More Bad News for Ford

Plummeting demand for trucks and SUVs in the U.S., and now news of a big third-quarter loss, put Ford in a precarious position

By David Kiley

Ford Motor (F) reported a third-quarter net loss of just $129 million on Nov. 7. But the numbers that Wall Street and the U.S. government are paying attention to more closely are the $2.9 billion operating loss and the $7.7 billion in cash reserves burned to offset plummeting demand for new vehicles.

The grim news, followed by word of General Motors' (GM) third-quarter $2.5 billion loss and $6.9 billion cash burn, comes just a day after Ford Chief Executive Officer Alan Mulally and GM CEO G. Richard Wagoner Jr. joined other auto industry and union executives to meet with House Speaker Nancy Pelosi to ask the government for "bridge loans" to help the industry get through a recession that is expected to drag down auto sales at least into the first half of 2010.

Ford has lost $11.6 billion in the first three quarters of the year. Because the company reduced its pickup truck inventory and manufacturing in the quarter to make way for an all-new redesigned 2009 F Series pickup, Ford Chief Financial Officer Lewis Booth said the burn of Ford's cash will be improved in the fourth quarter and will level out in 2009. Sean McAlinden, chief economist of the Center for Automotive Research, believes Ford has enough cash to last to about the middle of 2010.

All eyes are on cash reserves of both Ford and GM, as well as auto suppliers. Both companies need about $8 billion to $10 billion to maintain normal operations. Ford had $18.9 billion in cash at the end of September after burning $15.7 billion in nine months and $10.7 billion in additional untapped credit lines. But rating agency analysts who assign risk to Ford's debt say that if the automaker needs to tap those lines, it will send a terrible message to investors and debt holders. "Cash burn is troubling," says Goldman Sachs (GS) analyst Patrick Archambault.

Staying Optimistic

CEO Mulally, though, is enthusiastic about Ford's chances to weather the storm even if the U.S. government does not give Ford low-interest loans that can be applied straight to liquidity needs. "We are not counting on that money [as bridge loans] to help us," said Mulally. But, the CEO said, he hoped it would be there if the economy stays weak for longer than the company expects. Ford forecasts an upturn by mid-2010.

Not everyone agrees. "The companies simply cannot survive without additional federal assistance," says Global Insight auto analyst Aaron Bragman. "They need money and time in order to make it through to 2010, when pent-up demand and a rebounding economy are expected to return the companies to profitability."

Ford is preparing its application to the Energy Dept. for $25 billion in loans set aside to help automakers and suppliers pay for retooling plants and other costs associated with bringing more fuel-efficient vehicles to market. Energy promises to expedite the payouts once the applications are approved. But GM, perhaps more than Ford, will, according to the parameters, have to prove financial viability, which would indicate an ability to pay the money back. And industry sources say the clause in the Energy Dept.'s language is being opposed by lobbyists and members of Congress.