Ford Rough

Ugly earnings darken the No. 2 American auto maker, but some rays of light seem to be coming from outside the U.S.

For Ford (F) and cross-town rival General Motors (GM), it's going to stay ugly for a while before it gets any prettier. On Friday, Ford posted a $1.19 billion first quarter loss due to factory closures and softening SUV sales.

The Dearborn (Mich.) auto maker took a $1.65 billion charge to earnings as it began to shut 14 plants and cut up to 30,000 jobs in North America -- even though not all the closures have taken place and they will continue to show up as charges to earnings for several quarters to come, as the company works through its second restructuring effort in four years. The loss compares with a profit of $1.21 billion the auto maker posted in the first quarter of 2005. The company expects to take a total of $3.4 billion in pretax charges for the full year.

"Three months in, we are in the very early stages of this strategy to transform the way we do business, down to its very core," said chairman and CEO Bill Ford Jr. during a phone call this morning. "This transformation isn't going to be quick, and it isn't going to be painless. It will involve risks -- and the financial rewards will not be immediate. But in the end, I believe we'll get there."


  As expected, the Ford chairman also said he would not replace James Padilla, president and chief operating officer, who is retiring in July. Ford will assume the responsibility of managing five executive vice-presidents. The move echoes that of GM's chairman and CEO G. Richard Wagoner Jr., who assumed direct oversight of GM's struggling U.S. operation last year. If Ford doesn't show Wall Street real progress in operating results and on the current turnaround plan by next year, pressure will mount for him to find his own replacement, probably from outside the company.

Not all of the loss in the first quarter was due to restructuring, as earnings from continuing operations were 24 cents per share, below the 26 cents per share expected by Wall Street analysts. Revenue for the quarter fell 9%, to $41.1 billion, from $45.1 billion a year earlier as sales of SUVs like the Ford Explorer and Lincoln Navigator were down. The company also said foreign currency valuations and a weak U.S. dollar accounted for part of the shortfall. Ford has been overly dependent on SUV sales for profits for the last decade, and the pain is likely to get worse as rising gas prices soften demand even further.

Ford and GM, which reported a $323 million first-quarter loss on Thursday, are also struggling with sagging stock prices, high labor and raw material costs, and "junk" ratings for their debt, which requires the companies to pay escalating interest rates on the money they borrow.


  Is there any good news? Earlier this month, Ford reported March and first-quarter 2006 sales results, boasting of record mid-size sedan sales and continued strength in its F-series truck line. Its Ford Fusion sedan is selling well, though the two other similarly designed cars, Mercury Milan and Lincoln Zephyr, have left most critics cold.

The F Series has stood tall against pickup entries from Honda (HMC) and Nissan (NSANY). But GM launches new pickups later this year, and Toyota (TM) next year will double production of its Tundra pickup, redesigned specifically to take on Ford. That will put pricing and sales pressure on Ford's cash cow F Series, which is the best-selling vehicle in the U.S. (see BW Online, 4/19/6, "America's Favorite Pickup").

Ford's U.S. vehicle problem remains that it has too much manufacturing capacity for its shrinking market share. Its costs have grown so out of whack that Ford has long relied on sales of its more-profitable SUVs and pickups to make up for the lack of profit it makes on its passenger car portfolio. That imbalance, says Bill Ford, must end if Ford is to re-establish any kind of normal profitability. "Our business structure is that all of our vehicles have profit potential. We have to hit singles and doubles, not just home runs," said Mr. Ford. All of Ford's vehicle operations around the world, except North America's, finished the quarter in the black.


  Ford's Premier Automotive Group (PAG), which includes Volvo, Jaguar, Land Rover, and Aston Martin, reported a pretax profit, excluding special items, of $163 million for the first quarter, compared with a pretax loss of $55 million for the same period in 2005. Ford executives say Volvo, Land Rover, and Aston Martin are currently profitable on an operating basis, which means that Jaguar continues to drag down the premium and luxury car unit's results. Ford has owned Jaguar since 1989, and has lost, by some estimates, $10 billion on the unit since then.

Some analysts have been keen to see Ford jettison the British brand, but the company is trying another turnaround plan that calls for smaller global volumes and production, and the phase-out of the entry-level X-Type line that many see as having hurt the image of the brand. "When you take down your volume projections, it's tough," said Mr. Ford on the same call. As far as the product goes, "We've not had enough product differentiation in recent years, and we've moved to correct that," explained Ford. The CEO said the company has an internal target for Jag to become profitable, but it's one he's not sharing publicly.

Ford shares closed at $7.95 on Thursday, down 42% from where it was trading two years ago. Meanwhile, the Dow Jones Industrial Average hit a six-year high Thursday. And shares were down in early trading Friday even as the Dow was up.

Ford's core automotive operations posted a loss of $184 million before taxes and excluding special charges, while its finance arm, Ford Motor Credit, contributed net profits of $479 million. In the U.S., Ford lost $457 million during the quarter, before taxes and excluding special items.

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