Ford’s second quarter a wreck
Three months ago, Ford Motor Co. reported an unexpected $100-million first-quarter profit, and quiet jubilation ensued on Wall Street. But on Thursday, Ford brought down the hammer of reality, reporting its largest quarterly loss ever. It blamed the $8.7-billion shortfall on soaring gasoline prices and the resulting crash in consumer demand for large vehicles.
Chief Executive Alan Mulally said Ford would aggressively move toward producing smaller, more fuel-efficient cars, in many cases in factories now making trucks. He also said Ford would reduce costs and cut its workforce. Ford sold 1.11 million cars in the first six months of the year, down 14% compared with last year.
“We continue to take decisive action in response to the rapidly changing business environment,” he said. “The second half will continue to be challenging, but we have absolutely the right plan to . . . begin to grow again for the long term.”
The $3.88-a-share loss in the quarter compares with a $750-million profit, or 31 cents a share, a year earlier. The latest figures include a $5.3-billion write-down of Ford’s automotive production business and a $2.1-billion write-down on its Ford Motor Credit arm, which has been punished by falling values of trucks and sport utility vehicles.
Revenue fell to $38.6 billion from $44.2 billion a year earlier.
Excluding the one-time charges, Ford lost $1.38 billion in the quarter, or 62 cents a share, more than double the 27-cent loss Wall Street analysts expected. Ford shares fell 92 cents, or 15.2%, to 5.11.
“I’d like to think that this is the bottom, but Ford is in this position because the market has shifted sharply away from the company,” said Mark Warnsman, an analyst at Calyon Securities.
Ford had a pretax profit of $1 billion in its international operations, but its main problem lies in turning around U.S. operations that lost $1.3 billion in the quarter.
Ford’s new plan is to bring six of its European car models stateside, converting three truck and SUV plants in the United States and Mexico to produce some of them, while doubling its output of hybrids and four-cylinder engines.
Despite a string of staffing and production cuts announced in recent months, Ford said last month that it would miss its long-stated goal of full-year profitability in 2009. Now, with things looking gloomier, there are more worries about Ford’s solvency than its red ink.
Ford shares have plummeted in recent weeks, to $4.36 on July 2 from $8.48 on May 1. Mulally was brought in from Boeing Co. in 2006 as an industry outsider expected to right the ship, yet six of the eight quarters that have passed since his arrival have been money-losers.
Last week, debt-grading firm Fitch Ratings said it would review Ford as serious concerns about the company’s long-term liquidity bubbled to the surface. Ford denied Thursday that it had liquidity problems, pointing out that it ended the quarter with $26.6 billion in cash, down $2.1 billion from the end of the first quarter.
General Motors Corp. last week announced dramatic cost-cutting moves, including suspension of its stock dividend as well as large staff and marketing cost reductions, to maintain solvency. On Wednesday, Chrysler said it would cut 1,000 salaried jobs.
The problem for Ford, like that at GM and Chrysler, is straightforward: It no longer makes vehicles that consumers want. After years of reaping profit from huge-margin SUVs and pickups, Ford’s three brands -- Lincoln, Mercury and Ford -- have but one compact car among them, the Ford Focus.
That worked when gasoline cost $1.50 and Americans bought 17 million cars and trucks a year. Now, with gas over $4 a gallon nationwide and the total U.S. vehicle market expected to slip below 15 million units, the picture is radically different.
Truck and SUV sales have declined 18% this year, while Focus sales are up 27%.
Ford had previously said it would bring its new Fiesta subcompact to the United States by early 2010. Its new plan will bring a total of six models to the United States, including the popular European Focus, the Transit Connect fuel-efficient van and an as-yet unnamed small car.
Ford will convert truck plants in Wayne, Mich.; Louisville, Ky.; and Cuautitlan, Mexico, to produce compact and subcompact cars. Ford also said it would convert its Explorer from body-on-frame to unibody construction, essentially turning the legendary SUV into a crossover.
The company’s $5.3-billion write-down on automotive production reflects those shifts, as the huge sum invested in massive truck capacity is no longer worth as much on paper. And the rapid decline in the value of SUVs and trucks forced the $2.1-billion write-down at Ford Motor Credit, which faces faster-than-expected depreciation on its leased vehicles.
Shelly Lombard, analyst at Gimme Credit, said that even with smaller cars in hand, Ford still had to figure out how to make them profitably. In the past, Ford indicated that it lost money on every small vehicle it sold.
“No matter what you do, you have to make money on the cars you sell,” she said. “That’s Ford’s Achilles’ heel.”
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