By on July 26, 2011

 

Ford’s Q2 results [Presentation in PDF here] were mixed, as deliveries and revenue improved (7% and 13% respectively, compared to Q2 2010) but profitability slipped, but the automaker still ended the quarter with $2.4b in profit and $2.3b in operating cash flow. Debt was reduced by $2.6 from the first quarter of this year, and total Automotive debt landed at $14b, while gross Automotive cash landed at $22b. So, what happened to Ford’s operating profit margin?

 

Gains in pricing and incentives were almost entirely wiped out by increased commodity, material and warranty/freight costs, while increases in manufacturing, engineering, advertising and overhead structural costs more than compensated for volume and mix improvements. The drop from Q1 demonstrated a similar dynamic, with an identical $200m improvement in pre-tax results.

Ford’s overall US market share was up considerably in the second quarter, but retail share saw a slower improvement to 14.3%, helping to explain some of the weaker profit.

Still, North American operations were up enough to overcome a weaker profit margin, and delivered a slight improvement in pre-tax results compared to Q2 2010.

And at the end of the day, North America is still Ford’s bread-and-butter, earning the lion’s share of pre-tax profits. South America saw pre-tax results drop by $18m, while Europe saw operating margins fall by more than 50%, en route to a weak $176m pre-tax profit. Meanwhile, huge costs and a weak market in Ford’s Asia-Pacific region saw pre-tax profits fall to just $1m, a huge decline from the $113m earned in Q2 2010.

On the financial services front, Ford’s profit also showed signs of slowing, as pre-tax profits fell by nearly $300m, to $604m. Volume was flat and margin was up by just $40m, leaving Ford Credit’s results vulnerable to credit losses of $130m and lease residual losses of $125m.

Going forward, Ford expects the global economy to continue to grow by around 3%, despite challenges in Europe, Japan and the US. For still assumes the US market will hit at least 13m units, an assumption that is just a little bit risky. Increased structural and commodity costs are expected to be $2b higher than previously estimated, but it estimates operating margins and cash flow to remain on track. Ford’s already increased prices twice this year to make up for increased commodity prices, which seem to be hitting the Blue Oval especially hard. How the firm plans to bring back profitability in the face of these rising costs isn’t entirely clear, but with volume up and pricing remaining strong across the industry, at least the timing is good. Besides, $2.4b in profit ain’t all that shabby itself.

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24 Comments on “Ford Profitability Slides, Earns $2.4b Anyway...”


  • avatar
    Amendment X

    Poor leverage in the Asia Pacific market prevents me from buying Ford stock.

  • avatar
    eldard

    There goes the R&D budget. Thanks, executives and UAW workers!

    • 0 avatar
      pgcooldad

      There is nothing in this article that mentions R&D, executives or UAW.

      Unless … Engineering = R&D, UAW = manufacturing, and Executives = commodities.

      • 0 avatar
        eldard

        Turd, I mean Ford, is more profitable than Toyota even though they sell 3 million less vehicles, employ 2-3 times more workers (in the US) and pay them more by the hour and gives their execs the highest wages in the industry. Care to guess how they achieved such a high income despite all that?

      • 0 avatar
        PenguinBoy

        The fact that Ford is currently more profitable than Toyota does not imply that they are cutting R&D, or cutting corners somewhere else. There are some other possible explanations:
        -Customers might be paying a premium for a Ford over a comparable Toyota. I wouldn’t be surprised if this is the case for new offerings like the Fiesta and Focus which may well sell for more than the Yaris and Corolla on average.
        -Toyota’s Japanese workers may well cost more than comparable American workers at Ford. Japan isn’t exactly a “cost to market” location.
        -Toyota’s cost structure may be higher than Ford’s, especially in light of the recent devaluation of the Dollar vs. the Yen.
        -Toyota’s inability to manage risk in their supply chain cost them big time when the Tsunami hit. I’m still amazed at how many Japanese manufacturers were dependent on a single chip plant for their ECUs.
        -Toyota has recalled more cars than they have built in the past couple of years – so their warranty costs must be eroding margins a bit. They have also had to increase incentive spend to preserve market share as a result of the recalls, which would further depress earnings.

        Toyota was a very well run company for 40+ years – but everything ends. In another year or two we will see if Mr. Toyoda’s cherry tree bears fruit…

    • 0 avatar
      faygo

      @eldard :

      please to explain your intimate knowledge of Ford’s R&D budget. based on mine, it hasn’t gone down. Ford (and GM & Chrysler) has hired a not insignificant number of engineers this year, easily in the hundreds.

    • 0 avatar
      Pch101

      There goes the R&D budget. Thanks, executives and UAW workers!

      Ford’s most recent annual report: “We recorded $5 billion, $4.7 billion, and $7.1 billion of engineering, research, and development costs that we sponsored during 2010, 2009, and 2008, respectively.”

      Toyota’s most recent annual report: “Research and development costs were ¥904,075 million, ¥725,345 million and ¥730,340 million ($8,783 million) for the years ended March 31, 2009, 2010 and 2011, respectively.”

      Ford’s 2010 revenues from automotive operations were $119.280 billion. Therefore, R&D was equal to 4.2% of revenues from vehicle sales.

      Toyota’s 2010-11 revenues from “sales from products” (which is primarily automotive) were $214.318 billion. Therefore, R&D was equal 4.1% of revenues from (what are mostly) vehicle sales. Virtually the same as for Ford.

      Ford’s 2010 cost of automotive operations were $104.451 billion. That’s equal to 87.6% of revenue from automotive sales.

      Toyota’s 2010-11 cost of operations were $192.252 billion. That’s equal to 89.7% of revenue from automotive sales.

      R&D obviously doesn’t explain the difference. The difference in expenses from (mostly) automotive is about 2%, so that doesn’t really work, either.

      Rather than make broad assumptions, it’s better to look at the numbers. And I wouldn’t take the quarterlies quite as seriously, as those numbers are unaudited.

      • 0 avatar
        eldard

        4.1% of 214 billion is almost double the 4.2% of 119 billion. Regardless of vehicle sold, Ford spends less on R&D than Toyota. So I am correct.

      • 0 avatar
        Pch101

        Regardless of vehicle sold, Ford spends less on R&D than Toyota. So I am correct.

        Why would you expect Ford to spend the same dollar amounts on R&D when it sells fewer cars?

        Your analysis was faulty. Go review the numbers and try again.

  • avatar
    Scoutdude

    Third quarter is going to be the interesting one. Moving into the #1 brand in the US position could mean even lower profits. We shall see how much of the work they have done to increase transaction prices and profit margin per unit they are willing to throw away to ensure they keep that title and how much they want their vehicles to earn the #1 seller spot in their respective segments.

    Just last week I as a Ford customer received an loyalty coupon for $1000. In it they tout their YTD #1 overall status and the coupon is only good for the Explorer, Escape, Fusion and Focus. My fear is that they will up the incentives to Toyota like levels to earn the #1 positions in those vehicles respective segments.

    Long term it could work out though as there are a lot of lemmings in the US so many people will assume that if it is #1 in class in sales it must be the best. One only needs to look at Camry and Corolla sales to see that. So in the long run it may not be a bad idea, IF and only if they can keep those customers happy and maintain their momentum.

  • avatar
    eldard

    Why would you expect Ford to spend the same dollar amounts on R&D when it sells fewer cars?

    Oh, I don’t know. So they’d sell more cars? I remember a time when Ford was bigger than Toyota. And it wasn’t even 10 years ago when they were selling cars in the 7 million range, ahead of VW. Now they sell a measly 5 million, behind Hyundai group. Oh, how the mighty have fallen. Embarrassing, much?

    EVen if you slice R&D spent per car (can anyone do that? I can’t be bothered), Ford most probably spent less. Maybe they won’t be the King of recalls (sorry Toyota), rollovers, and spontaneous combustion (sorry Italians) if they didn’t employ so many union fattasses and overcompensated execs and rewarded their engineers more.

    • 0 avatar
      Pch101

      Oh, I don’t know. So they’d sell more cars?

      So, let me understand this — you want Ford to spend billions more on R&D, in a depressed market, with the expectation that they’re going to fly past Toyota’s position even though there is no indication that this could happen quickly.

      You’re just looking for excuses to hang on to your flawed analysis. Ford’s R&D budget is adequate for the volume, and salaries have nothing to do with it. You didn’t haven’t any basis for saying it before, and you still don’t.

      • 0 avatar
        Scoutdude

        Ummm at least in the US in brand terms Ford has flew past Toyota and isn’t looking back.

      • 0 avatar
        eldard

        Au contraire. I don’t want them to spend more because I want them to die (along with all of Detroit.) So you’re saying is, if Sony sells only half of Panasonic TVs, the former should spend only half of what the latter does on R&D? That’s only valid if Toyota has twice the model range of Ford’s (which would require twice the cost of development and double the number of engineers needed.) Which it does not.

        Daimler-Benz and Toyota each spent a billion bucks (and these were late 80s bucks) develeping the first gen LS and W140. You’re saying Lexus should’ve scrimped more since they sold less than the Benz?

        Ford’s scrimping is starting to show: https://www.thetruthaboutcars.com/2011/06/ford-quality-is-job-one-again/

      • 0 avatar
        Pch101

        I don’t want them to spend more because I want them to die (along with all of Detroit.)

        How exactly is spending $5 billion per year in R&D going to cause Ford to die?

    • 0 avatar
      faygo

      it appears you have some sort of axe to grind on this subject but no actual data to support your assertions.

      spending more R&D per car can mean :

      A) you get fewer sales out of each R&D dollar because your R&D is less effective at delivering something people want – you spend to develop things people don’t want.

      B) your engineers are too expensive or inefficient and you get less effective results out of each dollar spent, even if you develop equally desirable vehicles.

      C) you have more redundancy across your operations, so are less efficient. (most definitely the situation at Ford in years past, PD Engineering in the US is half as large as it was 5+ years ago but is delivering more programs, quicker, with better results.)

      D) you are at a different point in development of particular technologies – hybrids, battery-electrics, lightweight materials, etc. perhaps this is due to prior bad decisions (US makers). perhaps it’s due to lacking decades of zero-cost loans available from the government (Japan).

      spending more or less on R&D overall isn’t much more meaningful unless you have details (those not available to the public in general) which of how the money is spent as well as reported.

      available surveys of the cost structures of major automakers show the major players to be within a few % of each other, well within margins of error and inconsistencies in reporting of cost.

    • 0 avatar
      eldard

      How exactly is spending $5 billion per year in R&D going to cause Ford to die?

      Most of that probably goes to trucks and not to sedans? The others are spending like double?

      Hey, they’ve lost 2 million sales already. I’d say they’re terminal. lol

      • 0 avatar
        Pch101

        The others are spending like double?

        “Like, double” must mean “below double.” I’ve posted the numbers above, and they don’t match your “like” figures.

      • 0 avatar
        eldard

        Doesn’t matter if they spend the same amount, really. Similar amounts don’t buy the exact same thing in two different places. The following I’ve posted on another car site:

        “To achieve the same goal would take 5 Jap engineers, or 8 for a German team, or 15 for a Korean team (while still probably cheaper than the Jap team) and 700 engineers from a US team. And the Americans will demand more salaries per head, take two hour breaks shooting the $hit, high fiving each other and whining and bitching about everything under the sun. And ask for a longer time frame.

        No, you can’t compete with German or Jap engineering.”

        I’m mostly jesting, of course. But you get the idea. America should just stick to cloud computing and 3D animated penguin films. ;)

  • avatar
    acuraandy

    I would attribute the slight down-tick in profits to the discontinuation of the Panther body and a shortage in red paint sigment or whatever…

    • 0 avatar
      NulloModo

      You may be onto something with the platform shifts. The new F-150 engines are likely more expensive to produce than the old ones, the new Explorer probably costs more to build than the old Explorer, and the ancient Panthers are starting to fade away.

      Milking paid off platforms was likely good for profitability, but it was necessary to modernize the lineup for future marketshare and profits.

      • 0 avatar
        highdesertcat

        Actually, I was surprised that profitability slid. I really expected Ford to do a little better, overall. North America really is Ford’s bread and butter and with the resurgence of Ford sales in most markets I had Ford pegged for at least $3B, even with the higher cost of goods and materials.

        I watched Alan Mullaly’s interview on Bloomberg this morning at the airport while waiting to catch a flight home and it is clear to me that the UAW contract negotiations are going to weigh heavily on Ford’s future profitability. Mulally said he talks about it every day with his management team.

        What I’m thinking is that the UAW will probably hit up GM first, (can’t strike there), and maybe even finagle a separate deal with Fiatsler, (it would be foolish to strike yourself), but Ford is going to be the crown jewel that the UAW will squeeze like a sponge (nothing to stop the UAW from calling a strike at Ford).

        I’m inclined to agree with the concept that if Ford wants greater profits they’ve got to move more production to Mexico. Their Mexico operations are a cash cow. Their UAW/CAW operations not so much.

    • 0 avatar
      Scoutdude

      While it has been over a year since the Panther was officially canceled, the first time, they are still rolling off the assembly line, faster than they have in years, and will continue to roll off the line for a few more weeks.

  • avatar
    Morea

    Are we sure that both companies define “research and development” in the same way? Are the R&D tax adjustments the same in Japan and the US? I read a statement once that in order to reap tax benefits US companies use the costs of market research as part of their R&D totals. (Is that true?) Popular color choice is likely not what most people consider automotive research and development. Though there may be standards on what may be called R&D are they faithfully followed? (GAAP anyone?)

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