DEARBORN, Mich. -

Since it was judged against the company’s best performance ever, Ford accentuated the positives although the automaker watched its third-quarter net income drop by $38 million or 2 cents per share year-over-year.

The Blue Oval said Wednesday that its third-quarter net income totaled $1.6 billion, or 41 cents per share, but Ford president and chief executive officer Alan Mulally insisted the OEM continued to generate solid profits, strengthen its balance sheet and invest for future growth, as well as take actions to improve its competitiveness.

“We delivered solid results for the third quarter despite an uncertain business environment by continuing to serve our customers around the world with best-in-class vehicles,” Mulally stressed about the company’s second highest-ever profit for a quarter that was exceeded only slightly by the 2010 third quarter.

“We accomplished this while continuing to invest for future growth and focusing on developing outstanding products with segment-leading quality, fuel efficiency, safety, smart design and value,” he continued.

Industry Reaction & Analysis

Edmunds.com found that some key elements went into the near-record third-quarter profit of $1.65 billion in a message to Auto Remarketing. These points included:

—Ford’s U.S. vehicle sales in the quarter totaled 531,284 vehicles, up 8.7-percent from a year ago.
—Ford reduced incentives from the year-ago third-quarter to an average of $2,771 per vehicle, a hefty 10.4-percent drop from 2010.
—Because of lower incentives and a richer mix of vehicles sold, including more sport utilities, Ford’s average transaction price came to $32,391 per U.S.-sold vehicle in the third quarter, up 4.8 percent from 3Q 2010.
—Even as Ford’s incentives are up 3.9 percent in the third quarter from the second, the automaker still improved its average transaction price by 3.9 percent from the second quarter.

“Ford’s solid third-quarter financial performance relied on the winning formula of higher sales volume, lower incentives and healthier transaction prices,” surmised Michelle Krebs, senior analyst at Edmunds.com.

“Ford is also keeping tight control of its U.S. vehicle inventory with its average days-to-turn at 49 days, well below the 60-day industry ideal,” Krebs continued.

Like Edmunds.com, TrueCar’s Jesse Toprak took a positive view of Ford’s third quarter performance. The vice president of industry trends and insights told Auto Remarketing that the fundamentals of Ford’s business are sound.

“Even though earnings were slightly lower this quarter, it does show that the fundamental transformation of the company in the last three years especially has been successful,” Toprak indicated. “We can see that by their willingness to consider restoring dividend payments in the coming quarters.

“Their incentives are lower and they’re selling more cars while spending less money on producing them, which clearly has an impact on their bottom line,” Toprak went on to say. “We see this trend for Ford where they’re spending less money to produce and sell cars continuing and should only add to their profitability in the coming quarters.

“Ford is now producing cars that people want to buy, and they’re selling them at higher margins than they have in the past. That’s all thanks to the merit and acceptance of their products,” he added.

With the fourth quarter in full swing, Toprak projected Ford could finish 2011 strong.

“The fourth quarter is a particular good time for the domestics in general because of the fact that December is typically one of the best months for SUVs and trucks,” Toprak explained. “Even though Ford now has a much more balanced product portfolio with many small-car offerings in their mix, they still do rely on profits from SUVs and trucks, especially in the fourth quarter.

“What that means is if everything goes as planned in the overall economy, meaning we don’t run into any major road blocks, the fourth quarter should be another healthy and profitable growth quarter for Ford,” he estimated.

And over at Kelley Blue Book, executive editorial director and executive market analyst Jack Nerad continued the parade of positive dialogue for the Blue Oval.

“Ford Motor Company’s third-quarter earnings depict a company that is maintaining its strength in a global auto market that is still rife with challenges,” Nerad stated in a message to Auto Remarketing.

“Not only did Ford increase its overall corporate-wide market share in America and in Europe, it also consolidated the position of its Ford brand as the best-selling brand in the United States,” he continued.

Nonetheless, Nerad approached one part of Ford’s performance with some apprehension.

“There are some reasons for caution regarding Ford’s future,” Nerad pointed out. “Despite a 14-percent increase in overall revenue, both earnings and pre-tax operating profit were down — earnings off $38 million, pre-tax profits off $111 million.  

“While you can make the case that Ford remains on a good ‘roll,’ some of its recently introduced vehicle models have not been a warmly embraced by the public as they have been by the press,” he went on to say. “In the U.S. ‘franchise-player’-type vehicles, Mustang and Taurus, have experienced sales drops this year despite a slowly building market, another reason for concern.”

Beyond what these two particular models are doing in the showroom, KBB emphasized Ford has significantly improved the quality of nearly every vehicle it produces.

“Everything from the subcompact Fiesta to the full-size Taurus has improved tremendously both in terms of style, drivability, and features offered to consumers,” surmised Alec Gutierrez, KBB’s manager of vehicle valuation.

“Ford’s resurgence as an industry leader is not only reflected in their earnings figures, it is also clearly evident in their share of new vehicle sales and used vehicle value retention,” he continued.

KBB pointed out Ford continues to be the top-selling brand in the U.S., accounting for a little more than 16 percent of all new vehicle sales through September of this year. This represents a 6.6 percent improvement from the 15 percent share that was maintained through all of 2010.

"This increase can be attributed to the highly anticipated launch of the fully redesigned 2012 Focus, the all-new 2012 Ford Fiesta and the continually top-selling Ford F-150 that has only continued increased its relevance in today’s high fuel-price environment with the introduction of their more fuel-efficient twin turbo V6,” Gutierrez explained.

“The earthquake in Japan and subsequent shortfall in Japanese production also helped to allow Ford to capture additional share, but make no mistake, Ford’s products can speak for themselves,” he declared.

In addition to increased sales volume, KBB said Ford’s improved product during the past several years is already having an impact on used-vehicle values. Today, the value of a one- to three-year-old used Ford is approximately 8 percent higher than that of a similarly aged used Ford at this time last year.

Among the top five selling brands in the U.S., KBB tabulated Ford’s improvement in used-vehicle value retention is only surpassed by Toyota which has benefited immensely from rising gas prices due to their fuel-efficient portfolio of vehicles.

“While Ford’s used-vehicle values still slightly lag those of their Japanese counterparts, Ford is gaining ground quickly,” Gutierrez estimated.

“As the latest and greatest new Ford models begin to show up as used vehicles over the next several years, we expect Ford to continue to narrow the gap and improve their overall used-vehicle values,” he went on to say. “Ford has come a long way in just a few short years and we at Kelley Blue Book can’t wait to see what’s coming next.”

While Ford’s third-quarter performance impressed industry analysts, those who watch the Blue Oval’s movement on Wall Street weren’t so positive.

In a report from Bloomberg, Gary Bradshaw, a fund manager at Dallas-based Hodges Capital Management who owns about 250,000 Ford shares, stated, “The company has delivered on what they’ve promised and yet the stock hasn’t kept up. I’m hanging tough, but it is painful.”

And according to a Reuters report, investors and analysts had been looking to the earnings report as a turning point where the automaker could detail plans to pay its first dividend since 2006. Reuters indicated Ford has posted profits for 10 straight quarters.

Analysts gave the quarter lukewarm reviews to Reuters with J.P. Morgan calling it “so-so” and Citi describing the results as “a bit messier than expected.”

Ford’s Overall Performance

The company indicated its third-quarter pre-tax operating profit was $1.9 billion or 46 cents per share. That figure represented a decrease of $111 million or 2 cents per share from the year-ago quarter.

Executives pointed out improved total automotive results were more than offset by anticipated reductions in financial services.

Within automotive results, Ford acknowledged pre-tax operating profit was reduced by about $350 million for unrealized mark-to-market adjustments on commodity hedges for future periods.

“These adjustments occurred because of the significant decline in commodity prices near the end of September,” executives explained. “This is a non-cash charge that will either reverse should commodity prices increase or be offset by the benefit of lower commodity prices in the future.”

For the first nine months of the year, Ford earned a pre-tax operating profit of $7.7 billion, net income of $6.6 billion and reported automotive operating-related cash flow of $4.9 billion.

The automaker insisted it continued to grow volume and revenue during the period.

Officials also mentioned Ford’s third quarter net income was affected by unfavorable special items of $98 million. The special items include personnel reduction actions, Mercury and other dealer-related actions in North America.

Elsewhere in the company’s third-quarter report, Ford Credit pre-tax operating profit was $581 million, a decrease of $185 million from the third quarter of last year, a level executives stressed was consistent with previous guidance.

Ford’s third quarter total automotive pre-tax profit was $1.3 billion, an increase of $45 million from the same period a year ago. North America and South America reported pre-tax profits for the third quarter while Europe and Asia Pacific and Africa posted a loss for the period.

Furthermore, Ford’s third quarter revenue was $33.1 billion, an increase of $4.1 billion from third quarter of last year. The automaker noted it generated positive automotive operating-related cash flow of $400 million during the quarter.

The OEM highlighted that it continued to strengthen its balance sheet with a net reduction in automotive debt of $1.3 billion in the third quarter. This included payment of the remaining $1.8 billion balance of secured term loan debt, which was offset partially by an increase in low-cost loans to support advanced technology.

Ford ended the third quarter with $20.8 billion of automotive gross cash, a decrease of $1.2 billion compared to June 30. Automotive gross cash exceeded debt by $8.1 billion, an improvement of $10.7 billion from a year ago. Ford’s automotive liquidity totaled $31 billion.

“We remain well on track to deliver improved full year pre-tax operating profit and automotive operating-related cash flow, consistent with our guidance,” stated Lewis Booth, Ford’s executive vice president and chief financial officer.

“Our liquidity remains strong, and we will continue to take actions when appropriate to strengthen our balance sheet,” Booth added.

More Details about Ford’s Automotive Sector

As mentioned, Ford’s total automotive pre-tax operating profit in the third quarter was $1.3 billion, an increase of $45 million from the year-ago quarter.

Executives attributed the increase to higher net pricing in each of their automotive operations, lower net interest expense and favorable volume and mix in North and South America. They acknowledged this gain was offset partially by higher contribution costs, which included material costs, warranty expense, as well as freight and duty costs.

“About two-thirds of the contribution cost increase is due to commodities,” Ford executives explained.

“As previously noted, in addition to higher commodity costs, the company recognized unfavorable mark-to-market adjustments on commodity hedges of about $350 million driven by a sharp decline in commodity prices mainly in the latter part of September,” they continued. “Ford uses hedging to provide cash flow protection against volatility in commodity prices.

“Mark-to-market refers to the accounting practice of reflecting commodity hedges at their current market value,” the automaker went on to mention. “As commodity prices go up, the market value of Ford’s commodity hedges increases; as commodity prices go down, the market value of Ford’s hedges decreases. These changes in the market value of the company’s commodity hedges do not have an immediate cash impact, although the change in value is reflected in its current earnings.”

In other news, Ford determined total vehicle wholesales in the third quarter were 1.3 million units, up 93,000 units from third quarter 2010 as every business segment reported higher wholesales.

The Blue Oval computed total automotive revenue in the third quarter was $31.1 billion, up $4.4 billion from a year earlier.

Breakdown by Region

Ford delved deeper into results by global region.

—North America: In the third quarter, North America reported a pre-tax operating profit of $1.6 billion, essentially unchanged from a year ago.

“Higher net pricing and favorable volume and mix were more than offset by higher contribution costs,” Ford explained. “These costs included higher commodity costs and hedging adjustments, and higher material costs excluding commodities mainly associated with our new products."

The automaker noted wholesales in the third quarter were 642,000 units, up 50,000 units from a year ago. Revenue in the third quarter was $18 billion, up $1.8 billion from a year ago.

—South America: In the third quarter, South America posted a pre-tax operating profit of $276 million, compared with a profit of $241 million a year ago.

“The increase primarily reflects favorable net pricing, volume and mix, and other profits, offset partially by higher structural costs, driven by local inflation, and higher commodity costs,” OEM officials noted.

Ford’s wholesales in South America during the third quarter were 133,000 units, up 17,000 units. Revenue in the third quarter was $3 billion, up $500 million from a year ago. 

—Europe: In the third quarter, Europe sustained a pre-tax operating loss of $306 million, compared with a loss of $196 million a year ago.

“The decrease is explained by higher commodity costs, including hedging adjustments, as well as unfavorable exchange, partially offset by improved structural costs,” the automaker emphasized.

Ford’s European wholesales in the third quarter were 357,000 units, up 17,000 units. Revenue in the third quarter was $7.8 billion, up $1.6 billion from a year ago.

—Asia Pacific Africa: In the third quarter, Asia Pacific Africa also suffered a pre-tax operating loss of $43 million, compared with a profit of $30 million a year ago.

“The decline reflects higher costs, unfavorable volume and mix, mainly mix, and unfavorable exchange, offset partially by higher net pricing,” executives reiterated.

Ford’s wholesales in these regions during the third quarter were 214,000 units, up 9,000 units. Revenue in the third quarter, which excludes sales at unconsolidated China joint ventures, was $2.3 billion, up $500 million from a year ago.

Commentary about Ford Outlook

Ford reiterated that it remains focused on delivering the key aspects of the One Ford plan, which are unchanged. These elements include:

—Aggressively restructuring to operate profitably at the current demand and changing model mix.
—Accelerating the development of new products that customers want and value.
—Financing the plan and improving the balance sheet.
—Working together effectively as one team, leveraging Ford’s global assets

In the first nine months of this year, Ford pointed out the seasonally adjusted annual rate of sales was 12.8 million in the U.S. and 15.3 million in the 19 markets Ford tracks in Europe.

Based on the latest outlook for industry volumes, Ford now forecasts the U.S. full-year industry volume at 13 million units, compared with a range of 13 million to 13.5 million units previously. For the 19 markets Ford tracks in Europe, Ford now forecasts the industry volume at 15.2 million units, compared with a previous range of 14.8 million to 15.3 million units.

As reported with first and second quarter results, executives conceded that quality remains mixed due to some near-term issues in North America, which Ford is addressing. The company also said it is on track to achieve quality improvements in its international operations.

The company expects its full year U.S. total market share, its U.S. retail share of the retail market and European market share to be equal to or improved from a year ago. In the first nine months, Ford’s U.S. total market share was 16.5 percent, its U.S. retail share of the retail market was 13.9 percent and European market share was 8.3 percent.

Ford declared that its third quarter and first nine-month performance was solid, and the company remains well on track to deliver continued improvement for full year pre-tax operating profit and automotive operating-related cash flow compared with 2010.

In 2010, the company reported a full year pre-tax operating profit of $8.3 billion and automotive operating-related cash flow of $4.4 billion.

Based on the company’s most recent assessment, Ford expects its structural costs to be about $1.6 billion higher than 2010. As a result of the recent hedging adjustments, Ford expects commodity costs to be about $2.2 billion higher than 2010.

Ford now expects its full-year automotive operating margin will be about 5.7 percent, compared to the 6.1 percent Ford achieved in 2010. This is due primarily to the impact of commodity hedging adjustments. Automotive operating margin through the first nine months of 2011 was 6.5 percent.

Furthermore, Ford this year’s capital expenditures will be about $4.6 billion as the company realizes efficiencies from its global product development processes. The company remains on track with its product plans. Capital spending in the first nine months was $3.1 billion.

The OEM is projecting total company fourth quarter production to be about 1.4 million units, up 22,000 units from a year ago. The company acknowledged fourth-quarter production in Asia Pacific Africa is being affected by flooding in Thailand.

“Although the company’s joint venture Auto Alliance Thailand assembly plant is not affected, the flood is causing parts shortages that have forced it to suspend production,” Blue Oval executives noted.

“Ford is working closely with its affected suppliers to return to production as quickly as possible and to minimize any potential impact in other regions,” they continued. “This forecast reflects the company’s best projection at this time. Should the outlook change materially, the company will update its forecast accordingly.”

In wrapping up the overall forecast, Mulally asserted, “We are making consistent progress on our commitment to deliver profitable growth for all.

“Going forward, we are focused on aggressively managing short-term challenges and opportunities and we remain committed to delivering our mid-decade plan and serving a growing group of Ford customers around the world,” he asserted.

All of Ford’s financial news comes just a day after its franchised dealers came to the brand’s defense after Consumer Reports gave Blue Oval models poor marks for quality. Auto Remarketing talked to Ford dealers in this report.