Ford: Q4 Will Be Even Worse

The ailing automaker announces a $5.8 billion loss for the third quarter, its biggest in 14 years, and no help is in sight

by David Kiley

It's going to get worse for Alan Mulally before it gets better. On Oct. 23 the new Ford Motor CEO—officially in the job for less than a month—had to preside over a dismal third-quarter earnings report in which Ford posted a $5.8 billion loss, its biggest one-quarter loss since the recession of 1992.

We know it will get worse because Ford (F) said so. The company stated that its fourth-quarter earnings will decline as it cuts production, watches SUVs pile up on dealer lots, and continues to pay employees to leave the company.

That will put a strain on Ford's cash flow, though Chief Financial Officer Don Leclaire made a point on Monday of saying several times that Ford's cash was adequate to meet the challenge. The automaker had a negative cash flow of $3.1 billion in the quarter, but ended the period with $23.6 billion on hand after it transferred $3 billion from the automaker's VEBA (Voluntary Employee Benefits Assn.) fund. "[Ford's] balance sheet is liquid, but we expect it to deteriorate…[and bond] ratings are likely to go lower," says Shelly Lombard, an analyst at Gimme Credit.

Luxury Loss

Wall Street, which has expressed mostly yawns over Ford's strategy for turnaround this year, weren't much impressed with the quarterly report. Though Ford's operating profit, outside the one-time charges associated with its restructuring, was slightly better than forecasts, the results were marred by a warning about earnings being restated next month. That's based on a restatement of every quarter going back to 2001, due to incorrect accounting of derivative investments.

Excluding special restructuring charges, Ford's pretax loss was $1.4 billion. Dragging down those results were a $2 billion pretax loss in North American Auto and a $600 million loss for the Premier Automotive Group, the luxury group that comprises the Land Rover, Aston Martin, Jaguar, and Volvo divisions. Ford's results were boosted in the plus column, though, by an unexpected gain from interest accrued on the overpayment of taxes going all the way back to the early 1990s.

Ford posted earnings from its South American operations, and from its controlling stake in Mazda. But it posted losses in Ford Europe as well as Ford Asia and Africa.

Spin-Offs in the Offing?

Goldman Sachs (GS) analyst Robert Barry says results from Ford Premier Auto Group and Ford Motor Credit were troubling: "The scale of losses in PAG were worse than expected—a loss of $593 million vs. our estimates of a $134 million loss. And Ford Motor Credit earnings were well below our expectations—just $448 million vs. our $710 million estimate." Goldman Sachs has a "sell" rating on Ford.

Mulally called Ford's results "unacceptable" and really didn't try to put a positive spin on any of the numbers. Ford took a $2.1 billion write-down on the falling book value of the combined Jaguar and Land Rover operations. Mulally said the sale of those businesses is being considered. "Clearly, the review of that is high on my priority list," said Mulally, though he offered no timetable.

Mulally also said that Ford is not currently exploring a deal for an alliance with another automaker, such as Renault-Nissan (NSANY). The French-Japanese company has made it clear it still wants a North American alliance partner, after talks for a deal with General Motors (GM) ended earlier this month.

The Biggest Drag

Ford already has its Aston Martin luxury unit on the selling block, and it has had interest from at least three potential buyers. Analysts say Aston Martin, famous as the maker of James Bond's car, would fetch $500 million to $750 million.