Stubborn warranty costs push down Ford's 2Q net profits, causing stock plunge in after-hours trading

DETROIT (AP) — In October of 2020, Ford's then-new CEO Jim Farley said the company was working to cut warranty costs after glitch-prone small-car transmissions hit the automaker's bottom line.

Nearly four years later, warranty costs are still vexing the nation's second-largest automaker and lopping billions off of its profits.

Ford Motor Co. reported Wednesday that its second-quarter net income fell 4.7% from a year ago as its combustion-engine unit posted a pretax loss due to rising warranty and recall costs.

The profit drop and lingering quality problems knocked net income to $1.83 billion from April through June, compared with $1.92 billion a year ago. It caused Ford to badly miss Wall Street estimates for adjusted earnings per share, touching off a stock plunge in after-hours trading.

Warranty and recall costs last quarter, the company said, totaled $2.3 billion, $800 million more than the first quarter and $700 million more than a year ago.

At its investor day event two years ago, Farley said Ford had made progress on quality of new vehicles as well as initial quality after vehicles were sold. “However we are not satisfied at all with our quality performance, including our recalls and customer satisfaction efforts, which we need to quickly accelerate,” he said at the time.

Chief Financial Officer John Lawler told reporters Wednesday that Ford is making progress on quality. The second-quarter costs were attributed to older vehicles from the 2021 model year and earlier.

Farley told analysts that improvements are showing up in internal data, and in research by J.D. Power, which found that Ford rose 14 places in this year's initial quality survey, from 23rd to ninth.

Lower warranty costs, Lawler said, lag 12 to 18 months behind quality improvements, and that’s when lower costs should start to show up.

Farley said many of the problems should have been caught before the older vehicles were put on sale. Now, the company is holding vehicles until it works out problems. “We do not release them until we’re happy with the quality and that we’ve done all the testing,” he said. “And it makes our quarters lumpy, and it’s challenging, but it will reduce warranty over time.”

Second-quarter warranty costs rose due to new technology, recalls and inflationary pressures that pushed up the costs of repair, Farley said. The company soon will be able to predict problems and potentially fix them with online software updates before bigger problems arise, he said.

The profit drop and warranty costs from April through June did not sit well with investors.

Shares of Ford, which had grown about 12% this year as of Wednesday’s market closing, plunged in extended trading during the evening, nearly erasing a year’s worth of gains.

Excluding one-time items, Ford made 47 cents per share. That was far short of industry analysts' estimates of 68 cents, according to FactSet.

The automaker reported $47.8 billion in revenue for the quarter, a 6.3% increase over the $44.95 billion in the second quarter of 2023. That barely beat analyst estimates of $47.79 billion.

Ford Blue, the company's internal-combustion-engine unit, made $1.17 billion before taxes during the quarter, down $1.1 billion from a year earlier. Ford Pro, the commercial vehicle unit, made $2.56 billion, $173 million above 2023. Model e, the electric vehicle unit, lost $1.14 billion, $63 million worse than a year ago.

Despite the net profit drop, Ford held its full year guidance for pretax income at $10 billion to $12 billion.

Asked by analyst if Ford’s stock is still a good value, Farley said it is, pointing to its highly profitable commercial-vehicle business and new high-margin opportunities from increased service and software revenue.

“I think people will understand over time how many exciting opportunities there are for Ford, and I’m not just referring to vehicles,” Farley said. “I’m referring to non-vehicle activities.”

A not-so-small team in California, he said, is working on a new electric vehicle platform that will yield lower-cost and profitable smaller EVs. The team, he said, has designed EVs and parts that are better and cheaper than competitors. He said the company is working on partnerships that will play out in larger vehicles. It is benchmarking Tesla and Chinese automakers on EV costs, he said.

Ford's second-quarter sales in the U.S., its most lucrative market, rose just under 1% to more than 532,000 vehicles.

Lawler said Ford is on track to cut $2 billion from material, manufacturing and freight expenses this year, which will be partly offset by higher labor and vehicle update costs.

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This story has been updated to correct the date Ford CEO Jim Farley made comments about vehicle quality at a company investor day to 2022 instead of 2020. It was also updated correct the headline to read that Ford’s combustion engine unit’s pretax profit dropped but it did not post a loss.