Ford's Worst Quarter Ever

Problems at its credit arm and a writedown of assets, plus a poor economy and high gas prices, led to a second-quarter loss of $8.7 billion

By David Kiley

Ford Motor (F) reported a second-quarter loss of $8.7 billion, its worst single quarter in history.

Much of the loss was due to a writedown in the value of assets, and losses on falling values of SUVs coming off leases back to the automaker's Ford Motor Credit arm. But, like a kid who wrecks the family car and tries to distract his parents from the bad news by offering to paint the house, Ford unveiled a plan to make over its lineup with more small, fuel-efficient vehicles in the next two-and-a-half years—faster than Wall Street had expected.

Ford's plan to achieve a net profit in 2009 after losing $15.3 billion the past two years had already been thrown off track by the worse-than-expected housing meltdown and high gas prices. But the huge second-quarter loss was a setback Chief Executive Alan Mulally did not anticipate until a few months ago when SUVs like the Ford Explorer (BusinessWeek.com, 9/1/06), Ford Expedition (BusinessWeek.com, 2/19/07), and Lincoln Navigator (BusinessWeek.com, 4/2/07) started losing thousands of dollars in value in a matter of weeks at auctions where off-lease vehicles are sold. Skyrocketing gas prices have cratered demand for such vehicles.

Whipsawed Stock

Ford shares were trading down 9.5%, at 5.46, in midday trading on the New York Stock Exchange. Ford has been a volatile stock over the past two months, trading between 4.30 and 8 a share. The company has been whipsawed between a surprise first-quarter profit, subsequent changed forecasts in profitability and cash burn, and an investment in the automaker by financier Kirk Kerkorian, who paid 8 per share for a stake in Ford.

The second-quarter loss was $3.88 per share, compared with net profit of $750 million, or 31¢ a share, in the same quarter last year. The loss includes $8.03 billion worth of write-offs because of a decline in value of North American assets and Ford Motor Credit's lease portfolio. Even excluding those special items, Ford lost 62¢ a share, worse than Wall Street expected. Twelve analysts surveyed by Thomson Financial, on average, expected only a 27¢ loss. Ford's second-quarter revenue was $38.6 billion, down $5.6 billion from the year-ago period. Analysts expected $34.6 billion.

Mulally is moving faster to restructure Ford's global product portfolio around more fuel-efficient cars, less reliance on trucks and SUVs, and less manufacturing complexity. Since his arrival at Ford from Boeing (BA) in late 2006, Mulally has been driving his team to make business cases for bringing more of Ford's smaller European vehicles to the U.S., a move on which Ford product strategists have pushed back. Mulally especially has questioned from the beginning of his tenure why Ford was making different similar-size vehicles for North America and Europe. "We can't survive with this level of complexity" is a mantra Mulally has repeatedly drilled into Ford managers, according to staffers.