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Ford Q1 Earnings Tumble

Maker blames higher taxes, lower European, Chinese sales.

by on Apr.27, 2012

Ford earnings tumbled sharply, driven in large part by declining demand in Europe. The Ford Evos concept is shown here during its Frankfurt Motor Show preview.

Ford Motor Co. saw its first quarter net income plunged 45% compared to a year ago to $1.4 billion, or 35 cents a share, the maker blaming higher taxes and lower European and Chinese sales for the sharp slide. But North American results were their best in over a decade.

The maker meanwhile announced plans to offer lump-sum buyouts to as many as 90,000 of its former employees, especially white-collar workers, in a bid to reduce its pension costs.

It’s unclear whether the weak first quarter will impact Ford’s efforts to improve its credit rating.  The maker received a significant boost from Fitch Ratings, earlier this week, which returned the maker to investment grade.  But other agencies, including Standard and Poor’s and Moody’s have yet to weigh in.

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“Our team delivered a solid performance during the first quarter, with particularly strong results in North America, despite a challenging global external environment,” said Ford President and CEO Alan Mulally. “We remain focused on investing for future growth and developing outstanding products with segment-leading quality, fuel efficiency, safety, smart design and value.”

Ford’s first quarter 2012 earnings compared with a $2.5 billion net income during the January to March period in 2011, equal to 61 cents a share.  Revenue, meanwhile, fell 2% to $32.4 billion.

According to the maker, two key factors contributed to its weak quarter.  About half the downturn was due to higher taxes, the maker paying a 32.5% corporate rate compared with just 8% during the first quarter of 2011.

Other one-time items included buyouts for 1,700 workers that cost the maker $255 million.  Excluding such items Ford’s earnings would have risen to 39 cents, actually beating Wall Street expectations.  Analysts polled by FactSet had collectively forecast a $32.3 billion net, and 35 cents a share.

The latest earnings report wasn’t entirely gloomy. Ford saw its North American pre-tax operating profit rise to $2.1 billion, up from $1.8 billion a year ago – and the best performance since it began breaking out earnings for the unit in 2000.  The operating margin for North America rose from 10.3% a year ago to 11.5%.

But the other key factor for the first-quarter downturn was a slump in most of Ford’s other major markets, especially Europe.  There the maker had a pre-tax operating loss of $149 million on significantly weaker sales compared to a $293 million pre-tax profit a year ago.

Worrisome, also, was Ford’s slide in the booming Chinese market, demand there dipping 25,000 units for the quarter.  Overall Chinese sales showed an unexpected hiccup during the January to March quarter, though industry leaders attending the Beijing Motor Show this week have been predicting that the market is likely to rise between 6% and 12% for the year as a whole.

Ford officials, meanwhile, confirmed plans to rapidly expand production capacity in a bid to double Chinese sales to 1.2 million annually.  (Ford targets big growth in China. Click Here for that story.)

Ford also experienced sales downturns in other parts of Asia, Africa and Latin America during the first quarter of 2012.

A variety of factors could influence earnings in the coming months, including the ongoing financial crisis in Europe and rising gas prices in North America.  But there the maker is hoping that its increased range of high-mileage products, such as the subcompact Fiesta and compact Focus models, as well as higher-mileage EcoBoost truck engines, will continue to appeal to consumers focused on cutting energy costs.

The proposed retiree buyouts could also impact earnings.  The maker says it does not know how many of those former employees will actually accept the offer and the final cost would vary depending on what individual workers were earnings before retirement.  But the payout will come from the maker’s global pension fund.

Another issue of concern is the unexpected shortage of a resin called Nylon-12 – and also known as PA-12 – in the wake of a catastrophic explosion at a plant in Germany late last month.  Industry officials have been scrambling for a replacement for the material, which is used in everything from seat fabrics to fuel tanks.  Several major suppliers have warned of pending shortages, though Ford has so far said it doesn’t expect to see any impact on its production.

Ford’s first-quarter earnings announcement followed just several days after news that Fitch was bumping the automaker’s corporate credit rating to investment grade for the first time since 2005.  That offers the possibility of a significant drop in Ford’s borrowing costs.  But the maker is waiting for S&P and Moody’s to weigh in before it can fully take advantage of the upgrade.

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