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Articles: Big gains, more trims at Ford

Posted by admin on Wednesday, July 21, 2004 - 12:42 AM

Ford Motor Co. nearly tripled its profit in the second quarter of the year after record earnings in its financing arm offset money-losing automotive operations, especially in the division that manages the company's four European luxury brands.
The company was optimistic enough to increase its projections for full-year profits, but it warned that deeper cost cuts may be needed to get there. The Dearborn automaker reported net income of $1.17 billion, or 57 cents a share, on Tuesday, up substantially from a profit of $417 million, or 22 cents a share, in the same quarter a year ago. The results, which exceeded Wall Street's estimate by about 11 cents a share, signal that the automaker's turnaround is on track, said Don Leclair, Ford's chief financial officer. "We are on an improvement trend," he said. However, Ford shares closed down 38 cents, or 2.54 percent, at $14.60 on the New York Stock Exchange on Tuesday. Leclair said Ford has moved closer to meeting its goal of $7 billion in annual profit, before taxes, by 2006. Ford increased its profit estimate for 2004 by 15 cents to a range of $1.80-$1.90 a share, excluding any special income or expenses. That would equate to a pretax profit for the year of about $5.3 billion. To meet that goal, Leclair said that Ford wants to cut an additional $800 million in costs this year. That's on top of the $600 million it cut in the first quarter. Leclair could not specify where those savings would come from but said that any job reductions would likely come through attrition. Global losses Despite the solid overall performance, Ford's worldwide automotive sector reported a loss of $57 million in the April-June period. Overall automotive revenues in the second quarter rose to $36.7 billion from $34.1 billion a year ago, and most of the vehicle-making divisions reported a profit. However, the Premier Automotive Group, which is known as PAG and manages the Aston Martin, Volvo, Land Rover and Jaguar brands, posted a pretax loss of $362 million in the second quarter that offset gains in North America and other business units. That is down from PAG's pretax profit of $166 million a year ago -- a decline of $528 million. Most of Ford's profit in the quarter was made in Ford Credit, which reported record net income of $897 million, up from $401 million a year ago. Revenues in the financing arm declined to $6.08 billion, from $6.44 billion a year ago. But the financing arm benefited from improvements in a few key areas that are likely to be unsustainable: reduced losses for loans, which may be partly the result of the improving economy; better returns on repossessed vehicles sold at auction, which are commanding higher prices, and low interest rates. Overall expenses for Ford Credit declined to $702 million in the second quarter from $1.17 billion a year ago -- a major savings. Ford's performance led some industry observers to continue questioning the strength of the company's core automotive operations. Rival General Motors Corp. has faced similar doubts about its car and truck business. Automotive analyst Gary Lapidus of Goldman Sachs said that while Ford's overall performance was good, the mix of results between the automotive and financial-services divisions "was disappointing, unless financing is the new core business." Lapidus said the profit contribution from the financing arm was 23 cents per share ahead of Goldman Sachs' forecast, while automotive profit contribution was 12 cents below forecast. John Casesa, an automotive analyst for Merrill Lynch, said he also was troubled by the mix of profits at Ford but took a more positive view of the automaker's overall performance. "More broadly, the recovery at Ford has really come through as management promised," Casesa wrote. Profits rebound After a combined loss of $6.43 billion in 2001 and 2002, Ford posted net income of $495 million last year. The company went on to post a profit of $1.95 billion in the first quarter of this year. With the April-June results, that brings Ford's profit for the first half of the year to $3.12 billion, or $1.51 a share -- more than double the $1.31 billion, or 67 cents a share, it earned through June 2002. Leclair defended Ford against criticism over how it made its second-quarter profits. He noted that automotive profits have steadily improved since 2001 and that Ford is committed to making a pretax profit on automotive operations of $1 billion this year, on top of an estimated pretax profit of $4.3 billion from its financial-services business. What's more, excluding $140 million in special expenses, global automotive profits were $83 million in the second quarter -- an $80-million improvement over last year. Most of Ford's worldwide automotive operations, he also noted, reported good results for the second quarter. Ford's North American pretax profit was $455 million, excluding special items, up $10 million from a year ago. The automaker said it was benefiting from a strategy to pull back from the fleet market, where vehicles are sold at a discount to government, rental and other companies. Overall, revenue was $20.5 billion, down from $20.7 billion a year ago. Ford Europe's pretax profit was $211 million, excluding special items, compared with a pretax loss of $525 million a year ago. A large part of that gain was caused by the Ford Focus C-Max, which helped boost automotive revenue to $6.7 billion, up from $5.2 billion a year ago. The major weakness of Ford's automotive empire is PAG, which Leclair said was hurt by major launches in the Land Rover and Volvo divisions. Other reasons cited for difficulty in the division: a strong euro, higher operating costs, model changes at Land Rover and Volvo and lower net pricing. Disappointing sales of Jaguar vehicles in the United States, and escalating costs, also were noted. The unit suffered even though revenues from PAG vehicles improved in the quarter to $6.9 billion, from $6.4 billion a year ago. Although Leclair refused to elaborate on what changes might be necessary at PAG, he characterized them as "more subtle . . . they're going to take a little longer to work through." Some of the additional cost-cutting Ford hopes to accomplish this year will undoubtedly be concentrated at PAG, Leclair said. Leclair noted that Ford's automotive operations will likely see a big improvement in the second half of the year, mostly in the fourth quarter, when Ford launches a variety of products, including the Ford Five Hundred, Freestyle and Escape Hybrid, the Land Rover Discovery/LR3 and the new Ford Focus in Europe.

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