Thursday, October 20, 2005

Ford 3Q loss hits $284 million

Automaker's weak third-quarter results could force it to ratchet up aggressive restructuring.

By Bryce G. Hoffman / The Detroit News

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Ford Motor Co., hurt by weaker SUV demand, lower prices and higher warranty expenses, swung to a third-quarter net loss of $284 million and said it will unveil additional restructuring moves in January. A year ago, the company earned $266 million.

Ford's struggling North American operations reported a wider pre-tax loss of $1.2 billion, compared to a loss of $481 million a year ago. And worldwide, Ford's automotive business posted a pre-tax loss of $1.3 billion, compared to a loss of $609 million a year ago.

The company blamed lower inventories, unfavorable product mix, falling net prices and higher material costs for the wider loss.

The results include the favorable impact of a $240 million settlement with Bridgestone Firestone over a 2000 tire recall.

Ford said worldwide revenues rose 4.4 percent to $40.9 billion from $39.1 billion.

Like General Motors Corp., the Dearborn-based automaker is struggling with a consumer shift away from SUVs, a weak pricing environment, excess manufacturing capacity and high labor costs.

"We face many challenges in this competitive and difficult environment," Ford Chairman and Chief Executive Officer Bill Ford Jr. said in a statement today. "We have demonstrated throughout the year that we will continue to take the actions necessary to return our core business to sustainable profitability. We understand the issues, our priorities, and have the right team in place to get the job done."

Ford will announce a major restructuring plan in January that will mean, as expected, "significant" U.S. plant closings and staff reductions.

Bill Ford said today the plan would be painful but essential and would affect salaried workers and hourly workers represented by the United Auto Workers.

"This is not a sacrifice we will ask only the UAW and its members to share. There will be sacrifices throughout the company, top to bottom," Bill Ford said in a conference call today. "Our industry is beginning a dramatic restructuring which is sorely needed. While the challenges are great, so are the opportunities."

Ford has already cut thousands of white-collar jobs, reduced employee benefits and undertaken other cost reduction efforts to counter slumping sales, falling prices and a slump in SUV demand.

"For all the progress, we recognize we're very far from the finish line," Bill Ford said. "We need a dramatically different business structure and we need innovation to drive everything we do."

Separately, the company unveiled a new ad campaign today starring Bill Ford that will highlight its commitment to innovation and environmentally friendly vehicles.

With unit sales down 1 percent, Ford's share of the U.S. vehicle market has dropped below 18 percent this year.

Its North American operations lost $907 million before taxes in the second quarter -- a $1.4 billion decline from the same period in 2004.

Bill Ford and Mark Fields, the automaker's new president of its Americas division, are pushing for more sweeping cutbacks to stem the losses.

In July, Ford Chief Financial Officer Don Leclair said "nothing is off the table."

The automaker also is in discussions with the United Auto Workers union to lower health care costs for active employees and retirees. GM reached a deal with the UAW this week to cut its long-term retiree health care obligations by $15 billion, or 25 percent of its hourly health care liability.

The deal will also slash GM's annual pre-tax employee health care expenses by about $3 billion, an g enearte cash savings of about $1 billion a year.

"We believe that it's inevitable that Ford and the UAW will strike a new health care agreement similar to GM's," said Peter Nesvold, who follows Ford for Bear, Stearns & Co. Inc. "The timing is uncertain."

Bill Ford said today the conclusion of any deal with the UAW would depend on the implementation of GM's agreement.

Ford's first major cost-cutting campaign began in January 2002 when it announced plans to eliminate 21,000 jobs, close parts and assembly plants and kill unprofitable models.

The plan worked for a while. After losing $6 billion in 2001 and 2002, the company returned to profitability and managed to make $4 billion over the next two years.

But rising gasoline prices knocked the bottom out of the profitable sport utility vehicle, a key source of profits in North America.

As market conditions deteriorated, the company was forced to abandon a goal of generating $7 billion in pretax revenue annually by 2006.

Ford began cutting white-collar jobs and eliminating contract employees. By August, the automaker had eliminated 1,100 salaried positions and was promising to cut 1,750 more by October -- a goal it met through a combination of retirements, voluntary departures and layoffs.

Ford has suspended matching contributions to employee retirement accounts, as well as management bonuses.

In August, Ford sold its Hertz rental car division for $5.6 billion in cash, giving the company much-needed capital and helping to offset the bailout of Visteon Corp.

But Wall Street wants more.

Global Insight Inc. estimates that Ford's North American factories are currently running at about 72 percent capacity. Global Insight's Catherine Madden said anything less than 90 percent is unprofitable.

GM said Monday it will accelerate plans to close plants and cut 25,000 jobs to boost its capacity utilization from less than 85 percent to 100 percent by 2008.

"(Ford's) problem is much more long term," Madden said, adding that the company has no choice but to close more plants and close them soon. "It's a crucial factor in the restructuring of their business moving forward."

Ford has already announced plans to shutter a Lorain, Ohio, assembly plant. Its assembly plants in Wixom and outside St. Louis are likely candidates for closure, Madden said.

The St. Louis Assembly in Hazelwood, Mo., builds the Ford Explorer and Mercury Mountaineer SUVs.

So does Ford's assembly plant in Louisville, Ky., and there may not be enough demand to justify keeping both factories open.

The St. Louis plant was marked for closure as part of Ford's initial restructuring plan, but union leaders managed to keep it open.

In August, Ford announced that the next generation of Lincolns will be built in Atlanta, rather than at the brand's traditional home in Wixom. Coupled with Ford's plan to build the new Lincoln Zephyr in Mexico, the decision left Wixom with no solid product plan for the future.

While the details of GM's agreement with the union have not been released, Nesvold expects Ford to convert its defined benefit health care program to a defined contribution program that would cap the amount of money the company contributes to workers' health insurance.

He also expects a 20 percent cut in Ford's total obligation, spread over seven years -- a deal that could be worth $7.8 billion to the company. If such a deal were approved this year, it could result in a pretax savings of $1.6 billion, Nesvold said, a gain of 51 cents per share.

"We would expect a relief rally in Ford shares," he said. "Nonetheless, we would expect the shares to thereafter continue to underperform, based on a handful of other structural issues and a weak product lineup."

Ford is trying to address those deficiencies, most notably through the launch of the new Ford Fusion and its siblings -- the Mercury Milan and Lincoln Zephyr.

Ford sales were up in the third quarter, though largely as a result of its aggressive price-slashing promotions.

"Like GM, Ford overproduced in 2004, and like GM, it has had to resort to fire-sale tactics to clear excess inventory in 2005," Merrill Lynch analyst John Casesa wrote in a report released earlier this week. "Currently unable to find a way to effectively differentiate its offerings from its main domestic rival, Ford has let itself be victimized by GM's tactics ... like GM, Ford's already poor fundamentals look likely to worsen further."

You can reach Bryce Hoffman at (313) 222-2443 or bhoffman@detnews.com.