Ford posts $100 million profit

By The Wall Street Journal

Ford Motor (F, news, msgs) swung to a first-quarter profit of $100 million, thanks to strength in its international operations and massive cost cuts in North America, where it continues to record losses as sales slump amid a weakening economy and high fuel prices.

Ford shares shot up more than 11% in mid-afternoon trading on the latest indication that the company's restructuring effort in North America is translating into improved financial results.

The Dearborn, Mich., automaker said it remains on track to achieve its goal of returning North American and global automotive operations to profitability in 2009. The company also said that while it is meeting its objectives for 2008 in key areas such as cash flow, costs and quality, it expects U.S. auto industry sales to be lower than previously projected.

The latest results and comments from Ford underscore the challenges the automaker faces as it deals with continued sales weakness in its home market, where it has had to rely on cost cuts to generate improved financial numbers. The Ford results also provide the latest example of the growing importance of international operations for North American companies struggling with the effects of a downturn in the U.S. economy.

Ford posted a net profit of $100 million, or five cents a share, compared with a loss of $282 million, or 15 cents a share, in the year-earlier quarter. Revenue fell to $39.4 billion from $43 billion, partly because the company didn't include revenue from its Jaguar and Land Rover units, which the company is in the process of selling.

Analysts surveyed by Thomson Reuters had estimated a loss for the period of 16 cents a share. Despite the better-than-anticipated numbers, not all analysts were convinced that there's reason for much optimism.

"Ford continues to make progress but the Q1 2008 earnings beat doesn't compensate for challenges ahead," said Citigroup analyst Itay Michaeli, who cited disappointment that Ford left its directional guidance for 2008 automotive earnings and cash flow unchanged.

Ford's North American automotive business posted a pretax loss of $45 million, a big improvement from a loss of $613 million in the first quarter last year. However, revenue in the region fell 7.6% to $17.1 billion, as sales of more-expensive, profit-rich trucks and sport-utility vehicles tumbled amid soaring fuel prices and the U.S. housing market downturn.

The weakness in North America was offset by the performance in Ford Europe, which posted a pretax profit of $739 million, versus $219 million a year ago. Revenue in the region jumped 19% to $10.2 billion.

Ford earnings, by business segment

Division	First quarter 2008	First quarter 2007
North America	($45 million)	($613 million)
Europe	$739 million	$219 million
Asia-Pacific	$1 million	$26 million
South America	$257 million	$113 million
Ford Motor Credit	$36 million	$293 million
Source: Ford Motor. Result on pre-tax basis and exclude special items

"Our plan is working," Chief Executive Alan Mulally said in a statement. "The restructuring in North America is taking hold and we will continue to take actions to stay on our plan. The remainder of 2008 will be a challenge, but we are cautiously optimistic despite the external challenges."

Ford said in its release that it now sees U.S. auto industry sales this year in a range of 15.3 million to 15.6 million. That's down from the 16 million projection in the company's 2008 planning assumptions. The company says European auto industry sales should be 17.6 million to 18 million, in line with its earlier assumption.

Second-quarter production to suffer

The continued weakness in U.S. sales is putting a premium on the company's ability to wring out cost savings. Mulally said today that the company would continue to seek ways to reduce costs, and the company also lowered its second-quarter production target in North America.

In the first quarter, the company reduced overall automotive operations costs by $1.7 billion, as costs in North America fell $1.2 billion. Ford said today that it had trimmed 4,200 hourly jobs in the first quarter, thanks to its recent companywide buyout offer.

Ford, which posted a combined loss of $15.3 billion in 2006 and 2007, ended the first quarter with $28.7 billion in automotive gross cash, down nearly $6 billion from the end of 2007. The company said that the amount was in line with its plan and primarily reflects the implementation of the first stage of its agreement with the United Auto Workers union for a health-care trust.

Mulally, who took over as Ford's CEO in late 2006 after a long career at Boeing (BA, news, msgs), has taken several steps to boost liquidity, including the sale of European luxury brands. Shortly after taking the top post, Ford raised $23.5 billion by putting up all its assets as collateral, as Mulally said the company needed cash to carry out its transformation effectively.

While the slumping U.S. auto market has complicated Ford's turnaround effort, the weakening performance of Ford's finance arm amid increased credit market volatility is also a growing source of concern.

Ford Motor Credit reported a net income of $24 million in the first quarter, an 88% decline from the previous year. Ford attributed the decline to higher provision for credit losses, higher depreciation expense for leased vehicles and higher net losses related to market valuation adjustments from derivatives.

"The automotive side of the business appears to be bucking the economic trend in the U.S., leveraging its reduced cost structure, whereas the credit side appears to have been adversely affected," said Calyon Securities analyst Mark Warnsman.

This article was reported and written by Jeff Bennett for The Wall Street Journal.