Ford Returns to Profit, Plans More Cuts

Tom Brown writing for Reuters reports that "Ford Motor Co. reported a $570 million second-quarter profit on Wednesday, as cost-cutting and stronger North American vehicle production helped it pull out of a year-long, multibillion-dollar tailspin.

But Ford also warned that it was planning a new round of cost cuts, which could include further job cuts, as it was missing targets for reductions in vehicle costs.

"We're committed to our financial targets and, if incremental actions are required to meet these targets, we will take them," Chief Financial Officer Allan Gilmour said.

Ford's move back into the black after four consecutive losing quarters will be short-lived, as the company said it expects to post a "small loss" in the third quarter, with a "modest profit" expected for the year as a whole.

The world's No. 2 automaker said its net earnings totaled 29 cents per share, compared with a net loss of $752 million, or 42 cents per share, a year earlier.

Industry analysts see Ford, just six months into a multiyear turnaround plan and struggling with declining sales and rising marketing costs, losing 12 cents a share next quarter. And its second-quarter gain paled in comparison with the $1.29 billion net profit that crosstown rival General Motor Corp. , the No. 1 automaker, reported on Tuesday.

Both companies have seen their earnings shrink from record highs only a few years ago amid increased competition, especially from Asian automakers.

But GM, aided by a strong new lineup of pickup trucks and sport utility vehicles, reported a 1.6 percent drop in U.S. sales in the first half of this year while Ford sales, including foreign brands Volvo, Land Rover and Jaguar, dropped 10.7 percent.

Before special items and accounting changes, Ford's earnings totaled $610 million, or 31 cents per share, compared with a loss of $551 million, or 30 cents per share, in the second quarter last year. Ford's results a year ago were hurt by its $3 billion recall of Firestone tires.

Its key North American automotive business made $45 million in the second quarter, or about $38 for every vehicle it sold.

LOW EXPECTATIONS

Analysts were already concerned that Ford was moving slower than expected on its turnaround plan aimed at generating $7 billion in pretax profits by mid-decade. As part of that plan, the automaker had set a goal of reducing costs by $700 per vehicle, and cutting parts costs by $3 billion.

Gilmour noted the company this year increased the number of engineers working on cost cuts for parts already in production to about 1,000 from 300. But, he said, costs were actually rising because new vehicles were more expensive to build, and Ford was running about six months behind in its cost-cutting targets.

"To offset any of these delays, we are now planning new cost-reduction actions for implementation in the second half, including staffing and compensation reductions, and further efficiencies in manufacturing, product development and logistics," Gilmour said.

He said while there were no specific plans for additional job cuts yet, executives were looking at "every cost item throughout the Ford world." Ford already has plans to cut about 10 percent of its work force, including closing three North American assembly plants.

"We want to be more efficient, and then we will look at the consequences," Gilmour said. "When we see what our business structure is, then we'll see how best we can allocate the people."

Some analysts called Ford's second-quarter results an important barometer for the company, which lost $5.45 billion last year. But others said the company had set expectations too low for anyone to get excited.

"The broader question is what kind of overall industry environment do we get to see over the balance of the year, overall industry sales. And I think that's the biggest issue for Ford," said Sanford Bernstein analyst Scott Hill.

"In the short term, earnings numbers aren't so important to their story," added Bear Stearns & Co. analyst Domenic Martilotti. "The biggest concern continues to be pricing and the percentage of marketing costs that are going toward moving vehicles."

Ford's U.S. marketing costs, including incentives such as cash rebates, represented 15.6 percent of gross revenue in the second quarter, up from 14.1 percent a year earlier. Gilmour said Ford was well-equipped to keep up with GM's moves on incentives, as it had more than $20 billion in cash on hand.

Shares of Ford have underperformed those of GM by about 16 percent since March. Ford and GM shares have fallen sharply in recent days on concerns that weak stock markets would drive up their pension costs. Both keep large shares of their multibillion-dollar pension funds in stocks, and both assume high rates of return to fund future obligations.

Gilmour said Ford's U.S. pension fund assets declined by 6.7 percent through June 30, resulting in an underfunding of $3.2 billion. Despite the decline, he said, Ford saw no changes to its 2002 pension expenses and no need to make a cash contribution this year.

Ford also said that, if present conditions hold, pension expenses might increase by $125 million next year, but that it expected no cash contributions would be needed before 2006.

Under the complicated accounting rules controlling pension funds, companies can generally keep pension plans underfunded to some degree for a number of years."