Ford Posts Solid US$1-bil. Q3 Net Profit

Ford achieved its second straight quarterly profit this year during the third quarter, posting after-tax net income of US$997 million, a dramatic improvement from the US$161-million loss recorded for the same period of 2008. Revenue declined somewhat, dropping from US$31.7 billion in the third quarter of 2008 to US$30.9 billion, but this fall was not as precipitous as it could have been thanks to a boost in production earlier in the quarter (automakers book revenue as vehicles are built, not sold). For the year to date (YTD), Ford has seen revenue drop from US$109.1 billion to US$82.9 billion, but after-tax profitability has been restored to US$1.3 billion from an US$8.8-billion loss through to the end of the third quarter of 2008. Ford also boosted its cash reserves during the third quarter, cutting back on its cash burn significantly and ending the period with US$23.8 billion in gross automotive cash on hand. "Our third quarter results clearly show that Ford is making tremendous progress despite the prolonged slump in the global economy", said Ford president and chief executive officer (CEO) Alan Mulally in a statement. "Our solid product lineup is leading the way in all markets. While we still face a challenging road ahead, our One Ford transformation plan is working and our underlying business continues to grow stronger."

Regionally, Ford returned to profitability in every part of the globe, and at almost all of its divisions. The quarter marked the first return to profitability for Ford in North America in nearly two years, aided by a number of encouraging factors. There was a massive shift from a US$2.9-billion loss in the third quarter of 2008 to a US$357-million pre-tax operating profit, with almost half of that gain coming from a surprising place: pricing improvements on vehicles such as the F-Series, Focus, and the new Taurus. Another US$1.1 billion of the gain came from cost-cutting efforts and lower raw material prices. It was profitable in South America, but saw both revenue and profits fall there because of the struggling global economy. Revenue fell 22.2% to US$2.1 billion in South America during the quarter, with net income sliding to US$247 million from US$480 million a year ago. In Europe, Ford experienced a drop in revenue as production was curtailed from year-ago levels, to US$7.6 billion from US$9.7 billion. Net income was up, however, jumping from US$69 million to US$193 million for the quarter, as was Ford's European market share, which hit its highest third-quarter level in 10 years. European sales were driven by the new Ford Fiesta, which has become the second best-selling car in all of Europe. Volvo remains the one trouble spot for Ford, but the numbers are improving—the Swedish brand, which Ford has put up for sale, narrowed its loss from US$458 million in the third quarter of 2008 to US$135 million in the most recent quarter, with revenue rising slightly. Ford's Asia-Pacific and Africa unit also helped add to the bottom line, where despite a US$200-million drop in revenue, the company turned in a US$27-million profit, significantly better than the meagre US$4-million profit for the same period of 2008.

Wholesales are also reflective of Ford's situation: these dropped almost across the board in nearly all regions in which Ford operates. The results for North America were not surprising given the "cash for clunkers" programme during the quarter, from which Ford benefited more than its domestic competitors, with two top-ten models in the sales race. As a result, Ford wholesales for North America were up 11.7% y/y for the quarter at 516,000 units, but the YTD figure is down by nearly that much, at 1.328 million vehicles. Its South American and European units were hit by the poor economic conditions and turned in lower wholesales numbers (dropping 14.3% y/y to 108,000 units in South America and 4.1% in Europe to 393,000). Volvo saw a gain of 15.2% y/y to 76,000 units for the quarter, and sales rose in the Asia-Pacific and Africa region as well, with a healthy 25.2% y/y increase to 139,000 units.

Outlook and Implications

The third-quarter results are better than most analysts predicted, and indeed a US$1-billion net profit is quite an accomplishment, especially considering that it came largely without the special one-time additions that led to the company's surprise second-quarter profit report. The most encouraging aspect has to be the improvement in net pricing in North America—nearly half of Ford's swing to profitability in the region was attributable to the company being able to obtain nearly US$2,700 on average more per vehicle than a year ago. That is an incredible accomplishment and is indicative of a couple of things. First, that Ford's very carefully crafted pricing and trim strategies, created by a "brain trust" of mathematicians and economists employed by the company, are paying off in a big way; and second, that the public is willing to start paying more for Ford vehicles, and in particular its passenger cars. Given the heavy loss of truck volumes over the last several years with the passing of the sport utility vehicle (SUV) and pick-up craze, it was hard to see how Ford would be able to replace the thousands of dollars of profit garnered from the sale of just one pick-up truck with the hundreds of dollars of profit generated by the sale of compact cars. The first way to do that is to improve product, and with the latest round of Ford models winning accolades from enthusiast reviewers and consumer reports alike, the public is starting to take notice. Combined with the much lower costs at Ford now thanks to new labour contracts (albeit not quite on a par with its domestic competitors in the wake of the union's recent rejection of an egalitarian pattern contract) and the elimination of a lot of retiree healthcare liabilities, Ford's recent revision of its guidance for 2011 from "break even" to "solidly profitable" does seem achievable.