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

Ford Motor Co.’s second-quarter net income fell 4.7% from a year ago as the company’s combustion engine unit saw pretax profits decline due to stubbornly high warranty costs

Stubborn warranty costs push down Ford’s 2Q net profits, causing stock plunge in after-hours tradingBy TOM KRISHERAP Auto WriterThe Associated PressDETROIT

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.

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

At its investor day event nearly four 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.

Ford shares plunged almost 12% in after-hours trading Wednesday. The Dearborn, Michigan, company released results just after the closing bell for regular trading.

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.

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 headline to read that Ford’s combustion engine unit’s pretax profit dropped but it did not post a loss.