Ford Profit Drops 19% on Higher Commodity Prices

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Ford Motor Company (NYSE: F) said that its adjusted pre-tax profit, excluding one-time items, fell 19% to $1.7 billion in the fourth quarter, on higher costs related to rising commodity prices and unfavorable exchange-rate movements.

But Ford's net income rose to $2.4 billion in the fourth quarter, up sharply from a $783 million net loss a year ago, thanks to some tax breaks and a much smaller loss from its annual pension-plan remeasurements. Ford's revenue in the quarter increased almost 7% from a year ago, to $41.3 billion.

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For the full year, Ford earned net income of $7.6 billion, a $3 billion improvement over its 2016 result, on revenue of $156.8 billion.

On an adjusted basis, excluding one-time items, Ford earned $0.39 in the fourth quarter, up from $0.30 in the fourth quarter of 2016. For the full year, Ford earned $1.78 per share on an adjusted basis, up slightly from $1.76 in 2016.

The raw numbers

Here are the key numbers from Ford's fourth-quarter and full-year 2017 results.

Metric Q4 2017 Change From Q4 2016 Full Year 2017 Change From 2016
Revenue $41.3 billion 6.7% $156.8 billion 3.3%
Vehicles sold 1,749,000 2.5% 6,607,000 0.7%
Adjusted pre-tax profit $1.7 billion (19%) $8.4 billion (18.4%)
Automotive operating margin 3.7% (2.0 ppts) 5% (1.7 ppts)
Net income $2.4 billion Improved by $3.2B $7.6 billion 65.2%
Adjusted earnings per share $0.39 30% $1.78 1.1%

How Ford's business units performed in the fourth quarter

Here's a look at how each of Ford's business segments performed. All financial results in this section are presented on an operating (pre-tax) basis.

North America: Ford earned $1.64 billion in its home region in the fourth quarter, down from just under $2 billion a year ago. Its operating margin in the region fell to 6.8% from 8.5% a year ago. Ford had strong sales and gained U.S. market share in the quarter, but higher costs for commodities such as steel and aluminum, along with an expensive recall, more than offset its sales-driven gains.

For the full year, Ford earned $7.5 billion in North America, down from $9 billion a year ago. Its operating margin for the full year was 8%, down from 9.7% in 2016.

South America: Ford lost $197 million in South America in the fourth quarter, a significant improvement over the $293 million loss it posted a year ago. Revenue, sales, market share, and operating margin were all significantly improved from a year ago. Although Ford still has a long way to go in the region, improving economies in the key markets of Brazil and Argentina are helping to lift Ford's efforts.

For the full year, Ford lost $784 million in South America, an improvement over its $1.1 billion loss in 2016.

Europe: Ford's profit in Europe fell to just $56 million in the fourth quarter from $166 million in the year-ago period. Sales and revenue were up from a year ago, but Ford's pre-tax profit was hit by about $130 million of adverse Brexit-related effects, along with higher recall costs year-over-year.

For the full year, Ford made $234 million in Europe, down sharply from $1.2 billion in 2016.

Middle East and Africa: Ford's Middle East and Africa unit lost $70 million in the fourth quarter, a slight improvement over its $71 million loss a year ago. The industrywide pace of sales fell in key markets in the region; Ford's wholesale deliveries were down 15% from the year-ago period.

For the full year, Ford lost $263 million in the region, an improvement over its $302 million loss in 2016.

Asia-Pacific: Pre-tax income in Ford's Asia-Pacific region fell sharply from a year ago, to just $5 million from $284 million in the fourth quarter of 2016. That's despite an 11% in revenue, to $3.8 billion. The big story is China: Ford's sales and market share have both slipped in the world's largest new-car market, and its pricing was under pressure all year from fast-improving domestic Chinese automakers. Equity income from Ford's joint ventures in China fell to $206 million, from $380 million in the fourth quarter of 2016.

For the full year, Ford earned $561 million in the region, down from $627 million in 2016.

Ford Credit: Ford Credit, the company's in-house financing unit, earned $610 million in the fourth quarter, up 53% from a year ago. It was a terrific quarter for Ford Credit, one that capped off a very strong year of growth for Ford's financing arm. Credit and loss indicators remain quite strong, with over-60-day delinquencies down to 0.13% of the portfolio from 0.16% a year ago.

For the full year, Ford Credit earned $2.3 billion, up 23% from its 2016 result.

Cash flow, debt, and available liquidity

Ford had $2.3 billion of positive cash flow related to its automotive business in the fourth quarter, driven by strong auto-related profit and the favorable timing of some expenses.

Ford had $27.5 billion in cash and equivalents as of the end of 2017, along with another $10.8 billion in credit lines, for total liquidity available to its automotive business of $38.3 billion. Against that, it had $15.9 billion of well-structured long-term debt.

Looking ahead: Ford's full-year 2018 guidance

Ford reiterated the guidance Shanks gave at a presentation last week. Briefly, Ford expects its revenue in 2018 to be equal to or slightly better than its 2017 result. But its adjusted earnings per share will fall to between $1.45 and $1.70 for the year, and its operating cash flow in 2018 will be lower than in 2017, largely because of rising commodity costs and unfavorable exchange-rate movements.

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John Rosevear owns shares of Ford. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.