Ford Motor Co. posted a 39-percent drop in net income in the first quarter of 2014 to $989 million, weighed down by weaker pricing in the United States and higher warranty expenses. Ford said in a statement that it just posted less than 1 percent hike in revenue to $35.9 billion.
The carmaker saw a 35-percent drop in profit margins in North America due to higher incentives and a $410 million increase in warranty reserves linked to recalls and other service campaigns for past model year vehicles. For the first quarter of 2014, Ford logged a 36-percent decline in pretax operating profit to $1.4 billion.
Once taxes are counted, Ford’s first-quarter operating profit was equal to 25 cents per share – a sharp drop from 41 cents in the same period in 2013. It is also below the 31 cents that Wall Street had expected. According to Ford, “weather-related costs” trimmed its earning in North America by around $100 million.
Ford chief executive Bob Shanks described the period as “solid” despite the large drop in net income, saying that the underlying run rate for the business was much stronger than “what was indicated by the bottom line.” He added that Ford’s first-quarter performance is setting it up for stronger growth, stronger profitability this year.
Shanks said Ford hiked its warranty reserves after issuing more recalls and other service campaigns in the past years than anticipated. He remarked that Ford allocates a reserve on each vehicle it sells and adjusts it according to the trends it is observing. According to Shanks, $340 million of the higher reserves were related to costs fixing vehicles from the 2008-2013 model years.
Around $70 million were tied to two recalls of vehicles: one involved the Ford Escape and the other involved the Ford Crown Victoria and Mercury Grand Marquis sedans. In January 2014, Ford disclosed that a recall of 161,000 Escapes in 2013 to fix a fault tied to 13 fires was the main reason for the $300 million in fourth-quarter warranty costs.
Shanks explained that recalls and other actions are becoming more common across the auto industry since more technology is being infused into vehicles and carmakers can now spot issues more quickly than in the past. [source: Ford]