Ford Q3 profit drops 56% as North America slips

DETROIT -- CEO Mark Fields defended Ford Motor Co.’s outlook of a “much weaker than normal” second half of the year as the company reported a 56 percent decline in third-quarter net income to $957 million today.

“I would call our approach realism -- not optimism, not pessimism” Fields said in a call with financial analysts today. “It’s realism.”

Fields said that as North American sales growth slows, Ford foresees “a tough and more competitive pricing environment” with increased incentives. But he added that the market is flattening at a high sales volume, not declining sharply.

“We don’t see a recession on the horizon, but we do see a marketplace that, from a cycle standpoint, has matured,” Fields said.

Ford’s third-quarter net income compares with a profit of $2.19 billion in a strong third quarter of 2015. Corporate revenue fell by 6 percent to $35.9 billion. Ford’s pretax profit was $1.41 billion, down 55 percent from the third quarter of 2015.

Ford shares fell 1.2 percent to close at $11.74 today. 

Fields surprised industry observers when second-quarter earnings were reported in July, saying that softening U.S. demand, rising incentives and overseas challenges like the British vote to exit the European Union would bog the company down for the remainder of 2016. He also cited costs for the redesigned F-series Super Duty pickups, which Ford began shipping to dealers in August.

For Ford's Q3 earnings report, click here.

In a statement today, Fields said that “we remain on track to deliver one of our best profit years ever.” Ford is sticking with its guidance that full-year pretax profit will be $10.2 billion, which it lowered in September to account for the cost of an ongoing door-latch recall. Ford posted a pretax profit of $10.8 billion for 2015.

Today CFO Bob Shanks told reporters that the earnings decline in North America accounted for the bulk of the corporate drop. Shanks attributed the North American result to:

• The door-latch recall, which will add $640 million in costs this year.
• Launch expenditures and supply disruption for the F series Super Duty trucks.
• “Normalization” of F-150 pickup revenues. Shanks said that in the third quarter of 2015, having recently hit full production, Ford was selling a rich mix of F-150s primarily through retail. With an increase in fleet sales this year, the mix has become less lucrative, he said.

“Those three things explain entirely the change in North America, which essentially explains the change in the company,” he said.

Margins down

North American operating margins dipped to 5.8 percent from 12.3 percent in the strong third quarter of 2015. Global automotive operating margins fell 4.4 percentage points to 3.3 percent.

Ford had $24.3 billion in cash at the end of the quarter, down $2.9 billion from June 30 but $700 million more than a year earlier.

Ford's adjusted earnings per share dropped to $0.26, half of last year’s $0.52. The company is projecting full-year earnings per share to fall from $1.93 last year to $1.46.

Ford’s Asia Pacific region delivered a record third-quarter pretax profit of $131 million, up $109 million. Ford’s joint ventures in China added $320 million to the pretax profit, up from $67 million last year.

In Europe, Ford booked a pretax profit of $138 million, its best third-quarter result since 2007. Shanks reaffirmed Ford’s expectation of a $140 million hit to second-half profits due to the British vote to exit the European Union and the subsequent decline of the British pound.

South American pretax results declined to a $295 million loss, down from a $163 million loss a year earlier. But Shanks said that the company thinks the Brazilian economy has bottomed out and is poised to rebound.

Ford Credit posted its strongest quarter since 2011, with a pretax profit of $567 million, up from $541 million a year ago.