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Ford’s Q1 Profit is Lower-Than-Expected, Hit by High Warranty Costs

April 28, 2014

Another one of Detroit’s Big Three automakers has reported a sales decline for the first quarter. Ford Motor Co. reported lower-than-expected earnings on Friday. According to Forbes, the Blue Oval earned $35.9 billion through March but its after-tax net income totaled $989 million, a 39 percent decline.

Though Ford is not dealing with a massive recall crisis similar to that of General Motors Co., recalls have also affected its bottom line. The biggest contributor to the decline of profit is the higher costs of warranty. The nation’s second-biggest automaker acknowledged that the company’s decision to boost its warranty reserves cut into its Q1 earnings.

Ford took a $400 million charge for service actions in North America. It was reported that $350 million of the said charge was allotted for recalls and service work that the automaker is expected to do for its cars and trucks from model years 2008 to 2013. The charge is also inclusive of expenses related to current recalls on older vehicles, such as the 2003 to 2005 Ford Crown Victoria and Mercury Grand Marquis sedans.

Ford’s Chief Financial Officer Robert L. Shanks justified the charge, insisting that the increase of recalls and customer service programs made an increase in warranty reserves a must. He pointed out that in a time when cars are made more complex and equipped with advanced technology, more recalls are expected to be issued.

Shanks did say in an interview that such a huge reserve hike was necessary because the company had more recalls. According to the National Highway Traffic Safety Administration (NHTSA), Ford was in fifth place among other automakers in 2013 in terms of recalls. It recalled 1.2 million vehicles in the United States last year.

Warranty reserve costs are included in Ford’s list of nonrecurring expenses that affect the bottom line. Shanks noted that while the company adjusts the reserves every quarter, the reserves for Q1 was bigger because Ford issued more recalls and handled more service actions.

Recalls in the auto industry are not unusual, but these are now met with more attention and scrutiny after GM’s long overdue recall of defective ignition switches. The faulty component is linked to at least 13 fatalities. With the possibility of GM paying hefty fines and legal settlements, other automakers like Ford choose to be cautious and try to address customer complaints as soon as possible.

There were other factors that helped decrease Ford’s Q1 earnings. These include production issues as well as higher labor and freight expenses connected to the severe winter weather the country experienced early this year. It cost the carmaker $100 million.

South American operations also contributed to the lower bottom line: political unrest, currency devaluation and import restrictions were among those that slowed sales in the region in the last quarter. It cost Ford $400 million.

Despite lower-than-expected first quarter earnings, Ford considered the past quarter as a good one.

“We had a solid quarter, and we are on track with our most aggressive product launch schedule in our history,” Ford President and Chief Executive Alan Mulally said in a statement. Ford will continue to spend heavily this year, with most of its spending related to its 23 new products.

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