Ford Losses Are Awful, Cash Burn Is Worse

Ford Motor (F) lost $14.6 billion in 2008, its worst annual performance in 105 years, as the U.S. auto market collapsed in the fourth quarter. But the company is sticking to its plan to not ask for U.S. Treasury loans, counter to what rivals General Motors (GM) and Chrysler are doing to cope with historic losses.

More important than the losses these days is the rate at which automakers are burning up their cash reserves to cope with dramatically lower revenues and fixed overhead costs. Ford went through $21.2 billion in cash reserves last year. The company said it is tapping a $10.1 billion bank credit line it had in place, bringing its remaining cash to $24 billion.

In the fourth quarter alone, Ford burned $5.5 billion. But Chief Financial Officer Lewis Booth said the cash burn in 2009 should be better despite the company projecting a further 10% decline in auto industry sales. Ford is increasing production in the first quarter, which enhances revenues. It also is substituting debt for cash payments to the United Auto Workers health-care trust fund. In addition, it's expecting billions of long-term loans from European investment banks and the U.S. Energy Dept. to assist in retooling plants to build more fuel-efficient and less polluting vehicles.

Production Cuts

GM and Chrysler, with far lower cash reserves, between them have received government guarantees so far of $17.4 billion in loans to avert bankruptcy.

Ford's numbers in the fourth quarter were made worse by the company's decision to cut production at its factories to pull its dealer stocks of unsold vehicles in line with sharply lower consumer demand. It lost $5.9 billion in the quarter, compared with a loss of $2.8 billion the previous year.

The full-year loss of almost $15 billion was far worse than its $2.7 billion loss in 2007 and beat its record $12.7 billion loss in 2006.

Besides the collapse of the U.S. auto market in the second half of the year, Ford was hammered by the spread of recession to Europe. Ford Europe and Volvo combined for a $1.1 billion loss. "These are unprecedented challenges we face in global markets," said Ford CEO Alan Mulally. "Current conditions have shaken the foundations of even the strongest companies in the auto sector and other industries."

Selling Volvo

Despite the huge loss, many industry analysts are cautiously optimistic about Ford's prospects. "While operating results and cash [burn] were worse than we expected, we think the stock could see some relief on the basis that a potentially larger miss was averted," said Goldman Sachs (GS) analyst Patrick Archambault.

Ford is stepping up its effort next month to sell Volvo. It has shopped the Swedish automaker for more than a year, with little interest. But the automaker installed a new CEO last summer who has been aggressively cutting head count to lower costs and restructure the company to make it more attractive to buy, something Volvo's previous Swedish managers were unwilling to do. Top prospects for buying Volvo, say Ford executives privately and investment bankers, are Chinese automakers or possibly Eastern European private equity firms.

Assessing Ford's ability to survive without additional government help is difficult. How low auto sales fall this year is unknowable, as is the impact of the White House stimulus package on consumer spending. But there is widespread agreement that the wild card of the economy makes the automaker's situation almost as precarious as GM's. "These losses are not sustainable," Sean Egan, president of bond ratings firm Egan-Jones Ratings, said in a Bloomberg Television interview on Thursday. "Even if they draw down their lines and the money from the government, it begs the question of whether or not the overall situation is going to improve."

Competitive New Models

Already, Ford has lowered its estimate for 2009 industry auto sales from 12.5 million units to a range of 11.5 million to 12.5 million.

Ford is not engaged with the government to secure even the $9 billion credit line it sought in congressional legislation last December. In contrast, GM and Chrysler have to submit "financial viability" plans by Feb. 17, with the government set to decide if it will continue to prop up the companies by Mar. 31.

Even without its hand out, Ford is in negotiations with the United Auto Workers to get similar wage and benefit concessions that GM and Chrysler are trying to obtain in order to secure government help. Ford officials also indicated they are in talks with holders of Ford debt to potentially renegotiate the pay-off value of Ford bonds.

Ford has a stake in GM and Chrysler securing loan terms and further Treasury participation. If GM or Chrysler is forced into federal bankruptcy court, the likely collapse of many suppliers could disrupt Ford's business to the point where it would be forced to ask for loans or seek bankruptcy itself. Mulally cited the collapse of one of Ford's rivals as something that could force the company to seek government loans.

Ford has several competitive products launching this year, but the timing for them couldn't be worse. In the spring, it launches hybrid electric versions of the Ford Fusion and Mercury Milan, but demand for such cars has plummeted with gas prices. It also will launch a new and redesigned Ford Taurus and Lincoln SVT luxury crossover. "Great looking and performing products, but horrible timing," says independent marketing consultant Dennis Keene. "By the time the market may pick up in 2011, they won't be new anymore."

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