Ford Motor Co posted a lower-than-expected first-quarter profit on Friday as the No. 2 U.S. automaker saw $400 million in higher warranty costs in North America, sending shares down 3.4 percent.
The company also saw incentives in North America rise in the quarter due to heavy competition and an aging lineup of vehicles it will address with the launch of 16 new models in the region this year.
Fitch Ratings analyst Stephen Brown called 2014 a transition year for Ford and said earnings will improve in the second half.
"They've got a few challenges out there, but ... the company has a lot of new products coming online this year. They haven't seen the benefits (of the new vehicles) on dealer lots yet."
Ford Chief Executive Alan Mulally, 68, told analysts on a conference call that there was no change to plans for him to remain at the company through the end of the year. Earlier this week, a source said that Ford will soon name Chief Operating Officer Mark Fields as Mulally's successor.
While Ford adjusts its warranty reserves every quarter, Chief Financial Officer Bob Shanks said the total was larger in the first quarter because the company has seen more field service actions, such as safety recalls and addressing customer complaints, over the last two years. He said that was a trend in the industry as vehicles become more complex.
The company affirmed its forecast for pretax profit for 2014, a year in which it is launching a record 23 new vehicles globally. It also said it is amending and extending its revolving credit facility.
Shanks said the underlying business remains strong.
"The run rate is very healthy and we feel that we're moving forward very nicely in terms of what we expect for the year and setting us up for stronger growth and stronger profitability in 2015 and beyond," he told reporters at the company's Detroit headquarters.
Net income fell 39 percent to $989 million, or 24 cents a share, from $1.61 billion, or 40 cents a share, in the year-earlier period.
The quarter included the $400 million in additional costs for warranty reserves in North America for vehicles from as early as the 2001 model year, and $100 million in costs related to higher freight and other items due to the harsh winter in North America. It also included previously disclosed costs of $400 million, mostly due to the currency devaluation in Venezuela. All three items totaled 17 cents a share.
Excluding one-time items for European restructuring, Ford earned 25 cents a share, 6 cents below analysts' estimates in a poll by Thomson Reuters I/B/E/S, or about the same amount as the warranty reserves. Weather costs accounted for another two cents.
Revenue was up slightly at $35.9 billion, above the $34.06 billion analysts had expected.
EUROPEAN LOSS NARROWS
Ford, which still expects a pretax profit this year in the range of $7 billion to $8 billion, said its credit facility is expected to grow to about $12 billion, from $10.7 billion after its completion at the end of the month. It sees operations in South America weaker than it previously forecast for the year, while Asia Pacific's profit will be higher than last year.
Shanks said various global launches, including its redesign for the highly profitable F-150 full-size pickup truck, remain on track.
Net pricing in the quarter was up only $175 million as incentives increased $471 million over last year. Most of those higher incentives were offered in North America, where net overall pricing actually declined $139 million.
The North American operating profit fell by more than a third to $1.5 billion. RBC Capital markets analyst Joseph Spak said that was below Wall Street's expected consensus of $2.2 billion and the company's profit margin in the region was weaker than expected.
The North American operating margin fell to 7.3 percent from 11.1 percent last year as Shanks said the warranty and weather-related costs took a bite of 2.5 percentage points. However, Ford affirmed its outlook for a full-year margin in the region of 8 to 9 percent.
Overseas, business was more positive as demand continued to increase in China, the world's largest auto market, and the company's losses in Europe narrowed and were lower than expected according to analysts.
Stifel analyst James Albertine said the outlook in Europe trumped the overall profit miss. "EU growth may come more quickly than anticipated," he said in a research note.
In China, Ford said its market share hit a record 4.5 percent, up from 4.4 percent in the fourth quarter. The profit in Asia Pacific rose to $291 million from a year-ago loss of $28 million, and the company's profit margin in the region was a far stronger than expected 11 percent.
The company's loss in Europe, which has been a drag on Ford profit for several years, was $194 million, down from $425 million a year ago.
Shanks affirmed the company's previous outlook that it will return to profitability in Europe in 2015, helped by its own cost-savings actions as well as a rising European auto market.
The loss in South America, however, deteriorated to $510 million from a loss of $218 million last year due to the currency devaluation in Venezuela and Argentina. Ford now breaks out Middle East and Africa as its own region and its profit there rose 15 percent to $54 million.
Ford shares were down 3.4 percent at $15.77 on the New York Stock Exchange on Friday morning.