Wednesday, July 20, 2005

Ford braces for more cutbacks

North American auto operations lose nearly $1 billion; outlook is bleak for third quarter.

By Eric Mayne / The Detroit News

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DEARBORN -- Ford Motor Co. said Tuesday that it lost nearly $1 billion in North America in the second quarter and plans another round of cost cutting to reduce excess manufacturing capacity.

The disappointing financial results and ominous warnings about the rest of this year are the latest signs that Ford is faring little better than rival General Motors Corp., which announces second-quarter earnings today, in the brutal U.S. market.

Ford earned $946 million in the quarter, down 19 percent from the same period a year ago. But the modest profit did little to mask the problems -- falling sales and prices, rising warranty costs and high inventories -- that are dogging Ford.

A large chunk of the profit -- $384 million -- came from a tax adjustment. And the automaker's crucial North American operations cratered, losing $907 million on a pre-tax basis compared with a profit of $476 million during the second quarter of 2004.

Analyst David Healy of Burnham Securities said Ford needs to accelerate cost reductions to adjust to a drop in U.S. sales and market share that won't change soon.

"They're getting into the GM situation where they have too many plants, too many people," he said.

Ford Chief Financial Officer Don Leclair said the automaker plans to reduce excess factory capacity, but did not provide details.

"We realize we have excess capacity, and we will update you on our plans on that area later this year," Leclair said in a conference call. "As we said in April, nothing is off the table."

Analysts say Ford is likely to close plants and cut jobs over time. Earlier this year, GM announced plans to close factories and lay off 25,000 workers by 2008.

At the beginning of the year, Ford expected its global automotive business to generate a pre-tax profit in the range of $1.5 billion to $2 billion this year, up from $850 million in 2004. In the spring, weak sales forced it to lower guidance to "break even at best."

With truck and sport utility vehicle sales slipping, and discounts rising, the second half of the year is shaping up to be even tougher.

"They're going to lose money in the third quarter -- they're going to lose a bundle of money," said Brett Hoselton of KeyBanc Capital Markets.

Citing volatility with the industry's sales and pricing outlook, Ford said it would no longer offer quarter-by-quarter earnings guidance for the first time since January 2002, when it announced its post-Firestone revitalization plan.

Ford's worldwide automotive operations recorded a pre-tax, second-quarter loss of $245 million -- down from 2004's $97 million second-quarter profit -- prompting a vague warning from Chairman and Chief Executive Officer Bill Ford.

"Our global automotive results were disappointing, reflecting the fiercely competitive environment in which we continue to operate, particularly in North America," he said. "We are responding to this tougher operating environment through actions aimed at improving our cost structure, optimizing our global footprint, strengthening our balance sheet and making essential investments for the future. We'll continue to share our plans as the year progresses."

The message coming out of Ford is troubling for Ken Dearing, president of United Auto Workers Local 325, which represents about 1,800 hourly employees at Ford's assembly plant in St. Louis. Ford has been silent about the plant's future in recent months.

"They really haven't said too much about anything," Dearing said.

Ford's large and underused plant in Wixom is another plant with an uncertain future and no production plans beyond 2008.

Leclair declined to discuss the outlook for specific plants. Ford's contract with the United Auto Workers prohibits plant closings and is not scheduled to be renegotiated until 2007.

After cutting 1,100 salaried employees earlier through buyouts, Ford plans to reduce its North American white-collar ranks by another 5 percent by Oct. 1.

The automaker is also eliminating management bonuses worldwide and suspending matching 401(k) payments to salaried employees.

In addition, the automaker will reduce by 10 percent the number of salaried contract workers it employs.

Ford's overall performance exceeded Wall Street's expectations, but analysts said the results were enhanced by favorable tax rulings and a $1.2 billion profit recorded by Ford Motor Credit, the automaker's finance arm.

Ford's Premier Automotive Group recorded a pre-tax profit of $17 million, compared with a pre-tax loss of $347 million for the second quarter of 2004.

In South America, Ford posted a second-quarter pre-tax profit of $88 million, an increase of $66 million from a $22 million pre-tax profit a year ago.

The automaker said those markets were insulated from rising material costs.

"We've got vehicles that are hot in the marketplace," said Anne Stevens, group vice president of Canada, Mexico and South America.

In North America, where Ford's market share has dropped from 18.1 percent during the second quarter of 2004 to 16.7 percent this year, the automaker is counting on new models such as the Ford Fusion sedan and revamped Explorer to boost sales.

"In the final analysis, this is a product business," Leclair said. "And we've got some great ones coming in the fall."

But analysts remain skeptical.

"They need a home run on the car side," said Global Insight's George Magliano.

You can reach Eric Mayne at (313) 222-2443 or emayne@detnews.com.