BY BRENT SNAVELY
FREE PRESS BUSINESS WRITER
A much smaller Ford Motor Co. -- with 45% fewer workers and more than a dozen fewer factories than in 2005 -- is heading into the last stretch of 2009 with more money, optimism and fuel-efficient passenger cars than it has had for years.
"In 2011, we are pretty confident that, with our product line and our cost structure and a gradual recovery around the world, that we will be solidly profitable," Ford Motor Co. President and Chief Executive Officer Alan Mulally told the Free Press on Monday after Ford announced a net profit of nearly $1 billion for the July-September period.
Why not sooner? "We just need a little bit more time to see if the economic recovery takes place," Mulally said.
How did Ford do it?
It cut incentives and convinced customers to buy higher-priced cars and trucks, resulting in a $1.9 billion net pricing increase.
It gained 2.2 percentage points of market share in the crucial U.S. market, as well as in other key markets such as Europe, by promoting itself as America's independent and different automaker.
It cut engineering, manufacturing, advertising and other costs by $1 billion.
For the first time since the first quarter of 2005, Ford's long-ailing North American division has reported a pretax operating profit.
A result of improved net pricing, lower material costs, cost reductions and improved market share, the division that comprises the United States, Canada and Mexico posted a pretax operating profit of $357 million in the third quarter. In all, Ford said its Ford, Lincoln and Mercury brands gained 2.1 percentage points of U.S. retail market share.
Most of Ford's other divisions also were profitable during the July-September period:
South America: Pretax profit of $247 million. That's a decline from a stronger profit of $480 million during the third quarter a year ago.
Europe: Pretax profit of $193 million. That's an improvement from a profit of $69 million during the same period a year ago.
Asia Pacific and Africa: Pretax profit of $27 million. That's an improvement from a profit of $4 million a year ago.
Volvo: Pretax operating loss of $135 million. It's an improvement from last year's pretax loss of $458 million.
Other Automotive: This unit consists primarily of interest and financing-related costs, reported a pretax loss of $243 million.
Financial Services: Pretax operating profit of $661 million, compared with a profit of $159 million a year ago.
Biggest challenges?
Ford owes more debt than its domestic competitors, has a labor agreement with the UAW that the Dearborn automaker says isn't competitive and remains at the mercy of a global economy.
Ford looks to pay off some debts early
Hours after surprising Wall Street with a profit of nearly $1 billion for the third quarter, Ford Motor Co. announced plans late Monday to refinance a portion of its debt and pay it off in 2013 rather than in 2011 -- a move that will give the automaker some breathing room in repaying its loans.
"The early response from our lenders to this approach has been very positive, with some of our major banks already agreeing to extend about $6 billion," Lewis Booth, Ford's chief financial officer and executive vice president, said in a Monday afternoon e-mail to employees that capped a day full of good news for Ford.
After Ford released its third-quarter financial results, the automaker's stock increased 58 cents, or 8.3%, to close at $7.58 per share, and two credit-rating agencies boosted Ford's credit rating or outlook.
"The evidence we see indicates that Ford is on track in its plans to reestablish a sustainable and competitive business model," Bruce Clark, a senior vice president at Moody's Investors Service, said in a report Monday.
Ford still cautious
When the year began, analysts thought Ford would struggle to survive the year without asking for emergency federal loans, like General Motors and Chrysler Group LLC did.
Now, some anticipate that Ford will turn an annual profit earlier than the company's projections.
Ford President and Chief Executive Officer Alan Mulally forecasted Monday that Ford would be "solidly profitable" by 2011, but J.P. Morgan automotive analyst Himanshu Patel said that might happen sooner.
"Ford ... did not pull forward this forecast to 2010, somewhat surprising given the profitable quarter," Patel said in a research note Monday.
Mulally said Ford is being conservative and isn't certain about how the economic recovery in the United States and the rest of the world will shape up or how quickly.
"We have record-high unemployment, we have consumer confidence bouncing around" in the Unites States, Mulally said.
Losses tied to gains
Despite Mulally's cautionary tone, Ford reported a third-quarter profit for every one of its divisions, except for Volvo, and took in more cash than it spent for the first time since mid-2007. It also delivered a profit in its long-troubled North American division for the first time since the first quarter of 2005.
Ford's gains are the result of a lot of painful actions in recent years. It has closed more than 18 plants since 2003 and slashed 45% of its workforce in its long-ailing North American division since 2005.
Ford also negotiated cost-cutting contracts with the UAW four times in the last five years. On Sunday, the Canadian Auto Workers ratified another cost-saving deal.
In all, Ford said it has reduced automotive structural costs by $4.6 billion during the first nine months of the year.
"We expect structural cost to be relatively stable now that we have largely completed significant restructuring actions within our manufacturing facilities and personnel reduction actions," Booth said.
Ford also has seen a strong customer response to its new cars and trucks, such as the Ford F-150 pickup and Ford Fusion midsized car.
Although Ford's global revenue declined $800 million, to $30.9 billion in the third quarter, the automaker has been gaining market share in the United States and other critical markets.
Ford acknowledged that the government cash-for-clunkers program boosted its sales in the United States and Europe, but Mulally said Ford would have earned a profit even without those programs.
"We have been increasing our share in this down market every month for the last 10 months," Mulally said in an interview with CNBC. "So we are on a pretty steady trajectory of growth now."
Options help boost pricing
Another key reason for Ford's improved financial performance was a $1.9-billion improvement in net pricing around the world, compared with the same period last year. Most of that, $1.4 billion, was achieved in North America.
Ford said its net pricing improved because it has been able to cut discounts on vehicles and convince customers to buy more options and accessories in the United States and Europe. That includes options such as Ford's in-vehicle wireless communications and entertainment technology, Sync.
"We have a complete family" of cars and trucks, Mulally said. "We don't have to discount vehicles because we are making them in the amount the people really do want."
Profit and labor
Ford workers said they knew the automaker was on the way to financial health, which is part of the reason they rejected the latest proposal to modify their labor contract.
The deal was defeated by more than 70% of the 41,000 members who voted.
"We know they are making a profit," said Palemon Posey, 46, of Detroit, who voted against the proposed UAW contract.
Mulally said Ford would continue to work with the UAW to find other ways to reduce costs.
"The UAW," he said, "has clearly indicted that they do not expect Ford to be disadvantaged."
Goldman Sachs analyst Patrick Archambault: "By far, the largest surprise came from North America," which posted a pretax profit of $357 million.
Fitch Ratings, which on Monday raised its rating outlook for Ford: "The positive outlook reflects the better than expected progress on Ford's cost-reduction program, production and inventory discipline."
Jay Beard, of San Mateo, Calif., who is a Ford shareholder who actively trades the stock: "These numbers completely beat my expectations. ...it's a really good trade."
Ron Lare, Ford retiree, former executive board member of UAW Local 600, who campaigned against a UAW contract: "We voted no because we want to make the union stronger and win back what we've lost."
Palemon Posey, 46, of Detroit, who voted against the proposed UAW contract changes with Ford and works at the Dearborn Truck Plant in Detroit: "We know they are making a profit, and then for them to come to us like they did and offer us $1,000 for not striking? It would have put us in a position that, come contract time, we would have had no leverage to negotiate."
Gary Chaison, a professor of labor relations at Clark University in Worcester, Mass.: "I think the company has no credibility asking for concessions now, and I think the leadership is quite embarrassed for making a case for concessions."
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