Ford Earns $2.4 Billion In Second Quarter
Ford earned $2.4 billion in the second quarter, down from $2.6 billion a year earlier, but stronger than Wall Street expected as new small cars such as Fiesta and Focus sold well as gas prices rose and price increases generally offset higher material costs.
The bulk of the profits came from North America where Ford earned $1.9 billion before taxes, about even with year earlier results in the region. While its financial services arm, Ford Credit, earned $604 million before taxes, that was $284 million less than a year earlier. The company, which has increased prices on its vehicles in the U.S. and spent less on incentives, has been able to offset higher costs for steel, plastics and other materials that go into its cars and trucks.
The company barely broke even in the rapidly growing Asia-Pacific and South Africa regions because it is investing several hundreds of millions of dollars in new factories and partnerships. Worldwide, Ford's revenue rose 13.4% to $35.5 billion.
The median of Wall Street analysts’ forecasts was for Ford to earn an operating profit – before special accounting charges of $272 million -- of 60 cents a share. On that basis, Ford reported 65 cents a share. Ford shares initially rose in early morning trading, but fell back to Monday’s closing price of $13.17 by 11:15 a.m.
Ford reduced its debt to $14 billion, down from $16.6 billion at the end of the first-quarter, while increasing its cash position to $22 billion from $21.3 billion at the end of March. "We delivered very good second quarter results while growing the business globally," said CEO Alan Mulally.
Ford's strength in North America is significant as it formally opens contract talks this Friday with the UAW. Ford executives have floated the idea of tying more of its hourly workers' pay to the company's performance in the U.S.
“These numbers are very positive for negotiations because they illustrate what we have done together,” Mulally said. “The fact we transformed the company and we are growing on the strength of the product line gives us the opportunity to invest even more in the business.”
UAW leaders likely will point to Ford's profitability in North America as a reason why hourly workers should not be forced into concessions on pay or benefits.
Negotiating a labor agreement that does not raise labor costs over the next three or four years is important to Ford as it tries to convince debt-rating agencies to give it a higher credit rating. "They (the ratings agencies) will want to see us get through the UAW discussions," said Lewis Booth, chief financial officer.
Ford reiterated its production plan to make 630,000 vehicles in North America between July 1 and Sept. 30, 44,000 more than it produced in the third quarter of 2010. New vehicle sales in the U.S. were weaker than expected in May and June, but Booth said Ford still expects Americans will buy about 13 million vehicles this year, up from 11.6 million in 2010.
While Ford did make money in Europe, South America and its Asia-Pacific and African operations, its pre-tax operating profit in Europe fell to $176 million, from $322 million a year earlier.
In Asia-Pacific and Africa, Ford only made $1 million before taxes, down from $113 million in the second quarter of 2010. The decline reflected large investments Ford is making to become a larger manufacturer in China and India. Earlier this year it announced plans to invest $350 million with joint venture partners in its first transmission plant in China. Ford also is spending $72 million to expand an engine factory in Chennai, India. In South America, pre-tax profit slipped to $267 million from $285 million a year earlier.
Ford is on track to meet nearly all its key objectives for the year, except for quality. Last month, the annual J.D. Power initial quality survey showed that consumers’ assessment of new Ford products declined from 2010, largely because of consumer confusion or discomfort with some in-vehicle technology such as its Sync voice-command system and the MyFord Touch control screen available on the Edge, Lincoln MKX and Ford Explorer. The company has modified the voice-recognition software and is simplifying the menu of displays MyFord Touch offers.
“We saw some areas with potential for improvement, but we believe even more in MyFord Touch and Sync than ever before,” Mulally said. “One issue was just the computational capacity of the system. We are pleased by the acceptance of the improvements by the consumers.”
Both Mulally and Booth said they expect new vehicle sales in the U.S. to be stronger in the second half as their Japanese competitors rebuild inventories depleted by the March 11 earthquake and tsunami.
But the political showdown in Washington over raising the government’s debt ceiling has forced Ford to consider how business could be affected by a government default.
“We look at all the elements of the business and ask what it (a default) would mean,” Mulally said. “These issues are really important and we are confident we are going to get to a resolution that moves the country forward.”