Ford profits slide 86% on restructuring charges

Ian Thibodeau
The Detroit News
Ford profits slid 86% in the second quarter as the automaker continues to spend billions to restructure its global business. Expenses related to the introduction of the new Ford Explorer temporarily hurt the bottom line.

Dearborn — Ford Motor Co. said Wednesday its annual profits would be lower than analysts expected as the company's second-quarter profits slid 86% due to the automaker's ongoing global restructuring.

The automaker's income will likely continue to take hits through the remainder of 2019, officials said Wednesday, as the automaker moves to cut costs and reform unprofitable pieces of its global business. The situation could make contract negotiations with the United Auto Workers contentious, as the UAW will be looking for pay increases while Ford's profits shrink under the current restructuring.

Ford is making strong progress right-sizing its problem European and South American business, said CEO Jim Hackett and Ford's new chief financial officer Tim Stone. The short-term hits to earnings will pay out later when the company reports stronger earnings over the long-term following its global restructuring, the executives said. 

"There's a lot of good news in this year of execution," Hackett said. "We are improving fitness."

Ford officials previously said the company would spend $11 billion to restructure the global business over the next few years. It would spend roughly $3.5 billion of that in 2019 as the global moves get underway; $1.2 billion in expenses was incurred in the second quarter, which means the second half of the year will see more dents to earnings. Ford made $148 million in the second quarter. Profits were down 54% for the first half of the year.

The global redesign took a bite out of profits in the second quarter, but the automaker's pile of cash grew 30% compared to a year ago to boost operating cash-flow through the first half of the year to $10 billion. Stone said that is early proof that the automaker's restructuring moves can boost profitability.

"You're starting to see it in the results," Stone said. "It's the very early days. That's very encouraging, because we're already starting to see some early benefits, some early signs, and we have a lot of opportunity to continue to execute against the redesign."

Ford also took a hit to the bottom line on the Ford Explorer and Lincoln Aviator introductions, which slowed North American wholesales by 72,000 units. The company announced earlier this week it was adding capacity in Chicago to increase production of some of those new models.

The company's earnings before interest and taxes were flat at $1.7 billion. Ford took a $181 million charge there because shares of a software company, Pivotal, slid more than 35% in the first half of the year after the company lowered its full-year fiscal outlook earlier this summer. Ford had invested $181.2 million in Pivotal in 2016 for the company to develop cloud software. 

Ford also reported revenue was flat as it transitions out of small cars and sedans in favor of larger, more profitable vehicles. 

"The transition out of some of those products has been more than offset by the benefits of launching Ranger," Stone said. "Our portfolio is transitioning significantly in the U.S....and so it's a much better customer experience, (and) a fresh lineup of cars that customers want to buy."

Ford reported its automotive segment's earnings before interest and taxes were up 19% to $1.4 billion due to better mix in North America, though the company's North American business unit earnings dropped 3% to $1.7 billion. The automaker's profit margin was 7.1%; Ford is targeting a 10% margin in North America, and an 8% margin overall.

The automaker lost money in South America ($205 million), the Middle East and Africa ($45 million) and Greater China ($155 million), though the loss in China was a $328 million improvement compared to a year ago. Ford made $52 million in Europe and $30 million from the rest of its Asian business.

Stone said Wednesday that earnings per share for 2019 would be $1.20 to $1.35, lower than analysts’ estimates. He expects 2019 earnings before interest and taxes to be between $7 billion and $7.5 billion, up from $7 billion last year. Ford hadn't previously given specific targets for 2019.

Meantime, Stone emphasized the amount of cash Ford had as the automaker braves slowing sales at a greater rate than some of its competitors due to the vehicles it's eliminating from its lineup. The automaker's cash pile grew $1.5 billion in the second quarter. The company has $10 billion in cash flow from operating activities through the first half of the year.

Ford through the first half of 2019 was quickly paring back sedan sales as the company transitions to a more SUV- and truck-heavy lineup. Before the company's all-new Explorer, Aviator, Escape and other larger vehicles finish their production ramp-ups, Ford's Ranger and EcoSport were tasked with filling the void left by slow-selling sedans like the Fusion, and compact cars like the Focus and Fiesta.

"Ford is still working through some growing pains as it transitions away from passenger vehicles," said Jeremy Acevedo, senior manager of insights at Edmunds. "The company is facing a pretty big loss in sales from phasing out the Focus, and although the new Ranger is helping recuperate some of this, it's not enough at this point. You can't kill cars and expect sales to stay the same if you haven’t given shoppers other options. It's critical that the Escape and Explorer hit the market soon if Ford wants to execute against its master plan for the future."

But Ford's pile of cash could also make the automaker a target. Ford is in the beginning stages of national contract talks with the United Auto Workers. The UAW is angling to get better wages and retain already strong health benefits after years of record profits from the Detroit Three. 

Ford, General Motors Co., and Fiat Chrysler Automobiles all say the companies need to undergo some belt-tightening amid slowing sales and an uncertain future. Ford is currently undergoing a restructuring that would trim or redeploy some $25.5 billion in addition to the $11 billion it's spending to restructure the global workforce.

Twitter: @Ian_Thibodeau