Ford profit falls on taxes as Europe offsets North America

Bloomberg News (Southfield, US) - Ford Motor Co., seeking a second investment-grade credit rating, said first-quarter profit fell 45 percent on a higher tax rate and as overseas losses ate into growing income from North America.

Ford posted its 12th consecutive profitable quarter, with net income of $1.4 billion, or 35 cents a share, down from $2.55 billion, or 61 cents, a year earlier. Excluding one-time items, profit was 39 cents a share, beating the 35-cent average estimate of 17 analysts surveyed by Bloomberg. Ford fell 1.7 percent to $11.67 at 2:20 p.m. New York time.

While fuel-efficient models championed by Chief Executive Officer Alan Mulally won over U.S. consumers, the automaker faced weak demand in Europe, supply disruptions in Asia and rising competition in South America. Ford will earn higher profits in the year's second half, as North American operations provide a "big bounce" to results, said Chief Financial Officer Bob Shanks.

"We expect that engine that's pulling the company ahead to keep on pushing us along," Shanks said of North American operations, which earned pretax profit of $2.1 billion, the most since at least 2000, and an operating margin of 11.5 percent.

While overseas pretax losses of $190 million were less than the company expected, Europe will remain a challenge, Shanks said. Ford lost $149 million in Europe, where the industrywide first-quarter sales rate fell to 14.1 million.

"This past quarter was the lowest industry we've seen in Europe since 1995," Shanks told analysts on a conference call today. "This is like looking at the U.S. back in '08, '09. It's a really, really tough environment.''

Lump-Sum Offers

Ford said it's offering lump-sum pension payments to about 90,000 U.S. salaried retirees and former employees. The voluntary program is aimed at lowering the company's $74 billion global pension liability, which was underfunded by $15.4 billion at the end of last year. Ford said it's the first such program offered by any U.S. company.

Ford's net income fell largely because its tax rate rose to 33 percent from 8.5 percent a year ago because the automaker removed from its books a valuation allowance it held against deferred tax assets, Shanks said. That tax-rate change reduced Ford's net income by $612 million, he said.

''The valuation allowance last year was shielding the normal tax expenses you would have expected," Shanks told reporters at Ford's Dearborn, Michigan, headquarters.

On a pretax operating basis, Ford earned $2.3 billion in the first quarter, down 19 percent from $2.8 billion a year ago.

European Slowdown

"Europe is a problem for everybody; there's just too much overcapacity there and in Asia, Ford just doesn't have much of a presence," said Mirko Mikelic, a senior money manager at Fifth Third Asset Management in Grand Rapids, Michigan, which recently purchased five-year Ford notes. "Expectations are high for Ford to continue to grow."

Ford avoided larger losses in Europe because it "held the line" on prices there, reducing them by only $30 million in the quarter, Shanks said.

Ford said it won't meet U.S. market share or quality targets this year. There have been problems with the transmissions in the Focus and Fiesta small cars, Shanks said.

Ford will lose share this year in the U.S. because it hadn't anticipated how fast sales would take off and doesn't have enough factory capacity, Shanks said.

'Can't Keep Up'

"We just simply can't keep up with what we think will be the consumer demand," Shanks said. "We're going to be able to essentially sell everything that we build this year, but it's just not going to be enough to maintain or to grow the share."

Ford's larger second-half profit will be driven by increases in factory production as it starts making the Ford Fusion sedan in Michigan, Focus compact in China and Ranger pickup in Thailand, Shanks said.

"We expect second-half profit to be a little higher than first half," Shanks said. "That's driven by the fact that we've got a lot of capacity coming on stream in the second half."

Ford's loss in Europe compared with a profit of $293 million a year earlier. Ford said its sales fell 7.3 percent to 325,400 cars and trucks in the top 19 European markets in the first quarter.

"Europe is a challenge right now," said Stephen Brown, auto analyst at Fitch Ratings. "But the majority of their revenue still comes out of North America, and North America is looking very good right now."

North America Gains

Ford's U.S. light-vehicle sales rose 8.5 percent, to 537,822 vehicles in the first quarter, trailing the U.S. industrywide 13 percent increase for the quarter, according to Autodata Corp. of Woodcliff Lake, New Jersey.

Ford reported a pretax profit from South America of $54 million for the quarter, down from $210 million a year earlier.

In Asia-Pacific and Africa, Ford reported a pretax operating loss of $95 million, compared with a $33 million profit last year. Ford said its sales in China fell 14 percent in the first quarter. The Ford brand had 2 percent of the Chinese passenger car market during the period, said researcher LMC Automotive.

Ford has "world-class management and great cash flows," Sarat Sethi, a New York-based portfolio manager at Douglas C. Lane & Associates, said in an interview on Bloomberg Television's "Inside Track."

Sethi's company wants to keep buying Ford shares, he said. "Absolutely," he said.

Credit Rating

Fitch on April 24 became the first major ratings company to raise Ford, the second-largest U.S. automaker, to investment grade after the automaker slid to so-called junk status in 2005.

First-quarter sales fell 2.1 percent to $32.4 billion. The average estimate for total first-quarter revenue was $31.3 billion, according to the average of 11 estimates.

Ford built 677,000 cars and trucks in North America in the first quarter, up 20,000 vehicles from last year. In the second quarter, Ford said it plans to build 730,000 cars and trucks in North America, an increase of 20,000. Ford said it's cutting second-quarter production in Europe by 15 percent and in South America by 12 percent.

Vehicle output won't be disrupted by a worldwide shortage of a specialty resin used in brake and fuel-system components, Shanks said.

Buyers Paying More

U.S. consumers paid an average of $31,995 for the company's models in the first quarter, up 1.4 percent from a year ago, while down slightly from last year's fourth quarter, according to online auto researcher Edmunds.com. Ford's average prices are up 26 percent from 2002 and 11 percent from 2007.

Mulally has revamped Ford's lineup with a focus on fuel economy. The subcompact Fiesta gets as much as 40 miles (64 kilometers) per gallon in highway driving, while the F-150 pickup offers two fuel-efficient V-6 engines that account for more than half of sales. Until the 2011 model year, Ford hadn't used a V-6 engine in the F-150 since 2008.

That leaves Ford better able to cope with rising fuel prices than in 2008, when an overdependence on trucks and sport- utility vehicles tanked the automaker's sales and led to record losses, Brown said.

Automotive debt, which excludes Ford Motor Credit, was $13.7 billion on March 31, an increase from $13.1 billion on Dec. 31, the company said.

Logo Collateral

Ford has more debt than rivals because it borrowed $23.4 billion in late 2006, after Mulally arrived from Boeing Co. and before credit markets froze. That enabled the automaker to avoid the bailouts and bankruptcies that befell the predecessors of General Motors Co. and Chrysler Group LLC in 2009. Ford earned $29.5 billion in the last three years after $30.1 billion in losses from 2006 through 2008.

To obtain the 2006 financing, Ford had to pledge major assets, including its blue oval logo, as collateral. If Standard & Poor's or Moody's Investors Service joins Fitch in assigning Ford an investment-grade rating, Ford will regain control of the assets.

Ford resumed paying a dividend last month following a five- year suspension. The automaker March 14 declared a second- quarter dividend of 5 cents a share payable June 1 to shareholders of record on May 2.

Ford shares are up 10 percent this year before today after falling 36 percent last year.

"I'm surprised that the equity is languishing given that they're doing pretty well and they're talking about raising the dividend," said Mikelic. "The market is still taking a wait- and-see attitude."