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Ford Earnings: A Tough Fourth Quarter Sets the Stage for Gains in 2015

By John Rosevear – Jan 29, 2015 at 9:28AM

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New product launches and foreign restructuring costs hit Ford's bottom line in 2014, but the future looks brighter as a result.

The steep costs of launching Ford's all-new 2015 F-150 weighed heavily on the automaker's bottom line in 2014. But the new truck should set it up well for a rebound in 2015, Ford officials say. Source: Ford Motor Company.

Ford (F 4.83%) said on Thursday it earned $3.2 billion in net profit for 2014, or $0.80 per share, as increased costs related to new-product launches and foreign restructuring weighed heavily on the company's bottom line.

On a pre-tax basis, Ford collected $6.3 billion last year, down $2.3 billion from 2013's total. That was slightly ahead of the guidance for a pre-tax profit of about $6 billion.

Fourth-quarter net income was just $52 million, or $0.01 a share, weighed down by an expected $800 million one-time charge related to troubles in Venezuela. The automaker delivered $1.1 billion in pre-tax profit, down $197 million from the fourth quarter of 2013.

On an after-tax basis and excluding one-time charges, Ford earned $0.26 a share in the fourth quarter, slightly ahead of Wall Street expectations.

A look under Ford's hood, region by region
The best way to understand Ford's financial reports is to look at results in each of its business units. Ford's principal business segments include regional units for its automotive business, as well as Ford Credit, its in-house financial arm.

Note that Ford reports results for its business units on a pre-tax basis.

North America has long been the driver of Ford's global earnings. It earned $1.5 billion in the fourth quarter, down $252 million from a year ago. Ford CFO Bob Shanks said the financial impact of new-product launches, particularly the all-new F-150 pickup, more than explained the decline. Sales volumes were down 5%, in large part because of constrained supplies of Ford pickups as the company transitions to its new model, and revenue dropped 6% as a result. The unit's operating profit margin, a widely watched metric, was 7.8%, down 0.8 percentage points from a year ago. Again, the decline was largely explained by tight pickup supplies and the costs of transitioning Ford's two pickup factories to produce the all-new model.

For the full year, Ford North America's operating margin landed at 8.4%, a bit better than the guidance given by unit president Joe Hinrichs in September.

South America lost $187 million in the fourth quarter, $61 million worse than a year ago. Ford blamed the decline on "higher warranty costs," including a recall -- but the reality is that conditions in South America are very difficult right now. Gross domestic product growth is slowing in key markets including Brazil and Argentina, and that has meant substantial drops in new-car sales in these countries. Ford said wholesale volumes dropped 2% in the quarter, despite a 0.9 percentage point year-over-year increase in market share to 9.4%.

For the full year, the unit lost $1.16 billion. A substantial amount of that was related to the devaluation of the Venezuelan bolivar and other actions by the Venezuelan government that have hampered Ford's ability to do business in the country.

Europe has been a trouble spot for Ford -- and most of its regional rivals -- for a few years now, as protracted recessions in several nations have held new-car sales far below pre-economic-crisis levels. Ford Europe's fourth-quarter loss of $443 million actually represents an $86 million improvement over its year-ago result, driven by a 5% increase in wholesale volumes. Sales have picked up in Europe recently, and Ford has gained a bit of retail market share. But those gains have been blunted by ongoing troubles in Russia, where the economy has slowed sharply -- and where Ford has made a substantial investment in expectation of long-term growth.

For the full year, Ford Europe lost $1.06 billion, an improvement over its $1.44 billion 2013 loss. Ford expects Europe to return to profitability in 2016.

Middle East and Africa is Ford's newest regional business unit. It was carved out of the company's "Asia Pacific" unit in expectation of long-term growth in Africa. Right now, though, the unit is quite small, and it is losing money as it invests in long-term expansion. The business lost $82 million in the fourth quarter, $20 million for the year. Sales volume dropped 10% in the fourth quarter as dealers reduced stocks in response to slowing markets. Revenue declined 2% from the year-ago quarter. It's a work in progress.

Asia Pacific includes the company's equity stakes in its vast joint ventures in China. It made $95 million in the fourth quarter, down $14 million from a year ago. Ford said the decrease was "more than explained" by costs related to a recall. Volume for the region as a whole was up 2%, and volume in China rose 5%, as the overall industry continued to gain ground. 

For the full year, Ford's China joint ventures contributed $1.3 billion in profit, it said. The unit overall earned $589 million for the year, as Ford's ongoing investments in new factories in India and the costs of shutting down its Australian plant cut into profits.

Ford Credit earned $423 million in the fourth quarter, up $55 million from a year ago. Its full-year pre-tax profit was $1.9 billion, up $98 million from a year ago. The improvements were due largely to higher volumes, Ford said.

Special items, cash and debt, and Ford's 2015 guidance
As expected, Ford took a whopper of a special item -- $800 million -- against its fourth-quarter earnings as it changed the way it accounts for its Venezuelan operation. The company also took $251 million of charges related to factory closures in Europe. Ford has closed two U.K. factories and a large assembly facility in Belgium as part of its European restructuring plan; the charges are largely related to severance payments for laid-off factory workers.

Ford had $21.7 billion of "automotive gross cash" (its term for cash available to its automaking business, as opposed to cash held by its financial arm) as of the end of the year. That was down $3.1 billion from a year ago, but still represents an adequate reserve. Ford also had $10.7 billion worth of available credit lines, for total "automotive liquidity" of $32.4 billion. Ford's total debt of $13.8 billion as of year-end was $1.9 billion lower than a year ago.

Ford reiterated its 2015 full-year guidance, saying it "expects to realize the benefits of its global product investment and growth strategies" with a pre-tax profit between $8.5 billion and $9.5 billion.

The upshot: No big surprises here
I said on Tuesday that Ford's fourth-quarter result would probably reflect "short-term pain for long-term gain," and that's exactly what we saw on Thursday morning. The company has been making sizable investments in future growth. It expects to start realizing that growth in 2015, but 2014's results reflect the costs of those investments. 

For shareholders, it's important to remember these results represent progress, despite the sharp drops from Ford's sunnier 2013 results. Nothing here was a big surprise, and the company remains on track to start realizing the fruits of its investments in 2015.

John Rosevear owns shares of Ford. The Motley Fool recommends and owns shares of 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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