Dire straits

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"Ford and the entire auto industry faced an extraordinary slowdown in all major global markets in the fourth quarter that clearly had an impact on our results.” –Alan Mulally, president and CEO, Ford Motor Co.

Witnessing Ford Motor Company post a $5.9 billion net loss in just ONE fiscal quarter doesn’t just singe the eyebrows – it burns them right off, along with a good chunk of flesh and bone to boot.

No matter how you look at it, this is certainly rotten news – and it shows pretty definitively that the U.S. domestic automotive industry is in dire straits, for Ford is actually in the BEST fiscal health among the former “Big Three” American automakers, with reported total liquidity standing at $24 billion, including automotive gross cash of $13.4 billion as of Dec. 31 last year.

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Still, despite the blood on the floor, Alan Mulally – Ford’s president and CEO – believes the manufacturer is going to survive these turbulent times. "We continued to take the decisive actions necessary to lower production to match the lower worldwide demand and reduce costs, which we expect will allow us to significantly reduce negative operating cash flow in 2009 and position Ford for growth when the economy rebounds,” he explained.

"The progress we continued to make in the fourth quarter gives us great confidence that we have the right plan, the right people and the right products to create a viable, profitably growing Ford for all of our stakeholders," Mulally added. "Our market share growth in the fourth quarter in the U.S. and Europe is a positive sign that customers recognize the value of our new products and understand that a new and different Ford is emerging."

Based on current planning assumptions, Mulally said Ford has sufficient automotive liquidity to fund its business plan and product investments WITHOUT a bridge loan from the U.S. government – and remains on track for both its overall and its North American Automotive pre-tax results to be at or above breakeven in 2011, excluding special items. In the meantime, the automaker is drawing on available credit lines due to concerns about the instability of the capital markets with the uncertain state of the economy – allowing it to add $10.1 billion in cash to the company’s bottom line for the first quarter of 2009.

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The United Auto Workers (UAW) union has also agreed to end the "jobs bank" at Ford, further helping lower the automaker’s costs. In fact, the company noted it reduced automotive costs by $1.4 billion in fourth quarter last year and by $4.4 billion in 2008 versus 2007. All told, Ford reported its achieved $5.1 billion in cost reductions throughout its North American operations by the end of 2008 compared with 2005, excluding favorable impact of depreciation and amortization from asset impairment at the end of the second quarter last year.

Still, Ford – along with General Motors and Chrysler – still has a tough row to hoe. On an after-tax basis, Ford's fourth quarter operating loss from continuing operations, excluding special items, was $3.3 billion, or $1.37 per share, compared with a loss of $487 million, or 23 cents per share, in the fourth quarter of 2007. Ford's fourth quarter 2008 revenue plummeted to $29.2 billion, down from $45.5 billion in the same period during 2007 – a decline primarily due to lower volume, plus the sale of Jaguar and Land Rover and foreign exchange translation costs.

Special items also reduced Ford’s pre-tax profits by $1.4 billion in the fourth quarter, largely reflecting costs associated with global personnel reductions and retiree health care charges related to new agreements with the UAW.

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For 2009, the outlook is pretty grim at Ford (not surprisingly) as the OEM anticipates weak volumes across all markets, with worldwide sales down more than 10 percent. Significant government policy stimulus plans being implemented in most global markets (by the U.S. and European nations most notably) is expected to improve the environment for sales later this year, Ford believes. However, financial markets remain under significant stress, and further government and central bank actions to provide liquidity and stabilize banks are needed, the company said.

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"Ford continues to take the decisive actions necessary to match our production in line with demand. This allowed us to reduce dealer stock by about 50,000 units and benefit from one the lowest days supply in the U.S. industry," said Lewis Booth, Ford’s executive vice president and CFO.

"As production volumes stabilize, payables will stop declining and generally will grow as volumes recover. In addition, with the major F-150 launch behind us, we expect spending to decline in 2009," Booth said. "We expect this will allow us to significantly reduce our negative operating cash flow in 2009 and maintain the liquidity we need to fund our product-led transformation."

Let’s hope so.

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