Ford Posts Solid US$2.7-bil. Profit in 2009

Ford yesterday reported its fourth-quarter and full-year 2009 financial results, ending a disastrous economic year with better results than just about anyone had expected. For the fourth quarter, Ford posted a net income of US$868 million, an improvement of more than US$6 billion from the same period of 2008, and representing the third straight quarter of profitability for the company. For the full year 2009, Ford posted a net income of US$2.7 billion, a massive swing from the record US$14.6-billion loss it posted for the full year 2008. Although the results among the company's various international divisions were mixed for the first half of the year, the fourth quarter saw all of Ford's regional units return to profitability. Total revenue fell by 14.3% to US$118.3 billion in 2009, down US$20 billion from 2008, which itself was down a staggering US$26 billion from 2007, providing a significant measure of how much Ford has cut production over the past two years. Ford chief executive officer (CEO) Alan Mulally was ebullient in his conference call with the media announcing the 2009 full-year results, saying, "2009 was an extremely challenging year for the global automobile industry…For Ford, it was also a pivotal year and the strongest proof yet that our 'One Ford' plan is working. Despite the deep economic downturn, historically weak sales and the government-funded bankruptcies of our domestic competitors, Ford returned to profitability in 2009." The company reported that it had gross cash of US$25.5 billion on hand at the end of the year, nearly double the US$13.4 billion it had at the same time in 2008.

Ford is seeing considerable improvement in North America, with cost-cutting efforts and a new-found interest in the company's products among U.S. consumers helping to improve business. In North America, Ford made US$707 million during the fourth quarter, significantly better than the US$1.9-billion loss it posted for the fourth quarter of 2008. Ford attributed the improvement to a better product mix and increased volumes, but also higher pricing as the company is now getting more money for its vehicles than it has previously. Revenue in the region improved as well, up to US$15.8 billion from US$11.3 billion in the fourth quarter of 2008. "We delivered very encouraging results in the fourth quarter and for full year 2009 despite severe economic headwinds, although our transformation remains a work in progress", Ford chief financial officer (CFO) Lewis Booth said. "We are committed to staying absolutely focused on executing our plan to deliver profitable growth."

Ford's South American unit recorded a profit of US$369 million in the quarter on revenues of US$2.6 billion, up significantly from a profit of US$105 million in the fourth quarter of 2008 on revenues of US$1.7 billion. Higher volumes and a better mix, along with favourable net pricing, offset losses in currency exchange rates to show a noticeable improvement, but this was still not quite as good a performance as in the fourth quarter of 2007. In Europe Ford posted a far better performance in the fourth quarter of 2009 than it did in the same period of 2008, swinging from a loss of US$338 million on revenues of US$7.6 billion to a profit of US$305 million on revenues of US$8.7 billion. The results look considerably better partially thanks to improved sales and pricing, but also because of some base comparison effects, given that the fourth quarter of 2008 was a dismal quarter in Europe for new vehicle sales. The company's Asia-Pacific and Africa unit meanwhile went from a US$10-million profit in the fourth quarter of 2007 to a US$208-million loss for the fourth quarter of 2008, back to a profit of US$19 million for the fourth quarter of 2009. Revenue improved slightly, from US$1.4 billion a year earlier to US$1.6 billion in the most recent quarter.

As for Ford's subsidiary companies, Swedish brand Volvo continued to be a loss-maker for the company despite an improved performance in 2009. Volvo posted a US$32-million loss in the fourth quarter of 2009 on revenue of US$3.9 billion, an improvement from a US$736-million loss for the fourth quarter of 2008 on revenues of US$3.3 billion. Ford's stake in Mazda now basically means that it no longer reports income from the division as a broken-out line item; Mazda's contributions to Ford's bottom line are treated like marketable securities and are lumped into an "other automotive" category. The company's Financial Services division returned to the black, turning in a pre-tax operating profit of US$683 million, compared with a loss of US$384 million in the fourth quarter of 2008. Ford Credit in particular fared well, posting a net income of US$696 million, compared with a loss of US$372 million a year eralier. The increase at Ford Credit reportedly came from improving auction prices for off-lease vehicles and lower provisions for credit losses, the first of which pretty much proves the value of working towards maintaining good resale values for used Ford models.

Outlook and Implications

This time last year, the U.S. automotive industry was teetering on the brink of destruction, with the only hope of salvation and avoiding bankruptcy coming from the incoming Democratic administration's willingness to engage with the industry and bankroll its recovery. At both General Motors (GM) and Chrysler, bankruptcy seemed imminent despite their strenuous denials, and the concern was that if either of those two companies were to enter bankruptcy, Ford would have to follow suit if only to maintain cost competitiveness. Ford only had US$13 billion in cash on hand, dangerously close to the US$10-billion minimum most felt Ford needed in order to just maintain operations and keep the lights on at its various plants. However, the company kept its head down, saw its domestic rivals forced into bankruptcy, and worked on its own to try to achieve the benefits of bankruptcy without having to endure the stigma and loss of managerial control that such a filing would bring. As a result, Ford has accomplished many of the same achievements seen at GM and Chrysler without having to take government bailout money, avoiding the public chastisement that has stung its domestic rivals and made them political hot potatoes, and has reaped the rewards of that comparatively better public image, increasing its U.S. market share by a full percentage point. Its products won several awards last year as well, with the Ford Fusion claiming both the Motor Trend Car of the Year Award and the independent journalists' North American Car of the Year Award for the hybrid version, while the Ford Transit Connect won the North American Truck of the Year Award. Ford successfully created a healthcare fund for its hourly union retirees, paid for part of it, and removed huge healthcare liabilities from its balance sheet as a result. It convinced its lenders to extend the maturity date on US$7.9-billion-worth of debt—money it borrowed three years ago before the collapse of Wall Street as part of a US$24-billion loan package—from 2011 to 2013. It also performed a debt-to-equity swap that helped draw down some of that debt; and through it all, the company's stock has risen from just under US$1.00 per share a year ago to over US$11.00 per share today.

All of this points to an extraordinary turnaround at the automaker, and many questions are being asked as to how Ford was able to accomplish this while GM and Chrysler were forced to accept bankruptcy as the only way they could survive 2009. There are fundamental differences between the companies, however, that play an important part in understanding how Ford survived, but in many ways it boils down to one word: liquidity. When current executive chairman Bill Ford., Jr. decided that the CEO job was not for him and brought in outsider Alan Mulally from Boeing, one of the latter's first tasks was to approve a massive December 2006 loan of nearly US$25 billion, a sum that was viewed as enormous at the time and which required the company to put up nearly everything it owned as collateral, right down to the "blue oval" logo itself. CFO at the time, Don LeClair, was reportedly pushing for such a loan, but for a lesser amount—sources indicated that it was Mulally that decided to dramatically increase the amount borrowed all at once. Thus funded, the "Way Forward" plan that Ford president Mark Fields had developed could now be implemented much more rapidly.

The timing of this loan was critical, and the fact that Ford had this cash on hand to fund its development while taking massive hits and losses throughout the fuel price crises and recession years is what differentiates it from Chrysler and GM. Chrysler was sold to a private equity company that either did not understand just how badly the automaker had been gutted by former parent company Daimler or was simply unprepared for how much money it would take to keep the automaker afloat, and as a result Chrysler largely ran out of cash. GM had much the same problem, with both automakers floundering in the wake of the mortgage market crisis that saw lending from traditional sources evaporate completely in a matter of months, bringing the U.S. and global economies to a halt. Without sources of operating capital and with U.S. vehicle sales in freefall, only Ford, with its comparatively deep pockets, could afford to stay out of bankruptcy and turn down government money. The results, as seen in the fourth-quarter figures and the successful full-year 2009 profit two years ahead of Ford's own predictions, speak for themselves.