Ford Motor warned on Thursday that it no longer expects to meet a key target of returning to profitability in 2009 and would cut production through this year in response to a slumping U.S. auto market.
The news sent Ford shares down 8 percent as investors came to terms with the first major setback for the No. 2 U.S. automaker since Chief Executive Alan Mulally was brought in to steer its turnaround in 2006.
Analysts said the weaker outlook showed Ford's recent gains had been overrun by a weak U.S. economy, spiraling prices for oil and other commodities and an accelerating consumer shift from larger trucks and sport utility vehicles.
"This is an embrace of reality," said Pete Hastings, a corporate bond analyst at Morgan Keegan. "The market's very soft, and they can't get the cost savings they need."
Ford's warning marked the second time in 20 months that the automaker has had to scale back expectations for its return to profitability, the ultimate milestone under restructuring plans first launched seven years ago.
Just before Mulally was hired from Boeing
Ford, which has lost more than $15 billion over the past two years, has spun off luxury brands Aston Martin, Jaguar and Land Rover to raise cash. It has also bought out more than 38,000 union-represented U.S. workers, slashed cut-rate sales to car rental agencies and pushed to unify its global vehicle development in an effort to cut costs and boost margins.
Analysts had seen Ford as running ahead of its domestic rivals General Motors and Chrysler after it posted a surprise $100-million first quarter profit.
But Thursday's announcement, which followed similar profit warnings from Japan's Toyota Motor and Nissan Motor , showed the deepening pressure across an industry strained by overcapacity, analysts said.
"I don't think this is a surprise to anyone given the economic conditions. The question everyone has is what is the depth and the timetable of the recessionary conditions," said Fitch Ratings managing director Mark Oline.
Mulally said the No. 2 U.S. automaker now expected to be "about break-even" in 2009 before taxes and special items. (Get the whole story in the CNBC video at left.)
"Unless there is a fairly rapid turnaround in U.S. business conditions, which we are not anticipating, it now looks like it will take longer than expected to achieve our North American automotive profitability goal," said Mulally.
Mulally said Ford would detail steps to cut more jobs and push faster into the market for smaller and more fuel-efficient cars in July.
The head of the Canadian Auto Workers union, Buzz Hargrove, told Reuters he expected about 300 job cuts at a Ford engine plant in Windsor, Ontario. Just over two weeks ago the union and Ford concluded a new three-year contract.
Kerkorian Steps In
The lowered profit forecast could bring new pressure and investor scrutiny on Ford management at a time when billionaire investor Kirk Kerkorian is tendering to buy more of the stock.
Kerkorian's investment company, Tracinda, said in late April that it had acquired 100 million Ford shares and planned to buy more, raising his stake to almost 6 percent.
Tracinda has offered to buy up to 20 million shares of Ford at $8.50—almost 19 percent above Thursday's market trading—in a tender offer that expires on June 9.
Ford's board said on Thursday it would remain neutral on the offer.
Analysts and investors have wondered whether Ford would move faster to sell remaining assets if its restructuring faltered. Among the largest of those assets is Swedish carmaker Volvo , where Ford has said it is working to improve results.
Ford said it expected to reduce second-quarter North American production by another 3 percent beyond the cuts it had already announced. The company now expects to make 690,000 vehicles this quarter, down 15 percent from 2007 levels.
Production will be down 15 percent to 20 percent at 510,000 to 540,000 vehicles in the third quarter from a year earlier and decline 2 percent to 8 percent to between 590,000 and 630,000 vehicles in the fourth quarter, Ford said.
These cuts will reduce Ford revenues in each of the coming quarters for 2008 since major automakers book sales when vehicles are assembled and shipped to dealers for sale.
Sales Down—Even the F-Series
Ford's U.S. sales have dropped almost 10 percent through April for all of its brands. Sales of its F-Series pickup trucks have fallen 15 percent, hit by slower U.S. housing construction and higher gas prices.
The Ford trucks have been the best-selling vehicles in the U.S. market for over 20 years, and the light-truck segment had been Ford's most lucrative before the recent slump.
U.S. auto sales are on track to drop by about 1 million vehicles, or about 7 percent, from a 2007 total near 16.1 million vehicles that many in the industry inaccurately read as the low point of the current downturn.
"The recovery will be a little bit longer and a little bit slower," Mulally said on a conference call, when asked about Ford's outlook for 2009. "Clearly it's going to be slower than we've all thought."
Like other automakers, Ford has suffered from skyrocketing prices for steel, which have doubled over the past five months. That has added as much as $900 to the cost of the average vehicle, according to analysts.
Ford said it would step up its second-half production of better-selling sedans like the Ford Focus and crossovers like the Edge, while it slashes production of trucks and SUVs.
Ford shares closed down 64 cents, or 8.2 percent, to $7.16 on the New York Stock Exchange, while the company's 7.45-percent bond due 2031 fell to 71.44 cents on the dollar from 73.5 cents.