Ford caps 'challenging year' with 19% decline in Q4 pretax profit

DETROIT -- Ford Motor Co.’s fourth-quarter adjusted pretax profits fell 19 percent to $1.7 billion due to higher steel and aluminum prices, as well as adverse currency rates, the automaker said Wednesday.

Ford's fourth-quarter operating margin was 3.7 percent, down 2 percentage points from a year earlier.

Net income swung to a gain of $2.4 billion from a year-earlier loss of $800 million, reflecting a lower effective tax rate and pension re-measurement. The year-earlier loss had been due mainly to accounting changes.

Revenue rose 6.7 percent to $41.3 billion.

For the full year, Ford’s 2017 pretax profits fell 19 percent to $8.4 billion, slicing its operating profit margin to 5 percent from 6.7 percent in 2016. Those declines were caused by a $1.2 billion hit in raw materials costs and a $600 million negative impact from Brexit. 

Net income soared 65 percent to $7.6 billion, as revenue rose 3.3 percent to $156.8 billion.

"It was a very challenging year, but also a year of progress," CFO Bob Shanks told reporters. "It's very, very clear we have to improve the fitness of the business."

Ford shares fell 4 percent to close at $11.57 on Thursday. 

N. America leads regions

Ford's earnings were driven by its North American region, where pretax profits fell 16 percent to $1.6 billion in the fourth quarter, due to rising commodities and warranty costs plus expenses related to the launch of the Ford Expedition and Lincoln Navigator that Ford attributed to a supplier-related parts shortage that has since been fixed.

The warranty costs include an October recall of 1.3 million F-150 and Super Duty pickups to fix faulty side-door latches that cost the automaker $267 million.

Revenue in North America rose 4.3 percent to $24.1 billion. For the full year, pretax profits fell 16 percent to $7.5 billion in North America, even as revenue edged up 1 percent to $93.5 billion.

As a result, Ford's roughly 54,000 UAW-represented employees will get profit sharing checks of $7,500 on average. That's down from the $9,000 they received last year.

In Europe, Ford's pretax profit slid 66 percent to $56 million in the fourth quarter and tumbled 81 percent to $234 million for 2017. Most of the full-year drop was attributed to Brexit-related charges, as well as higher commodity and warranty costs.

In South America, Ford's pretax loss narrowed to $197 million in the fourth quarter, from a loss of $293 million a year earlier. For 2017, its pretax loss in the region narrowed to $784 million, from a loss of $1.11 billion in 2016.

In the Middle East and Africa, pretax losses narrowed slightly to $70 million in the fourth quarter from $71 million a year earlier, and to $263 million for the full year from $299 million a year earlier.

Pretax profits at Ford's Asia Pacific business unit collapsed 98 percent, to $5 million in the fourth quarter from $284 million a year earlier, largely due to a sales drop in China. For the full year, pretax profits there slipped 11 percent to $561 million.

Ford Motor Credit Corp.'s fourth-quarter pretax profit jumped 53 percent to $610 million, and its full-year pretax earnings rose 23 percent to $2.3 billion.

'Bad year'

Ford last week lowered its 2018 forecast for what CEO Jim Hackett characterized as a "bad year." Its per-share guidance for 2018 translates to earnings of $8 billion to $9.2 billion, according to investment firm Barclays Capital, down from an initial forecast of $9.9 billion.

Shanks, speaking last week, said the company will face about $1.6 billion in increased commodities costs, including steel and aluminum.

Shanks said most of that impact will come from rising steel costs, and that aluminum represents just 25 percent of that negative impact. Ford’s crosstown rivals, including General Motors and Fiat Chrysler, have not highlighted commodities as a financial concern.

Adding to the financial woes are the company's mobility investments, which were about a $300 million drag on earnings in 2017, the first year in which they've been broken out separately. Executives said mobility losses would be larger in 2018.

Shanks said that Ford isn’t as fit as its peers, and that is stopping it from achieving its desired profit margins of around 8 percent.

“We’re not able to get the same level of margins others may be able to,” Shanks said. “That shows the gap we need to address.”

Executives have said that Ford has started to implement business practices that should begin to bear fruit in 2019 and beyond, focused around Hackett’s mantra of “smart vehicles for a smart world.” Those include $14 billion in costs cuts, simplifying orderable products, and tailoring its model lineup to higher-margin segments for different parts of the world.

Said Shanks: “We’ve established our North Star.”