million in the second quarter, down $20 million from a year ago. Ford attributed the drop to "insurance losses from storm damage to dealer inventory in the quarter."
Ford upped its guidance for the unit a bit: It now expects Ford Credit's full-year profit to come in ahead of the 2013 amount. Ford Credit is a conservatively run operation and a steady contributor to the company's bottom line; there's nothing to be concerned about here.
Special items, debt, and cash on hand
That $481 million in one-time charges includes some expenses related to Ford's shutdown of a big factory in Genk, Belgium, a key part of the company's ongoing Europe restructuring plan. It also included an "impairment" of Ford's equity stake in its Russian joint venture, a charge that reflects the company's lowered near-term outlook for the business.
Ford had $25.8 billion of "automotive gross cash" on hand as of the end of the second quarter. (Ford uses the term "automotive cash" to refer to cash holdings related to its core manufacturing business, versus cash that may be held by its bank, Ford Credit.) That exceeds Ford's current debt by $10.4 billion.
The company also now has $12.2 billion in revolving credit lines available, of which $2 billion have been allocated to Ford Credit. Together with Ford's cash, the credit lines are a reserve intended to ensure the automaker can continue to invest in new-product development through an economic downturn.
The upshot: A solid result with few surprises
Pickup sales have been on Ford shareholders' minds. The F-Series is the key driver of profits for Ford in North America, and the lost production and resulting drop in market share was a point of concern. But Ford has made a point of holding its pickup incentives below those of key competitors to preserve overall profits; that clearly worked out well in the second quarter.
Even a tiny profit in Europe is nice to see, but there will be more losses before the unit is sustainably profitable. Still, and despite challenges in Russia, it's clear that Ford's restructuring in this market is already beginning to pay off.
And while losses in South America continue to be a concern, the company's big sales gains in China are a very nice story. As Ford completes its aggressive investment cycle in Asia over the next couple years, that business unit is well situated to become a significant contributor to the company's bottom line.