Ford 3rd Quarter 2009 Financial Results

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Tag: Ford, GM, Chrysler, bankruptcy, 3rd, third, quarter, 2009, financial, results, profit, analysis, UAW agreement, concessions, vote, no

November 2, 2009

Ford announced pre-tax earnings of $1.1 billion in the 3Q 2009 on revenue of $30.9 billion.  Its North American operation generated $13.7 billion – up $3 billion over the prior year which offset a $2 billion drop in earning from its European operations.  Total revenue for the quarter fell from $31.7 in 2008.  For the year, North American revenue is down $8 billion compared to last year with total company revenue down to $82.8 billion from $109.2 billion.  The Q3 revenue improvement in North America was attributed to the Cash-for-Clunkers government rebate campaign in July and August (Ford Q3 Financial Results).

The company's most important North American operations showed a small profit in the quarter of $357 million (Figure 1).  Overall, its global automotive operations earned $446 million in pre-tax profits.  Its Financial Services operations earned well over half of the company's profits with $661 million in earnings.  The company continues to do well in South America and reported a $247 million profit for the quarter.  

 Figure 1: 2008 – 2009 Q3 Pre-Tax Results (Click to Enlarge)
 
For the first nine months of the year, Ford's automotive operations lost $2.5 billion (Figure 2).  For the year, the company lost $1.3 billion.  The bulk of the loses were offset by the $1.2 billion profit from the Finacial Services division.

Figure 2: 2008 – 2009 First Nine Months Pre-Tax Results (Click toEnlarge)

Ford improved its automotive group’s cash position in the Q3 by $21.0 billion to $23.8 billion.  This is up from $13.4 billion at the start of the year.  The company generated $3.0 billion in cash flow from its operations in Q3.  However the company’s total debt now stands at $26.9 billion – up from $24.2 billion as of December 31, 2008 but down from $32.1 billion on March 31, 2009.  Only, $1.6 billion is payable within the next year.  Earlier this year, Ford restructured $10 billion of its automotive debt (Ford Q2 Financial Results).  The company also continues to raise funds though an equity offering.   In its financial release Ford noted:

  • Received $886 million in loans from the U.S. Department of Energy for development of more fuel-efficient vehicles. Ford has been approved for up to $5.9 billion in loans in support of  projected expenditures through mid-2012
  • Raised $565 million in new equity as Ford completed its previously-announced plan to issue up to $1 billion of equity

Analysis
Compared to 2008 when Ford had a negative cash flow of $19.9 billion and a full year pre-tax loss of $6.7 billion (excluding special items),  the 2009 Q3 results appear dramatic.   However, Ford’s auto sector health is being masked by improvements in its Financial Services operations which contributed $661 million pre-tax profits in Q3 and $1.1 billion for the year.

To conserve cash the company also cut its capital expenditures from $4.7 billion in the first nine months of 2008 to $ 3.7 billion in the same period 2009.  Between cutting investment in product,  money raised through government debt and revenue generated through sales of stock, the company was able to improve its cash position.  These moves maintained liquidity and kept the company out of Chapter 11 bankruptcy protection unlike its US peers GM and Chrysler.  However, Ford is at a disadvantage compared to GM and Chrysler as its balance sheet is still saddled with excessive debt.  The company will have to convert more debt-to-equity in the coming months to maintain parity with its peers – especially GM.  Post bankruptcy, GM likely has well under $20 billion in debt and it may be approximately $15 billion.  GM will report its first post bankruptcy earnings later this month. 

Ford estimates in 2011 the company will return to reporting profits for the full year.  Assuming market conditions remain stable and improve slightly that is plausible given the company's recent performance.  However, to remain competitive with GM and the rest of industry it will have to continue to work on its balance sheet.  With the stock price hovering around 52-week highs, it will have to further dilute at the expense of its current stock holders.  Ford share holders also have to contend with the dilution when the UAW healthcare obligation is converted into equity.

Another big concern is Ford has yet to reach agreement with its labor union the UAW on concessions similar to those that GM and Chrysler received during their brief stay in bankruptcy.   The UAW membership just voted down amendments to its labor contract that included a "no-strike" provision on wages and benefits for the next negotiations in 2011.  The revised contract would have reduced the number of UAW job classifications for skilled workers and would have enable Ford to increase hiring of entry level workers at $14 per hour.  Unless the UAW members rethink their position, Ford will be at a significant labor cost disadvantage compared to GM and Chrysler.

The recent news at Ford is mixed with the company’s labor issues a very troubling concern that could negate much of the progress made over the past year.  Ford avoided bankruptcy at all cost to prevent the Ford Family from losing control over the company but the road to recovery by gaining parity with post-bankruptcy GM and Chrysler is a must to remain competitive.  Moreover, the most significant improvement is that Ford stopped the cash burn.  The flip side is, as Ford continues to improve its finacial performance, the harder it is going to be to obtain the necessary concessions from the UAW even if much of the actual profit does not come from the auto sector but financial services.  It is sad because it seems like a complete replay of GMAC keeping GM afloat all those years.  That is - until is couldn't.

 

Reference:

Ford suffers UAW setback; Canadian workers OK cuts, Automotive News, Novemeber 2, 2009

Update November 3, 2009

New SEC Filing by Ford outlining a plan to raise $3 billion in equity:

Concurrent Transactions
 
This offering is part of a series of steps announced by Ford to improve its balance sheet and enhance automotive liquidity. In addition to this offering, Ford announced it intends to enter into an equity distribution agreement after this offering pursuant to which it may offer and sell shares of its common stock, par value $0.01 per share, from time to time for an aggregate offering price of up to $1.0 billion, generally by means of ordinary brokers’ transactions on the New York Stock Exchange at market prices or as otherwise agreed. Any sales of common stock under such an equity distribution agreement are not expected to commence before December 2009 and are expected to be made over a several-month period.
 
In addition, Ford has proposed to the lenders under its secured credit agreement an amendment that would reduce revolving lenders’ revolving commitments, extend the maturity of such lenders’ revolving commitments until 2013 and modify certain covenants and other provisions. Pursuant to the proposal, each revolving lender that agrees to extend the maturity of its revolving commitments may reduce its revolving commitment by up to 25 percent at its election and to the extent its reduced revolving commitment exceeds certain specified levels, such excess would be converted into a new term loan under the secured credit agreement maturing on December 15, 2013. In exchange for a reduction in their revolving commitments, as well as a 1 percentage point increase in interest rate margins, an increase in fees and payment of an upfront fee, the revolving lenders would agree to extend the maturity of their revolving commitments and loans to November 30, 2013 from December 15, 2011. The modified covenants would, among other things, expand existing limitations on debt prepayments and repurchases to allow for further balance sheet improvement actions by Ford. Ford would repay revolving loans to the extent necessary to effect the commitment reductions on December 3, 2009.
 
The revolving lenders are required to submit their response to Ford’s proposal by November 18, 2009. As of the date hereof, certain revolving lenders have indicated that they intend to accept Ford’s proposal and extend about $6 billion of revolving commitments and loans to November 30, 2013. The amendment and extension is subject to approval by lenders holding a majority in principal amount of the loans and commitments outstanding under the secured credit agreement.
 
This offering and the concurrent transactions are not conditioned on each other.

 

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