Ford posts a $5.8 billion loss
Continued weakness in North America
John D. Stoll and Stephen Wisnefski Wall Street Journal Posted: Thu, 25 Jan 2007 22:22 |
DETROIT -- Ford Motor Co. on Thursday provided the latest evidence of how deep its financial hole has become, announcing a fourth-quarter net loss of $5.8 billion that pushed the full-year shortfall to a record $12.7 billion.
The company, whose previous largest loss was $7.4 billion in 1992, also painted a bleak picture for 2007. Ford said that operating results will likely deteriorate further this year as the company continues losing market share in the U.S. and production is scaled back.
The fourth-quarter loss -- which was equivalent to $3.05 a share and compared with a loss of $74 million, or four cents a share a year earlier -- marked the auto maker's second consecutive quarterly loss in excess of $5 billion. Total sales and revenue in the fourth quarter fell to $40.3 billion from $46.3 billion a year earlier.
While the headline numbers are eye-popping, they were largely expected thanks to guidance Ford gave in October related to special charges and operating losses it anticipated for the fourth quarter. Ford's performance steadily deteriorated last year, as the company replaced General Motors Corp. as the poster child for the woes plaguing U.S. auto makers. GM recorded a loss of $10.6 billion in 2005, but is expected to report next week a significant improvement in 2006 numbers, while Ford isn't expecting profits for at least a few more years.
Ford shares were up 2% at $8.36 in late-morning trading, as investors welcomed the lack of negative surprises in the earnings report and analysts cited lower-than-expected cash outflows in the quarter. About 57 million shares had exchanged hands, already exceeding the average daily volume of approximately 56 million shares.
WSJ's Joe White discusses Ford's $5.8 billion loss in the fourth quarter and how cost-cutting alone won't bring the company back to profitability.Industry experts say they remain concerned with the ongoing viability of Ford's North American restructuring plan, which includes more than 30,000 blue-collar job cuts, several plant closures, an attempt to better coordinate Ford's sprawling and disjointed global operations, and an overhaul of its product portfolio. Ford has endured several restructuring attempts in recent years, and unsuccessfully tried to coordinate global operations in the 1990s.
"For the foreseeable future, the Ford story is less about quarterly [earnings] and more about liquidity, cash flow and restructuring," said Peter Nesvold, an analyst at Bear Stearns, in a note to investors, noting that the fourth-quarter numbers looked slightly better than anticipated.
"We remain strong supporters of senior management, though the aggregation of so many troublesome items in the [fourth-quarter] release raises concerns whether Ford's bench is deep enough to pull off a turnaround of this magnitude," Mr. Nesvold said. Bear Stearns has a peer perform rating on Ford shares.
North America Weakness
Ford said it posted an after-tax loss from continuing operations, excluding special items, of $2.1 billion, or $1.10 a share, in the fourth quarter, compared with a profit of $285 million in the year-earlier period. Analysts surveyed by Thomson First Call had, on average, estimated a loss of $1.01 a share.
The biggest drag on Ford's overall operations in the fourth quarter continued to be its North American automotive business, which lost $2.8 billion in the latest quarter, compared with a $217 million loss a year ago. Sales revenue in the region was $15.1 billion in the fourth quarter, versus $21.4 billion in the year-earlier period.
Ford's performance diminished last year as sales of high-profit trucks and sport-utility vehicles fell, leading to production cuts that devastated automotive revenue levels. The auto maker's condition in North America was further hit by the billions of dollars in restructuring costs it incurred in the region in order to implement plant closures, job cuts and other downsizing measures.
"We began aggressive actions in 2006 to restructure our automotive business so we can operate profitably at lower volumes and with a product mix that better reflects consumer demand for smaller, more fuel efficient vehicles," Ford Chief Executive Alan Mulally said in a statement. "We fully recognize our business reality and are dealing with it"
The executive, who took the helm at Ford in October after a long career at Boeing Co., insisted, "We have a plan and we are on track to deliver."
Deeper Operating Losses Expected
Ford said in the news release it expects its net loss to narrow in 2007 as special items -- which reduced last year's earnings by about $9.9 billion -- will come in significantly lower. But the company said it anticipates that its results excluding special items will be worse this year than in 2006.
Ford said it expects to post pre-tax profits in its South American and European automotive operations in 2007, just as it did in 2006. The company also expects its Premier Automotive Group business to tally a profit this year, after posting a $327 million loss last year.
But the company continues to expect a loss in its North American automotive operations. Ford, which last September accelerated the pace of its Way Forward turnaround plan for the region, has said it doesn't anticipate turning a profit in North America until 2009.
The company also expects that the performance of its Ford Motor Credit financing arm will deteriorate this year. In the fourth quarter, Ford Credit reported a net income of $279 million, down $26 million from a year ago, reflecting higher borrowing costs and higher depreciation expense, the company said. For the full year, Ford Credit earned $1.3 billion, versus $1.9 billion in 2005.
"While challenges lie ahead for us in 2007, we're focused on making continuous improvements to our plan, so we can capitalize on opportunities to create and sell more products and save more costs," Mr. Mulally said. "Our priorities, combined with our sense of urgency, will continue to transform Ford Motor Company."
Cost Cutting Continues
Speaking during a conference call with analysts and reporters, Ford's Chief Financial Officer Don Leclair said that Ford managed to shave $1.4 billion in costs during 2006 versus the prior year and that the company will continue reducing costs this year. He said that Ford is "on track" to cut $5 billion in annual costs by 2008.
In the near term, most of the cost cuts will stem from job reductions and plant closures in North America. Beyond 2008, Mr. Leclair said the company's focus is expected to shift to reductions in material purchasing costs and expenses related to product development.
Among the biggest challenges for Ford will be reducing health-care expenditures, which cost the company $3.1 billion last year. Ford, along with GM and DaimlerChrysler AG unit Chrysler Group, will seek to lower their health-care burden as part of collective bargaining talks later this year with the United Auto Workers union.
Jonathan Steinmetz, an analyst at Morgan Stanley, said in a note to investors that shareholders will be demanding more specifics on cost-cutting goals in the coming months. "We knew results would be weak for this quarter, and they were," Mr. Steinmetz wrote. "The onus is now on Ford to begin layering in additional cost reduction goals."
Cash Outflows Continue
The fourth quarter was a monumental period for Ford on a variety of levels. Mr. Mulally took over on Oct. 1 and immediately went to work challenging executives to consolidate the company's global operations. Mr. Mulally oversaw the implementation of a major attrition program in the U.S. that resulted in 38,000 United Auto Worker members agreeing to accept buyouts or early retirement during the quarter. And he was influential in the company's move in the fourth quarter to secure $23.5 billion in additional financing via secured loans and lines of credit, and a massive convertible loan offering.
Ford ended the year with total automotive cash, marketable securities, loaned securities and short-term Voluntary Employee Beneficiary Association, or VEBA, assets of $33.9 billion, up about $10 billion from the end of the third quarter.
"We're pleased the financial markets expressed confidence in our turnaround plan by providing us with the additional liquidity we need to fund our operations as we restructure to deliver sustainable profitability," Mr. Mulally said, noting that the capital will be deployed wisely.
In the fourth quarter, automotive operating-related cash flow was $1.8 billion negative, Ford said. "We did a little bit better on operating cash flow, just a little," Mr. Leclair said.
Mr. Steinmetz, at Morgan Stanley, said that the cash burn figure came in less than expected and represented the best part of the fourth-quarter report from Ford.
The company reiterated that it expects cumulative operating-related cash outflows will be about $10 billion from 2007 through 2009 and that restructuring charges will be $7 billion in the period. The company expects more than half of the $17 billion outflow to occur this year.
The outflows also reflect plans to invest in new products at levels comparable to those in previous years, or about $7 billion.
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