Ford Profit Misses on Growing Recalls Amid Higher Costs

Ford Motor Co. (F), beset by higher recall costs and bad weather, earned first-quarter net income of $989 million, down 39 percent from a year ago and less than analysts’ estimates. The shares fell.

Ford earned 25 cents a share excluding certain items, trailing the 31-cent average estimate for the first time since 2011. The company attributed the miss to an extra $400 million in warranty and recall expenses, a bigger loss in South America and bad weather in North America. Recall costs are rising across 2008 to 2013 vehicles, not from one specific model, said Chief Financial Officer Bob Shanks.

“We have seen more field-service actions over the last two years,” Shanks told reporters today at Ford headquarters in Dearborn, Michigan. Recalls have been increasing because “there’s more complexity in the vehicles, more technology in the vehicles. There’s better data and a better ability to very quickly identify issues. Everybody is generally reacting -- certainly we do -- as soon as we find a problem.”

General Motors Co. (GM), under scrutiny for its slow recall of 2.59 million small cars linked to 13 deaths, took a $1.3 billion charge for recall-related costs as it reported an 82 percent decline in first quarter profit yesterday. Ford slid 3.3 percent to $15.78 at the close in New York for the biggest one-day drop in three months. The shares have gained 2.3 percent this year after rising 19 percent last year.

Photographer: Ty Wright/Bloomberg

Employees work on the assembly line installing parts on the Duratech 35 V6 engine at the Ford Motor Co. Engine Plant in Lima, Ohio. Close

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Photographer: Ty Wright/Bloomberg

Employees work on the assembly line installing parts on the Duratech 35 V6 engine at the Ford Motor Co. Engine Plant in Lima, Ohio.

Ford Recalls

Automakers in the U.S. had recalled 14.7 million vehicles through 159 campaigns this year through yesterday. For all of last year, there were 632 recalls covering almost 22 million vehicles. About a third of all recalled cars and trucks don’t get repaired, and about one out of every seven vehicles, or 36 million, still on the road have an unrepaired defect, according to data compiled by regulators, safety advocates and the CarFax vehicle history company.

Ford ranked fifth among automakers last year when it conducted 16 recalls in the U.S. covering 1.19 million vehicles and it ranked fourth in 2012 when it issued 24 recalls for 1.4 million vehicles, according to National Highway Traffic Safety Administration annual reports. This year through yesterday, Ford had conducted three U.S. recalls covering 420,018 vehicles, according to NHTSA data on its Website.

South America

During the first quarter, Ford’s South America unit lost $510 million before taxes, compared with a loss of $218 million a year earlier, according to a statement. It recognized $310 million in costs to reflect the decline in Venezuelan currency. Ford said it will now lose more money in South America this year than the $34 million it lost last year, which is a change from its previous guidance. The region may break even for the rest of the year, Shanks said.

The company’s pretax operating profit fell 36 percent to $1.38 billion. A higher warranty reserve, weather-related expenses and currency effects reduced profit by about $900 million, Ford said. The coincidence of these items is unusual and not representative of the business, Ford said.

“We expect the rest of the quarters to be substantially stronger than what we’re seeing in the first quarter,” Shanks told analysts on a conference call today. “The run rate of the business is much healthier than what the initial view of the bottom line would seem.”

The second-largest U.S. automaker is rolling out 23 new models worldwide this year and a record 16 in North America. That has required costly overhauls of factories, including 13 weeks of downtime at two U.S. plants that produce profitable F-150 pickups. The automaker has promised investors that the profit declines from this “building-block year” will result in better 2015 earnings.

‘Messy’ Quarters

“We’re a little surprised at the magnitude of the hit in 2014 from all the product transitions going on, but when you look out at 2015, they’re very well positioned,” said Michael Levine, a fund manager at Oppenheimer Funds Inc. in New York, who said Ford is one of the top 10 stocks in the $5.8 billion equity income fund he manages. “We’re very excited about the future, but clearly the next few quarters could be messy.”

The profit dip comes as Ford prepares for a transition at the top, with Chief Operating Officer Mark Fields, 53, set to replace Alan Mulally, 68, as chief executive officer, according to two people familiar with the company’s plans. Ford could reveal the timing of Fields’s promotion and Mulally’s departure as soon as May 1, said the people, who asked not to be identified disclosing internal discussions.

In the first quarter, Ford had pretax operating income in North America of $1.5 billion, down from $2.4 billion last year. Ford’s U.S. sales fell 2.8 percent to 580,260 vehicles in the first quarter, while its market share fell to 15.5 percent from 16.2 percent a year earlier, according to researcher Autodata Corp. of Woodcliff Lake, New Jersey.

Aluminum Truck

Of all of Ford’s new-model introductions, the most crucial is the F-150 pickup, which the automaker has said it will begin selling in the fourth quarter.

The truck sheds as much as 700 pounds (318 kilograms) to improve fuel economy, mostly by using aluminum instead of steel in its body. In 2013, Ford’s F-Series truck was the top-selling vehicle line in the U.S. for the 32nd consecutive year, with sales rising 18 percent to 763,402. That helped drive Ford’s North American pretax profits to a record $8.78 billion last year.

“Ford’s quarterly numbers this year are going to be soft and unpredictable because of the product changeovers,” Levine said. “The question is, ‘When do investors in the market begin to look beyond that to 2015, which is setting up to be a great year?’”

Margin Decline

Ford is hoping to increase production of its current model F-Series pickup to meet growing demand, Fields said on the conference call. That could help boost operating margins in North America, which fell to 7.3 percent in the first quarter from 11.1 percent a year earlier, Fields said.

“The demand is out there, customers really like the existing product and we’re going to try to get as many as we can to them,” Fields said of the 2014 model truck. “That could help us get to the upper half of the margin range we have for North America.” Ford has said it expects North American operating margins to be 8 percent to 9 percent this year.

Ford has begun showing progress in other regions that have been challenging.

European Outlook

In Europe, where Ford said it will return to profitability next year, pretax operating losses fell to $194 million from a loss of $425 million last year, the company said today. The automaker’s sales in Europe jumped 14 percent last month as industrywide deliveries rose for the seventh consecutive month, and Ford raised its forecast for industrywide regional sales this year by 500,000.

The U.S. automaker anticipates $350 million to $400 million in costs this year to close a plant in Belgium and other restructuring expenses that won’t repeat in 2015, Shanks said in a telephone interview. New models including the Mondeo sedan and Mustang sports car will increase margins, as well, he said.

“All those things together will give us a profit in 2015,” he said. “Not necessarily the type of ongoing operating margin we’d like to have, but it certainly gets us over the goal line in terms of profitability and then we’ll continue to move forward from there.”

Asia Progress

In Ford’s Asia-Pacific region, pretax earnings rose to $291 million from a loss of $28 million last year. Ford sales in China surged 45 percent in the first quarter and it had record market share of 4.5 percent, as it moved close to becoming the third-largest foreign automaker in the country. Last year, Ford’s sales in China surpassed Toyota Motor Corp. (7203)

Ford said it now expects its Asia-Pacific region to earn a higher pretax profit this year than the $327 million it earned last year. Previously, the automaker forecast unchanged results.

First-quarter automotive sales were little changed at $33.9 billion as Ford cut North American production by 1.3 percent during the period to 774,000 cars and trucks. The average estimate for total first-quarter automotive revenue was $34.2 billion, according to the average of nine estimates. Ford said it plans to produce 810,000 vehicles in North America in the second quarter, down 1.2 percent.

Debt Picture

Automotive debt, which excludes Ford Motor Credit, was $15.7 billion on March 31, unchanged from Dec. 31, the company said.

Ford is “amending and extending” its revolving credit line to increase it to about $12 billion from $10.7 billion, Shanks said.

“This will provide the company with additional liquidity as we expand our business globally,” Shanks told analysts on the call.

Ford’s automotive gross cash and credit lines gave the company liquidity of $36.6 billion as of March 31, up from $36.2 billion on Dec. 31.

“The quarter contains a lot of moving pieces, and the shares could come under pressure initially,” Ryan Brinkman, an analyst a JPMorgan Chase & Co., wrote in a note to investors this morning. “When the dust settles, investors will conclude that Ford’s underlying operations are performing well despite this being a ‘transition year’ on a record number of new product launches, setting the company up for even better performance down the line.”

To contact the reporter on this story: Keith Naughton in Dearborn, Michigan, at knaughton3@bloomberg.net

To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net Niamh Ring

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