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Ford's hurdle now is high debt


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Ford's hurdle now is high debt

Official: Continued focus on gains will help firm pay down $34.3-billion load



In an eye-popping start to what could be its comeback year, Ford Motor reported a $2.1-billion first-quarter profit that puts the Dearborn automaker on track to be solidly profitable in 2010 -- a year ahead of the company's turnaround schedule.

"We all recognize that this is our time ... to demonstrate that we can move from survival to rebuilding this great business," Chief Financial Officer Lewis Booth told the Free Press. "We all feel absolutely in charge of our future and determined to deliver it."

Ford CEO Alan Mulally noted the first quarter was the company's best quarterly performance in six years. "The basic engine that drives our business results ... is performing stronger each quarter," he said.

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Still, Ford faces challenges, including high debt, rising prices for raw materials, relatively high incentives from rivals and a tottering European economy that drove U.S. stocks down Tuesday. Those factors have Ford officials working to strike a tone that is both celebratory and cautious, especially about rehiring workers.

On Tuesday, Ford said it plans to build 38.5% more cars and trucks during the April-June period -- a total of 625,000 that will keep plants humming. In recent months, Ford has revealed plans to hire or call back at least 2,260 workers through 2012.

Still, Booth remained cautious about new hiring, and stressed he doesn't want raise any "false hopes."

"We are not in a position to start hiring yet," Booth said. "If we continue to grow, maybe we'll talk about that sometime later."

High debt is a hurdle

With Ford's turnaround plan forging ahead faster than even its own company executives expected, the big millstone around the automaker's neck is its relatively high debt.

In April, Ford paid $3 billion of its debt ahead of schedule, but it still finished the quarter with $34.3 billion in debt -- nearly twice the $17 billion in debt that General Motors had as it left bankruptcy last year.

It's an expensive debt to carry: In 2009, Ford paid $1.5 billion in interest on it -- and it also diverts Ford's resources from other areas, such as product development.

Much of Ford's debt is from a $23.5-billion loan the company took out in 2006. Ford President and CEO Alan Mulally often jokingly refers it as a "home-improvement loan."

Ford Chief Financial Officer Lewis Booth, in an interview with the Free Press, said it was the 2006 loan that allowed Ford to survive the worst national recession in decades without federal assistance.

"It left us with more debt than our competitors," Booth said. "But we got many other benefits out of not going bankrupt."

That includes an unchanged management team and business plan and strong relationships with investors, employees, suppliers, dealers and consumers.

Booth said the best way for Ford to pay off its debt is to continue to sell more cars and gain market share while controlling inventory and incentives. Doing that, he said, will lead to profits that can be used to make the debt payments.

Right now, the formula is working. On Tuesday, Ford reported net income of $2.1 billion, or 50 cents per share, for the January to March period, eclipsing its loss of $1.4 billion, or 60 cents per share, for the same period last year.

Ford's improving results come four years after Ford launched its Way Forward turnaround plan and hired Mulally from Boeing Co., and after many painful cost cuts.

Between 2005 and 2008, Ford lost more than $30 billion before it posted a surprise profit of $2.7 billion for 2009, most of which was from the benefit of special charges.

But now, U.S. consumers are embracing the Fusion and Taurus cars, while Europeans and Asians are snapping up the Fiesta subcompact.

Before Ford reported its earnings Tuesday, some analysts were worried that the Dearborn automaker's profits would be hurt by an escalating incentive war unleashed by Toyota, which is offering no-interest loans to combat its recall problems.

But Ford used targeted incentives on some models and ultimately reported a net pricing increase of $1 billion for the first quarter. "We are expecting net pricing to improve throughout the year," Booth said.

Ford's increasing success might prove to be a challenge as the automaker prepares to negotiate a new labor contract with the UAW in 2011.

Ford was the first automaker to strike a deal with the UAW last year to revise its labor contract, but GM and Chrysler, as part of their bankruptcy restructuring, later extracted additional concessions that included a no-strike clause, a wage freeze for entry-level workers and a consolidation of skilled-trades classifications.

UAW workers rejected a similar proposal at Ford, given its improving position.

"Everybody is pretty much in a good mood after all the hard times," said Mike Hall, 49, of Monroe, who works at Ford's Dearborn Engine plant. "But a lot of people want the benefits back that we gave up."

Mulally, in an interview Tuesday with WDIV-TV (Channel 4), said the labor contract differences between Ford and its crosstown rivals are minor and that Ford's labor deal is competitive.

While Mulally said Ford is now confident that it will report solid profits for 2010, he also remains cautious, and Ford warned investors not to expect its quarterly profits to match its first-quarter performance throughout the year.

"The business environment remains challenging," Mulally said. "But we are committed to remain absolutely focused on our business plan."



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