Stuck in Reverse
Ford Reports Huge Loss, Enters Key Phase of Overhaul

By Sholnn Freeman
Washington Post Staff Writer
Tuesday, October 24, 2006

Ford Motor Co. yesterday reported a $5.8 billion loss in the third quarter, its worst quarterly result in 14 years.

While the nation's second-largest automaker has taken a series of steps to repair its troubled operations, its outlook appears to be darkening. Analysts say that the company is fighting for its life and that its survival depends on a financial recovery in the next two years.

"Ford Motor Company is in the midst of a serious financial crisis," said Gary Chaison, professor of industrial relations at Clark University. "I find Ford's picture very discouraging."

As part of its turnaround strategy, the company recently sped up plans to close factories and reduce its workforce. It has hired a new chief executive and acknowledged that it was slow to react to consumer trends. Company officials say they are revamping Ford's vehicle line with an emphasis on more fuel-efficient models. The company's loss in the quarter was largely due to restructuring costs, but analysts said signs of a turnaround have yet to appear.

"Things are likely to get worse before they get better," said David Healy, auto industry analyst at Burnham Securities Inc. "They are not out of the woods yet. They are not even into the woods."

The company said poor vehicle sales and sliding U.S. market share also contributed to the quarterly loss.

Ford has $23.6 billion in cash but is burning through it at the rate of almost $11 billion a year, Healy said, adding, "They can't keep that up indefinitely."

Ford's quarterly loss equates to $3.08 per share. A year ago, the company reported a loss of $284 million, or 15 cents per share, in the third quarter. Revenue in the latest quarter dropped by $4 billion from last year, to $36.7 billion.

Alan R. Mulally, Ford's new chief executive, called yesterday's results "unacceptable."

Ford's lost $6.7 billion in the first quarter of 1992 as a result of changes in how it accounted for health-care expenses, the company said.

The Detroit automaker is suffering from a meltdown in profits after the end of the 1990s sales boom of sport-utility vehicles. In a series of turnaround announcements this year, Ford has pledged to cut $5 billion in operating costs on an annual basis and eliminate one-third of its salaried workforce, and has offered buyouts to 74,000 hourly workers.

Ford recorded $5.3 billion in pretax charges, which included the costs of writing down assets and implementing various employee layoff programs. Ford also reported losses in Europe, Asia-Pacific and the Premiere Automotive Group of luxury brands.

In its core North American operations, Ford reported a pretax loss of $2 billion, compared with a pre-tax loss of $1.2 billion a year ago. Revenue declined to $15.4 billion from $18.2 billion. Market share in North America declined from 17.5 percent at the end of 2005 to 15.5 percent this year.

Don Leclair, Ford's chief financial officer, gave analysts a detailed look at Ford's financial wreckage. In a conference call yesterday, he said Ford's earnings will drop in the next three quarters. Leclair warned that other big negative charges loom later this year, including a charge related to the final bill for the buyout offers of hourly workers.

He said vehicle production in coming quarters will be throttled back, much of it coming in high-profit truck and SUV categories. The scheduled production cuts and permanent factory closings will further erode Ford's market share, threatening its No. 2 position in the U.S. market.

Leclair said he expected the automaker's cash flow to continue to be negative by a "substantial amount" over the next few years. Ford's cash drain amounted to $3 billion in the latest quarter, or close to $250 million a week. Leclair said Ford is searching for options to raise cash to keep its position strong. The company is seeking to sell its Aston Martin luxury brand and will sell more bonds.

Some analysts said that Ford's cash reserve is enough to stave off bankruptcy but that the automaker can't go on losing money forever. "If profitability never comes, something has got to give," said Kevin Tynan, senior analyst with Argus Research Corp. "It's a very key time."

Leclair said the automaker will continue to pump money into vehicle development. Ford said it would restore profitability at its North American division by 2009, a year later than an earlier pledge.

Chaison said Ford's hourly workers are the most vulnerable to the company's financial difficulties. "They can either accept the buyouts or continue to work for a company that is in serious financial trouble," he said.

Analysts seem to be willing to give Mulally some time to put his stamp on the company. In yesterday's conference call, an analyst asked Mulally to give his take on initial reviews of Ford's product plans. Mulally responded that he had not had a chance to start those detailed reviews.

Pete Hastings, vice president of corporate fixed income at Morgan Keegan & Co., said Mulally is still learning the company. "Mulally said 'they' instead of 'we' several times during the call," Hastings said. "It's fairly complex to try to turn this thing around. I would say next quarter's results should be 'we' instead of 'they.' "

Ford also said it plans to restate its financial results from 2001 to the second quarter of 2006 to correct accounting errors involving financial instruments used to hedge against interest rate volatility. Ford said the final restatement amounts haven't been determined.