Ford Q1 net falls 39% on weaker pricing, higher warranty costs

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DETROIT — Ford Motor Co. today said its first-quarter net income fell 39 percent from the same period a year ago to $989 million on weaker pricing in the
United States and higher warranty expenses.

It was Ford’s 19th consecutive profitable quarter.

Profit margins in North America declined 35 percent, due to higher incentives and a $410 million increase in warranty reserves related to previously
announced recalls and other service campaigns involving vehicles from past model years. Ford also said “weather-related costs” cut North American earnings
by about $100 million.

Revenue edged up less than 1 percent to $35.9 billion, Ford said in a statement.

Ford CFO Bob Shanks characterized the quarter as “solid” despite the big year-over-year drop in net income.

“The underlying run rate for the business was much stronger than what was indicated by the bottom line,” Shanks told reporters at Ford’s headquarters.
“It’s setting us up for stronger growth, stronger profitability in 2015 and beyond.”

Ford’s pretax operating profit dropped 36 percent to $1.4 billion. After taxes, its operating profit was equal to 25 cents a share, down from 41 cents a
year ago and below the 31 cents that Wall Street had projected.

Warranty reserves

Shanks said the company increased its warranty reserves after initiating more recalls and other service campaigns in the last few years than anticipated.
Shanks said Ford sets aside a reserve on each vehicle it sells and adjusts the amount based on the trends it is seeing.

He said $340 million of the higher reserves related to costs fixing vehicles from the 2008-13 model years, while $70 million relates to two recalls of
vehicles from the early 2000s. One of those recalls involves the Ford Escape and the other covers the Ford Crown Victoria and Mercury Grand Marquis sedans.

In January, Ford said a recall of 161,000 Escapes from 2013 to fix a defect linked to 13 fires was the primary reason for $300 million in fourth-quarter
warranty costs.

“Our last couple years, we have seen more field-service actions than what we thought,” Shanks said in explaining the increase to warranty reserves. He said
recalls and other actions to resolve customer complaints are becoming increasingly common across the industry as more technology is added to vehicles and
because automakers can identify problems more quickly than in the past.

Shanks said the higher warranty reserves, weather-related costs and $380 million in charges related to South American currency fluctuations reduced
earnings by about $900 million, or 17 cents a share, meaning they more than accounted for the decline from a year ago.

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