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Ford's Earnings Drop as It Gears Up for a Big Second Half

By John Rosevear – Apr 28, 2015 at 11:02AM

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Ford expects 2015 to be a great year. But first-quarter earnings dipped as Ford's investments weighed.

Shipments of the all-new F-150 were still well below Ford's year-ago levels in the first quarter. That hurt revenue and profits, but both should look a lot better as the year goes on. Source: Ford Motor Company.

Ford Motor Company (F 0.44%) reported net income of $924 million on Tuesday. That was down $65 million from a year ago, as the costs of new-product launches and exchange rate pressures took a bite out of revenues.

Excluding one-time items, Ford earned $0.23 a share, $0.03 short of Wall Street's $0.26 estimate. But Ford confirmed that it remains on track toward its full-year goal: a big increase in pre-tax profits.

Ramping up now for big gains later this year
Ford reported revenue of $33.9 billion for the quarter. That was down $2 billion from a year ago, a drop that Ford attributed to a couple of factors. First, the strength of the U.S. dollar versus other currencies reduced the value of Ford's overseas earnings when expressed in dollars. CFO Bob Shanks said in an interview that about 70% of that $2 billion drop was due to foreign-currency exchange. (Ford hedges against exchange-rate moves, but its older hedges hadn't anticipated the sharp rise of the dollar, Shanks said.) 

Second, Ford's total wholesale volumes were down by about 21,000 vehicles. That was largely due to the continuing ramp-up of production of the all-new F-150 and Edge SUV. Shanks said that wholesale shipments of the F-150 were down about 40% from the year-ago quarter, and Edge shipments dropped by more than half. U.S. retail sales of the Edge were down about 10,000 units in the quarter.

Had production of both models been at full speed, Shanks said, Ford's North America and overall pre-tax profit would have been higher by over a billion dollars, and the company's operating margin in North America (6.7% during the quarter) would have been "easily over 10%."

That's because new products improve Ford's ability to command higher prices. Fresh, competitive products can be sold at top prices with fewer discounts. In addition, Ford's latest products are offered with more premium options packages that can boost per-sale profits significantly. 

That effect showed up in North America, where stronger pricing contributed $402 million of gains, partially offsetting new-product launch costs. It also helped in South America, where Ford's all-new small car, the Ka, helped boost pricing (and overall market share) amid difficult economic conditions that have hurt overall sales and profits across the industry. 

Overall, Ford gained about $840 million in pre-tax income from improved pricing around the world, although that was offset by increased costs and other factors.

Europe and South America dragged, but Asia is ramping up, too
Not all of the news had a silver lining, though. Europe continues to be a money-loser for Ford, although its loss of $185 million for the quarter represents progress. Ford continues to say that its full-year losses in Europe will be lower than the roughly $1 billion it lost last year, and that it expects to return to profitability next year. 

Shanks said he expects to see pricing gains in Europe later this year as more new products arrive at European dealers. The all-new Mondeo sedan -- the European twin of Ford's Fusion, which went into production at the end of 2014 -- is already helping. 

Ford's Asia-Pacific unit, which includes its fast-growing operations in China, earned $103 million, a significant drop from the $291 million profit it posted a year ago. Most of the difference ($166 million) was due to increased structural costs: Ford is putting the finishing touches on two new factories that will open later this year. Those should help boost sales and profits in the second half of 2015.

And Ford -- along with the rest of the industry -- continued to face tough sledding in South America, though its $189 million loss was much improved from the $510 million hit it took a year ago. Ford gained market share and improved its pricing, as noted above, but it wasn't enough to offset a drop in overall sales volume. 

Ford still expects a very strong 2015
Ford's outlook for the full year is mostly unchanged. It still expects its full-year pre-tax profit (excluding special items) to come in between $8.5 billion and $9.5 billion, with higher revenue, operating margin, and operating-related cash flow compared to 2014.

Specifically, Shanks emphasized that results in North America should be "very strong" in the second half, as the all-new F-150 and Edge hit their strides. Ford revised its official guidance for North America operating margins up a bit, to between 8.5% and 9.5% for the full year. But it made a small negative change to its expectations for South America, where ongoing tough conditions now look to make things a bit worse than it had expected. 

Ford's second half should be very strong, but next quarter's results may be subdued. That's a reversal of Ford's usual pattern, in which costs rise (and profits drop) later in the year as the company ramps up to launch the next year's new models. 

Ford had $19.5 billion in cash on hand at the end of the quarter, a $2.2 billion drop from the beginning of the year. Much of that change ($1.8 billion) was attributable to capital spending, new factories, and tooling needed to build all of those new Fords. 

Ford still expects its operating cash flow for the full year to be higher than the $3.6 billion it generated in 2014.

So, why did Wall Street miss?
Why did Wall Street's experts overestimate Ford's per-share earnings?

Shanks said it appeared that some analysts failed to factor higher taxes into their financial models. Ford had hinted that its taxes would come in higher in the first quarter, but some analysts missed that, he said. (Ford's tax rate fluctuates as its sources of income change from quarter to quarter.) 

Ford paid at a 34% rate during the quarter, and Shanks said Ford expects to pay at the 34% rate next quarter as well. 

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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