Ford reports 58% drop in Q2 profits on European losses

Wed, 25 Jul 2012

Ford Motor Company announced Wednesday that it has posted a $1 billion profit for the second quarter of 2012. That sounds like good news for the Blue Oval, until you take into account that Ford posted a $2.4 billion profit for Q2 a year ago. That is a substantial 58 percent loss.

Ford also posted $465 million in international losses, with $404 million of those losses coming directly from Europe. The automaker also increased its European loss projections to $1 billion for 2012, due in large part to the economic crisis overseas, which has resulted in increased unemployment and decreased consumer confidence.

The $404 million loss actually beat out loss projections for this quarter, based on estimates from a month ago. The result was a 1.8 percent increase in Ford's stock, based on pre-market trading this morning.

Ford's North American unit posted a profit of $2 billion in Q2 – the second economic quarter in a row in which the company posted profits in excess of $2 billion.

Additionally, the investor service Moody's returned the Blue Oval's investment grade to its 2006 status. If you recall, that was when the company leveraged nearly everything, allowing it to avoid government bailout. Before this news, Fitch Ratings had restored Ford's investment grade as well.

FORD EARNS SECOND QUARTER 2012 PRE-TAX OPERATING PROFIT
OF $1.8 BILLION, NET INCOME OF $1 BILLION

• Second quarter pre-tax operating profit was $1.8 billion, or 30 cents per share, a decrease of $1 billion
from second quarter 2011. Ford has now posted a pre-tax operating profit for 12 consecutive quarters
• Second quarter net income was $1 billion, or 26 cents per share, a decrease of $1.4 billion from second
quarter 2011, reflecting lower operating results except for Ford North America and higher tax expense
• Solid second quarter results were driven by Ford North America and Ford Credit; challenges at Ford Europe and Ford South America are being addressed through the company's One Ford plan
• Total Automotive pre-tax operating profit was $1.4 billion, a decrease of about $900 million from second quarter 2011
• Ford North America recorded second straight quarter with profits of more than $2 billion and operating margin exceeding 10 percent
• Ford Credit reported a pre-tax operating profit of $438 million, a decrease of $166 million from second quarter 2011, in line with expectations
• Revenue was $33.3 billion, a decrease of $2.2 billion from second quarter 2011
• Ford ended the quarter with $33.9 billion in total Automotive liquidity, an increase of $1 billion compared with first quarter 2012
• Ford expects full year total company pre-tax operating profit to be strong, but lower than 2011, with positive Automotive operating-related cash flow

DEARBORN, Mich., July 25, 2012 – Near-record profits in North America and continued strong performance from Ford Credit helped the Ford Motor Company [NYSE: F] deliver its 12th consecutive quarterly pre-tax operating profit as it reports second quarter 2012 results today.
The company reported a pre-tax operating profit of $1.8 billion, or 30 cents per share, and net income of $1 billion, or 26 cents per share. The company also continued to generate positive Automotive operating-related cash flow, and ended the period with a strong liquidity position of $33.9 billion, an increase of $1 billion during the quarter.
"The Ford team delivered another solid quarter driven by the strength of Ford North America and Ford Credit," said Alan Mulally, Ford president and chief executive officer. "We remain absolutely committed to continuing to make progress on our One Ford plan, including dealing decisively with near-term challenges, investing for future growth, and developing outstanding products with segment-leading quality, fuel efficiency, safety, smart design and value."
Second quarter 2012 net income was affected by lower operating results and the impact of higher tax expense compared to a year ago that resulted from the release of the tax valuation allowance in the fourth quarter of 2011.
Ford finished the second quarter with Automotive gross cash of $23.7 billion, an increase of $700 million during the quarter. Automotive debt of $14.2 billion at the end of the second quarter was up from $13.7 billion at the end of the first quarter, primarily reflecting additional drawdowns of low-cost loans for the development of advanced vehicle technologies. The company will make its last draw on these loans by August 2012, and repayment of the loans begins in September 2012.
Ford also made payments of $800 million to its worldwide funded pension plans, of which $500 million were discretionary payments to U.S. funded plans, in line with the company's previously-disclosed long-term strategy to de-risk its funded pension plans. Dividends paid in the quarter totaled nearly $200 million. Automotive gross cash exceeded debt by $9.5 billion at the end of the second quarter, a net cash increase of $200 million during the quarter.

AUTOMOTIVE SECTOR The decrease in total Automotive pre-tax operating profit and operating margin was more than explained by lower results at Ford Europe, Ford South America, and Ford Asia Pacific Africa.
Ford North America

For the second straight quarter, Ford North America pre-tax operating profit exceeded $2 billion, and operating margin exceeded 10 percent. The increase in pre-tax results compared with strong performance in 2011 reflected higher net pricing, improved contribution costs, and other factors, offset partially by higher structural costs for growth, and unfavorable volume and mix including an adverse change in U.S. dealer stocks.
The company's outlook for full year North America 2012 profits remains unchanged. Ford expects significantly higher pre-tax operating profit and margin compared with 2011, as consumers continue to respond to the company's strong product line-up, including the recently-launched all-new Escape and the all-new Fusion launching in the second half of this year. Ford also remains committed to maintaining its competitive cost structure in North America.
Ford South America
Pre-tax operating profit and operating margin, while slightly positive, declined substantially compared with a year ago due to lower volume, higher costs, and unfavorable exchange. Although net pricing was higher compared with a year ago, it was constrained compared with recent periods by a more intense competitive environment.
Although the company continues to expect that Ford South America will be profitable for the full year, it now expects the level to be substantially lower than 2011, reflecting increased competitive pressures, weakening currencies, and changes in government policies affecting areas such as trade and access to foreign currency.
Ford continues to work on actions to strengthen competitiveness in this changing environment, looking at all areas of the business to improve operating results. These actions include fully leveraging the One Ford plan, including the introduction of an all-new lineup of global products over the next two years, starting with the launch of the all-new Ranger, EcoSport, and Fusion in the second half of this year.

Ford Europe
Ford Europe's results compared with a year ago largely reflected unfavorable market factors. Volume was unfavorable due to lower industry, share and associated production adjustments to maintain dealer stocks at appropriate levels. Net pricing was lower as the industry responded to excess capacity with higher incentives. Higher contribution costs also contributed to the profit decline.
Given the deteriorating external environment in Europe, Ford now expects its full year loss in Europe to exceed $1 billion. The magnitude of this loss will be affected by a number of factors, including the overall economic environment, competitive actions, and Ford's response to these developments.
The company recognizes the seriousness of the situation in Europe, and views the challenges the industry faces as more structural than cyclical in nature. While Ford is affected significantly because of its strong presence in the region, the company understands what is needed to achieve profitability and to generate an appropriate return on investments.
"We have faced challenging situations in other parts of the business before, and successfully addressed them through our One Ford plan," said Bob Shanks, Ford executive vice president and chief financial officer. "We will continue to use our plan as the guide to address challenges and opportunities in our valued European operations.
"We are reviewing all areas of our business to address the near-term challenges, while ensuring we build a strong foundation for our future," said Shanks. "It is premature to discuss details of what our plans may be in response to the situation in Europe, but we will continue to communicate our plans at the appropriate times with all of our stakeholders."

Ford Asia Pacific Africa
In Asia Pacific Africa, market factors were strongly positive compared with a year ago, but more than offset by higher costs associated with new products and investments to support higher volumes and future growth, as well as other factors.
Ford expects results to improve in the second half of 2012, due mainly to favorable volume and mix as Ford benefits from added capacity in China and Thailand and the all-new Focus and Ranger.

Other Automotive
In the second quarter of 2012, Other Automotive reported a loss of $163 million, compared with a loss of $76 million a year ago. The loss mainly reflects net interest expense and an unfavorable fair market value adjustment, primarily from the company's investment in Mazda.

FINANCIAL SERVICES SECTOR

Ford Motor Credit Company
The decrease in Ford Credit's pre-tax results was in line with expectations and is primarily explained by fewer lease terminations, which resulted in fewer vehicles sold at a gain, and lower financing margin. Ford Credit continues to expect full year pre-tax profit of about $1.5 billion, and total distributions to its parent of between $500 million and $1 billion. Ford Credit now projects managed receivables at year end to be in the range of $85 billion to $90 billion, and managed leverage of 8-9:1 for the foreseeable future, which is a decrease from the prior target of 10-11:1 and is consistent with its goal of achieving and maintaining a strong investment grade balance sheet.
Ford Credit remains a strategic asset for Ford, delivering high levels of quality and customer satisfaction with operating efficiencies that are among the best.

SECOND AND THIRD QUARTER PRODUCTION VOLUMES

The increase in the company's anticipated production volume for the third quarter, compared with a year ago, is more than explained by higher volumes for Ford North America and Ford Asia Pacific Africa. Compared with second quarter 2012, the company anticipates that third quarter 2012 production will be down 45,000 units, primarily reflecting seasonal summer shutdowns in North America and Europe.

About Ford Motor Company
Ford Motor Company, a global automotive industry leader based in Dearborn, Mich., manufactures or distributes automobiles across six continents. With about 168,000 employees and about 65 plants worldwide, the company's automotive brands include Ford and Lincoln. The company provides financial services through Ford Motor Credit Company. For more information regarding Ford's products, please visitwww.ford.com.

By George Kennedy