Ford's Q3 pretax operating profit falls 54% to $1.18 billion

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Automotive News / October 24, 2014

Ford Motor Co.’s third-quarter pretax operating profit tumbled 54 percent from a year earlier to $1.18 billion, hurt by lower sales volume and higher warranty costs.

Net income was $835 million, down 34 percent, Ford said in a statement today. The company took a $160 million charge for special separation actions related to its European restructuring plan. In the year-earlier quarter, special pretax charges of $498 million dragged down net.

Ford was profitable in its North America and Asia Pacific regions, but lost money in Europe, South America and Middle East & Africa. Revenues fell 3 percent to $34.9 billion.

“During the third quarter, we continued to introduce an unprecedented number of new vehicles and invest heavily in the new products and technologies that will deliver strong profitable growth beginning next year,” CEO Mark Fields said in a statement.

'Challenges'

In summing up the quarter, CFO Bob Shanks acknowledged, “We did have some challenges. But everything was in line with what we expected at the end of September” when Fields laid out his projections for investors.

At that investor conference, Fields cut Ford’s profit outlook for 2014, delivering a jolt to investors who had become accustomed to his predecessor, Alan Mulally, regularly beating Wall Street projections. Fields warned that profits this year would come in at least $1 billion, and as much as $2 billion, below prior guidance.

Ford tied the warning to several factors including economic weakness in Russia and South America on top of $1 billion in unplanned warranty expenses.

Ford reiterated today that it expects its 2014 pretax profits to be about $6 billion, excluding special items, and that its North American operating margin will be at the lower end of its 8 percent to 9 percent guidance range, while the automaker’s results in Europe, Asia Pacific and Ford Credit will improve from 2013 levels.

Volume hurts N.A.

In the third quarter, Ford’s North American region posted a pretax profit of $1.41 billion, down 39 percent, hurt by higher warranty costs and lower volume. Revenues fell 6 percent to $19.9 billion, as wholesale volume slid 8 percent to 665,000 units.

The volume drop was due to mainly to product launches, including five weeks of downtime in the quarter at the Dearborn Truck Plant near Detroit for the launch of the redesigned F-150 pickup, and supplier parts shortages.

In Europe, Ford’s pretax loss widened to $439 million from $182 million a year earlier. Ford said the wider loss was more than explained by Russia, currency losses on its balance sheet, lower component pricing and the non-recurrence of year-earlier special gains.

European revenues rose 7 percent to $6.9 billion. In July, Ford posted its first quarterly profit in the region in three years.

Asia Pacific drops

In the Asia Pacific region, pretax profit fell 62 percent to $44 million, as revenues rose 4 percent to $2.6 billion on a more favorable mix of sales. The revenue figure excludes Ford’s joint ventures in China.

Finance chief Shanks said the profit decline was due to the costs of opening five new factories in the region in the next nine months plus the cost of launching the Lincoln brand in China. He said Lincoln recorded its first sale in China today. Eight Lincoln dealerships will be open by the end of 2014.

In South America, Ford swung to a pretax loss of $170 million from a pretax profit of $160 million a year earlier, as revenues slid 17 percent to $2.3 billion. Ford cited lower volume and currency losses for the red ink.

“Ford is working to manage the effects of slowing GDP growth, declining industry volumes in its larger markets, weaker currencies and high inflation, as well as policy uncertainty in some countries,” the automaker said.

In the Middle East & Africa region, pretax losses narrowed to $15 million from $25 million a year earlier, as revenues rose 5 percent to $1.1 billion.

Ford Motor Credit’s pretax profit rose 17 percent to $498 million, on higher volume. The company said Ford Credit saw increases in nearly all financing products, including consumer and non-consumer products globally and leasing in North America.

Negative cash flow

Ford’s automotive operating-related cash flow was a negative $700 million for the third quarter, the first time since the first quarter of 2010 it has been negative, Shanks said. That was due to unfavorable changes in working capital, including the effects of the downtime at the Dearborn Truck Plant.

Ford said it expects working-capital changes in the fourth quarter to be positive.

Ford said supplier parts shortages also contributed to the negative cash flow. There were shortages at four North American plants, which Shanks declined to name.

“We’re not going to identify the suppliers and models,” Shanks said. “There were four different issues. We are not going to make it up fully in the fourth quarter.”

Ford ended the quarter with automotive gross cash of $22.8 billion, exceeding debt by $7.9 billion. Three months ago, Ford’s gross cash total of $25.8 billion was $10.4 billion more than debt.