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Ford’s Profit Falls on Weak Performance Overseas

July 25, 2012
4 min to read


DEARBORN — Ford Motor Co. suffered a 57 percent drop in earnings in the second quarter as a result of expanding losses outside North America, and warned of continuing trouble in Europe for several more years.


The auto maker earned $1.04 billion, or 26 cents a share, down from $2.4 billion, or 59 cents a share, a year ago, as strong profits in North America offset a $404 million loss in Europe, a smaller loss in Asia and a big drop in profit in South America. Lower sales overseas caused revenue to fall 6.2 percent to $33.3 billion, according to The Wall Street Journal.

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The problems in Europe are “structural in nature,” rather than the result of a cyclical downturn in the industry, Bob Shanks, Ford’s chief financial officer, said. He added that the company now expects European losses for the year to exceed $1 billion, up from an earlier $600 million forecast.


“We think this is a situation that we will have to deal with for the foreseeable future,” he said.


Mr. Shanks said Ford will take actions to slash costs and production capacity in Europe, despite the political and labor opposition to closures that make it difficult to shrink operations there. He suggested a downsizing in Europe could over time have positive results similar to those Ford has seen in North America, where the company restructured and now is producing near-record profits.


European auto sales have declined in each of the last four years and are on track to post a fifth drop in 2012, amid the European Union’s debt woes. As a result, many auto makers are operating more plants and employing more workers than they can keep busy.


“We have overcapacity now in Europe,” said Ford CEO Alan Mulally. “It isn’t going to come back fast and we aren’t going to be saved by volume.” Asked if Ford would try to close a plant in Europe, Mr. Mulally said it would examine “all areas of the business.”

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Separately on Wednesday, France’s PSA Peugeot Citroën and Germany’s Daimler AG were dragged down by Europe’s woes. Peugeot already has said it plans to close one European plant; so has General Motors Co.’s Opel unit. GM reports its results next week and losses from Europe will be significantly higher than a year ago, a person familiar with the matter said.


Ford’s overall income came entirely from North America, where pretax profits hit $2 billion, up 5 percent from a year earlier, mainly as a result of strengthening sales of highly profitable pickup trucks. Ford’s 10.2 percent profit margin in North America was up slightly from a year earlier and the company said margins would stay high throughout the year. On average, Ford made $2,727 in operating profit on each of the 737,000 cars and trucks it produced in North America in the second quarter, $90 more than the year-ago figure.


In Europe, Ford already has slowed its plant production, laid off temporary workers and cut the length of work days. A year ago, Ford made a profit of $176 million in Europe, but falling sales and rising incentive costs made the operations unprofitable.


Ford has five assembly plants in Western Europe and derives about 25 percent of its global sales from the region, Mr. Shanks said. The company’s efforts to build global vehicles that are virtually the same in every market could make it easier for Ford to shut a plant because it could export cars from North America or elsewhere to Europe.


The company said its South American operations posted a $5 million pretax profit, down from $267 million a year-earlier as stiff competition forced it to lower prices or use incentives to sell cars.

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A freeze in free-trade agreements between Mexico and Brazil and Argentina is hurting the business, Mr. Shanks said. Ford said it expects the region to remain profitable for the year.


Ford’s Asia and Africa operations also lost $66 million on a pretax basis as higher revenue from car sales were offset by heavy capital spending for new plants and products. A year ago, Ford eked out a $1 million profit in the Asia region.


Ford Motor Credit’s pretax results declined to $447 million, down from $604 million a year earlier. The lending arm is getting less revenue and profit from vehicles returned on leases.


Ford’s effective rate of 37 percent in the quarter reduced net income by about $600 million compared with a year ago. Its effective rate was 8 percent a year ago. The higher rate is connected to the release of a tax-valuation allowance last year.


Ford’s annual pretax profit and automotive operating margins are now expected to be lower than a year ago after earlier forecasts predicting equal or better performances.

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Ford lowered its full-year profit forecast as well as its forecast for capital spending. Ford’s pretax earnings excluding charges were $1.8 billion, or 30 cents a share, were better than the 28-cent a share profit forecast by analysts. Mr. Shanks said the lower forecasts come directly from the eroding results from Europe and South America.


Capital-spending estimates were lowered to $5 billion from a range of $5.5 billion to $6 billion. Mr. Shanks said the lower capital spending came from efficiency improvements, and not from cuts to any car-development programs.

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