DETROIT (Jan. 31, 2011 ) — Ford Motor Co. posted a $6.56 billion profit for 2010, its highest annual net income in more than a decade, fueled by improved sales, products and pricing.
But the Dearborn, Mich.-based auto maker's fourth-quarter profit plunged, due to moves to pay down debt that Ford took on before the financial crisis hit. The company also confronted rising costs for launching new vehicles and suffered an unexpected loss in Europe.
“We're in transition mode now,” Ford CFO Lewis Booth said during a media briefing Jan. 28, predicting that 2011 will be more profitable than 2010. “We've fixed the fundamentals of the business. I think the thing that pleases us immensely is the improvement in the balance sheet.”
Ford shares fell 13 percent to $16.27 Jan. 28 on the New York Stock Exchange, in part because the results trailed analysts' estimates as well as a broad sell-off in equity markets worldwide prompted by the civil unrest in Egypt and a surge in oil prices.
“These results significantly call into question the idea that Ford's North American profit margins should expand from the 10 percent level as SAAR grows over next few years,” J.P. Morgan analyst Himanshu Patel said in a statement. “A faster-than-expected cost rise—both structural and variable—seems to have been the primary driver of the fourth quarter earnings miss.”
Mr. Booth said an increase in the auto maker's structural costs was not reflected in most analysts' forecasts.
Those structural costs included the increased costs for product launches, higher engineering expenses and rising marketing costs as Ford launched new and redesigned products.
“We chose to invest more in our marketing because as the year closed we saw an opportunity to get these products off to a good start,” Ford CEO Alan Mulally told analysts Jan. 28.
Fourth-quarter net income was $190 million, the seventh straight quarter of black ink, down from $886 million a year earlier. Excluding special charges, including a $960 million charge tied to a payment to convertible debt investors, Ford earned $1.2 billion. The payment helped reduce Ford's automotive debt by more than $1.9 billion.
Ford's European operations reported a $51 million loss, missing the company's expectations, because of lower market share and higher costs. New car and truck demand remain weak across Europe with the expiration of government incentives.
“We were a little disappointed but we did the right thing on the European call,” Mr. Mulally said. “Clearly, as that situation unfolded, we chose to act decisively and not chase market share and heavily discount our vehicles.”
The auto maker finished the year net cash positive for the first time since the second quarter of 2008.
Ford ended the year with $20.5 billion in gross cash while reducing debt to $19.1 billion. It said it has $7.4 billion in liquidity left on a revolver loan.
The company reduced its automotive debt by $14.5 billion in 2010, a 43 percent reduction. As a result, Ford said it has lowered its annualized interest expense by more than $1 billion.
Mr. Booth said Ford will continue to take actions to improve its balance sheet with the intention to reach an investment-grade rating, a status it lost in 2005.
“As you approach investment grade, you see the spreads on your borrowing costs improve,” Mr. Booth said. “We're seeing the benefit now from the improved balance sheet and our improved business.”
Ford also raised its first-quarter North American production plan by 15,000 units to 650,000.
Ford will give its approximately 40,600 hourly U.S. workers profit-sharing checks that will average $5,000 each. The payments are usually made in mid-March. Last year, Ford gave out checks for $450.
Salaried workers also are expected to receive bonuses, but Ford did not disclose the amount.
During the fourth quarter, Ford's automotive revenue in North America grew by $1.6 billion to $17.2 billion. North America posted a pretax operating profit of $670 million in the period, up $59 million from a year earlier. For the full year, North America swung to a pretax operating profit of $5.4 billion from a loss of $639 million in 2009.
Ford reported a $253 million profit from Europe in the fourth quarter a year earlier. In December, the auto maker's European sales dropped 23 percent as other manufacturers offered rebates to lure buyers.
The European market “was incredibly competitive in the fourth quarter,” Mr. Booth said. Ford lost share in Europe in the quarter.
For 2010, Ford in Europe had a pretax operating profit of $182 million, swinging from a loss of $144 million in 2009.
Europe's full-year profit was topped by that of Asia Pacific Africa, which posted pretax operating profit of $189 million in 2010, compared with a loss of $86 million in 2009. In the fourth quarter, Asia Pacific Africa's profit was $23 million, up from $16 million a year earlier.
In August, Ford sold its Volvo Cars unit to China's Zhejiang Geely Holding Co. In 2009, Volvo had revenue of $12.4 billion, Ford said.
For 2011, Ford expects each of its automotive operations to be profitable. Additionally, Ford's global operating margin in 2011 is expected to be equal to or improved from 2010, the auto maker said.
Worldwide, Ford earned $741 million on its core automotive operations during the fourth quarter, compared with $914 million a year earlier.
Ford's 2010 revenue rose to $120.9 billion from the $116.3 billion recorded in 2009. The auto maker excluded revenue from Volvo, which was sold in August, in both figures.
At Ford Credit, fourth quarter net income was $367 million, a drop of $85 million from a year earlier. On a pre-tax basis, Ford Credit earned $572 million during the fourth quarter, compared with $714 million in the previous year.
The finance arm said the drop in pre-tax earnings primarily reflected lower volume and the non-recurrence of lower lease depreciation expenses related to smaller gains as fewer leases terminated and the vehicles were sold.
Ford expects Ford Credit to remain solidly profitable in 2011, although at levels below 2010. During 2011, Ford Credit is expected to make distributions to parent Ford Motor of about $2 billion.
Second straight black-ink year
The results marked the second straight annual profit for Ford under Mr. Mulally, who has shed brands and put a global focus on the Ford marquee while establishing the auto maker as a leader in in-car information technology. In 2009, Ford ended three years of losses by earning $2.72 billion.
“Our 2010 results exceeded our expectations, accelerating our transition from fixing the business fundamentals to delivering profitable growth for all,” Mr. Mulally said in a statement. “We are investing in an unprecedented amount of products, technology and growth in all regions of the world.”
Ford says it plans to deliver “continued improvement in pre-tax operating profit and automotive operating-related cash flow” in 2011. Last year's profit was the highest since the $7.2 billion netted in 1999.
Ford credited its 2010 gains to improved vehicle quality, new product launches such as the Fiesta subcompact and aggressively restructuring the business to reduce costs and improve global operations through new investments in global markets.
“For Ford, 2010 was a breakout year in terms of customer perceptions of their design and quality,” said Adam Jonas, an analyst with Morgan Stanley in New York, said before today's results were announced.
“While market share gains will be harder to achieve in '11, we see Ford benefiting from higher industry volume in the U.S. and globally, partly offset by weaker financial services contributions,” Standard & Poor's said. “We expect Ford to improve its net income and cash flow even as it invests in expanding its global business.”
Bloomberg contributed to this report, which appeared in Automotive News, a Detroit-based sister publication of Tire Business.