Ford earnings pinched by recalls, incentives

Tax gains spur Q4 net of $3B; workers to get $8,800 each in shared profits

UPDATED: 1/28/14 4:15 pm ET - Adds closing stock price

DETROIT -- A big recall of the Ford Escape, higher incentives and plant shutdowns in South America cut into Ford Motor Co.'s fourth-quarter earnings, but full-year profits rose as U.S. sales and market share increased.

Ford earned $3 billion in the quarter, 90 percent more than the same period a year ago, though more than two-thirds of the profit was related to favorable tax benefits.

Excluding the $2.1 billion tax gain and other one-time items, Ford's pretax operating profit fell 24 percent to $1.3 billion. It was Ford's 18th consecutive profitable quarter.

For all of 2013, Ford reported net income of $7.2 billion, up from $5.7 billion in 2012. Its automotive operations generated a pretax profit of $6.9 billion, the highest in more than a decade.

Revenue increased 4 percent in the fourth quarter, to $36.3 billion, and 10 percent for the year, to $146.9 billion.

"We had an outstanding year in 2013, demonstrating that our One Ford plan continues to drive solid results and profitable growth for all," Ford CEO Alan Mulally said in a statement. "We are well positioned for another solid year in 2014."

Ford sold 2,485,236 vehicles in the United States in 2013, an 11 percent increase. Its U.S. share was 15.9 percent, up from 15.5 percent in 2012.

In North America, Ford earned a pretax profit of $1.7 billion in the fourth quarter, 9 percent less than the same period a year ago. But its full-year earnings for the region rose 5 percent to $8.8 billion, which the company said was a record.

Ford said higher warranty and structural costs and lower net pricing hurt results in North America. It accrued $300 million in warranty costs, primarily related to a November recall of more than 161,000 Escapes to fix a defect that has been linked to 13 fires.

The results mean Ford's 47,000 UAW-represented hourly workers will get profit-sharing checks averaging $8,800, or a total of about $414 million. That is the highest Ford has ever paid out to its workers for profit sharing. Last year's checks averaged $8,300.

"The company had an outstanding year, earning a profit that was higher than last year's strong performance and one of our best years ever," Ford CFO Bob Shanks said in a statement. "Our results were driven by record profits in North America and Asia Pacific Africa, improved results in Europe and another solid year from Ford Credit."

The fourth-quarter tax gains were largely related to an increase in deferred assets in Europe and the release of deferred valuation allowances, a move that will give Ford a "very low" U.S. tax rate on profits in the next few years, Shanks said.

Ford's operating margin in North America declined to 7.6 percent in the fourth quarter, from 8.4 percent a year earlier. It spent 27 percent more on incentives in the fourth quarter than a year ago, according to Kelley Blue Book.

The company has said it plans to reduce production in the first quarter, and it idled some plants recently to help reduce inventories. Ford has also been hit by warranty costs for recalls on the Escape crossover and by reimbursing owners of the C-Max hybrid for overstating the car's fuel economy.

Ford's fourth-quarter loss in Europe decreased to $571 million, from $732 million a year ago. On the year, it lost $1.6 billion in Europe, 8 percent less than in 2012. Europe is "on its way to profitability in 2015," Shanks told reporters at Ford headquarters.

South American operations swung to a $126 million loss during the quarter, from a $145 million profit a year ago. Ford temporarily shut some plants in Brazil to prepare for new models and halted most of its output in Venezuela because of a shortage of foreign currency in that country.

Ford generated automotive operating cash flow of $500 million in the fourth quarter, marking its 15th consecutive quarter with positive cash flow, and record cash flow of $6.1 billion for the year. It ended 2013 with $24.8 billion in gross cash, which is $9.1 billion more than its debt.

On a per-share basis, backing out the one-time items, Ford posted income of 31 cents a share during the quarter -- 3 cents more than analysts expected, Thomson Reuters said.

Ford shares were mixed throughout the day and closed 1 cent higher to close at $15.72 a share.

Ford previously warned that its profit margins would be lower in 2014 because of the costs of introducing new vehicles. It said pretax profits would fall to between $7 billion and $8 billion this year.

Executives stood by that guidance today, adding that Ford foresees North American profit margins remaining at 8 to 10 percent in the future, below the 10.4 percent it posted in 2012.

New products

The company is planning 23 product launches this year, including the Mustang and a redesigned version of its top-selling and most profitable nameplate, the F-150 pickup. It brought out 11 new products in 2013.

"This level of impending product activity suggests 2014 will be a critical year for the automaker with regard to branding and planning, but also a transitional year because many of these introductions will occur in late 2014," Karl Brauer, senior analyst with KBB, said in a statement.

"The full impact of a new, more advanced F-150 and Mustang, as well as the advanced drivetrain technology Ford is introducing, won't be known until well into 2015."

Ford showed off the F-150, which will have an aluminum body that helps make it about 700 pounds lighter and more fuel-efficient, at this month's Detroit auto show. How the truck is received in the market will have a significant effect on its profits this year.

"We give Ford credit for pushing the envelope with an innovative product that some would describe as potentially game-changing," Brian Johnson, an analyst with Barclays Capital, wrote in a report Monday. "However, with the new product comes a good amount of risk."

Among the risks is the potential to run low on inventory during the model changeover, significantly hampering sales and profits.

Ford said it is planning 13 weeks of downtime this year at its F-series plants during the model changeover. But it assured analysts and reporters during a conference call today that it will have sufficient supplies of the truck.

"We're well positioned from a stock standpoint to support our dealers throughout the year," Ford COO Mark Fields said. "We're maxing out our F-series production this year, and we feel comfortable about our assumptions."

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