Ford Announces Lower Q1 Earnings on European Troubles

Ford posted its first-quarter 2012 financial results late last week, announcing a decline in profits from the year-ago period, based mostly on continuing difficulties in the struggling European marketplace. Ford posted a USD1.4-billion after-tax net income for the quarter, a significant slide from the USD2.6-billion profit in the same quarter last year, although the amount did in fact beat Wall Street estimates on what Ford was expected to announce. Revenues were down as well, falling from USD33.1 billion in the first quarter of 2011 to USD32.4 billion. The company's cash position continues to improve as well, despite Ford spending to improve its balance sheet situation. Gross cash grew USD1.7 billion to USD23.0 billion at the end of the first quarter of 2012, while debt shrank from USD16.6 billion to USD13.7 billion. The company has been spending some of its cash on increased commodity costs as well as significant debt reduction efforts. As a result of those efforts, Ford now has USD9.3 billion more cash on hand than it carries in debt, thanks to diligent efforts to reduce the massive debt it incurred while funding its turnaround over the last four years, and an improvement of nearly USD4.5 billion from the same time a year ago. "Our team delivered a solid performance during the first quarter, with particularly strong results in North America, despite a challenging global external environment," said Alan Mulally, Ford president and CEO. "We remain focused on investing for future growth and developing outstanding products with segment-leading quality, fuel efficiency, safety, smart design and value."

Ford is continuing its dramatic turnaround in North America, where it has gone from being the loss leader three years ago to the strongest region for Ford globally. Ford North America posted a pre-tax operating profit of over USD2.1 billion in the first quarter, an improvement over the USD1.8 billion seen in the first quarter of 2011. The company says that this was the highest quarterly profit for the region since 2000, since Ford started reporting North America as a separate business unit. Ford attributed the gain to higher volumes and much more favourable net pricing. Revenue for North America came in at USD18.6 billion, an improvement of USD700 million. This represents nearly USD9.0 billion more in revenue than Ford saw in the first quarter of 2009. Profitability is also up in the region, with the company's margin improving from 10.3% to 11.5% of revenue. South America also provided profitable contribution for the quarter, with pre-tax operating profit of USD54 million, down from profits of USD210 million for the same period 2011. Unfavourable exchange rates and higher costs are digging into profits, says Ford. Revenue and wholesales were up in the region, by USD100 million to USD2.4 billion for revenue, and up 4,000 units to 118,000 moved in the region.

Ford's other two regions did not fare so well in the first quarter. Europe turned in a pre-tax operating loss of USD149 million, quite a swing from profits of USD293 million a year ago. Lower demand is the culprit here says Ford, with lower industry volumes, lower parts and accessories sales, and special incentives necessary to bring down dealer inventories. Cost increases were also seen in pension-related costs. Revenue dropped in Europe by USD1.5 billion to USD7.2 billion, a sizeable decline explained by wholesales that have fallen by 60,000 units to 372,000. The Asia-Pacific and Africa region also fared poorly, turning in a loss of USD95 million, another swing from a profit of USD33 million a year ago. Higher costs for investment and expansion were blamed, along with the slower-than-anticipated launch of the Thai-build Ranger pick-up. Wholesales were down 25,000 units to 217,000, with a commensurate drop in revenue of USD200 million to USD2.3 billion total. Ford Credit provided some much-needed profitability help however, contributing a pre-tax operating profit of USD456 million, itself a sizeable decline from the USD713 million seen a year ago. Ford expected this however, and chalks it up to fewer lease terminations (due to a dearth of leasing in the 2009 period due to the US economic crash) and fewer vehicles sold at a profit from those terminations.

Outlook and Implications

Ford has been continually building its profitability and improving its balance sheet, but took something of a hit this quarter with struggling performances in the European and Asia-Pacific markets. Europe is a known issue; few automakers are having a good year there thus far thanks to the continued economic malaise and the fear of various economies plunging into bankruptcy due to ongoing debt problems. Austerity measures do not seem to be helping those economies work their way out of the doldrums either, making the possibility of a return to recession increasingly real. Ford is working to right its ship in Europe, but the simple fact is that the market itself is in trouble, overcapacity is rampant, and solutions are likely to take some time to work out. Ford projects that Europe is a lost cause this year, aiming for a USD500-600 million loss for the full year, with the second half looking a little better thanks to some new product launches and active work in getting dealer inventories down. Asia-Pacific is expected to improve for Ford with the massive investment that the company is making, and Ford also feels that now that the new global Ranger is launched, that sales of the new pick-up will boost fortunes throughout the rest of the year.

Until then, North America looks to be the company's saviour, with growing business there, increasing production, and an outlook that is steadily improving. The company's latest introductions are doing well—the Ford Explorer is gaining sales considerably, the company's small cars are holding their own in an increasingly competitive marketplace, and Ford's EcoBoost engines are making the F-series pick-up unique among its competitors for its superior fuel economy. Ford has been preparing for this kind of economic scenario in the US, and has dramatically fleshed out its showroom with small cars and a variety of offerings meant to allow for US consumers to have a great deal of choice when it comes to car shopping. The new Escape crossover utility vehicle (CUV) will be arriving shortly, as will four-cylinder versions of the Taurus and Explorer, turbo models meant to allow for higher fuel economy in larger vehicles. Such a formula has been successful at crosstown rival GM, which has seen sales of its larger vehicles continue to be robust thanks to mild hybridisation of those large cars. Ford still has the edge in truck technology however, as GM has not yet come to market with a comparable fuel economy argument for its long-in-the-tooth trucks; Chrysler however will be fielding an interesting competitor when its new Ram 1500 hits showrooms with a best-in-class eight-speed transmission and nearly 300 hp from its Pentastar V6 engine. Thus, Ford's continued success in North America is certain to be challenged this year, and while overall numbers look to add up to a positive year for the North American market, eyes will still be focused mainly on the company's European efforts, and how well it responds to challenges in that market in trying to restore profitability amid the troubles and trials currently being seen throughout that market.