Accounting errors dating to the beginning of the decade forced Ford Motor Co. (NYSE:F) to restate its earnings on Tuesday, raising the company's net income since then by a total of US$850 million.

The company also reiterated its prediction that its North American operations will return to profitability in 2009, due largely to continued cost cuts and a stable market share of 14 to 15 per cent. Company officials said the profit would be small, but they would not give a dollar figure during a conference call with reporters and industry analysts.

The accounting errors, caused by the way Ford counted interest rate hedging by its financial arm, Ford Motor Credit Co., narrowed the company's net loss for the first nine months of this year to $7 billion from $7.25 billion, the company said in a statement. It also reduced the third-quarter net loss from $5.8 billion to $5.2 billion.

Ford said the errors stemmed from accounting for interest rate swaps, financial instruments used to hedge money that it borrowed to make car loans against changing interest rates.

In the past, Ford accounted for the swaps by changing pretax income and balancing that with a change in the value of its debt. But a review of national accounting standards showed that the swaps had to be offset on the bottom line, affecting net income, Ford officials said.

Pete Hastings, an auto industry corporate bonds analyst with Morgan Keegan & Co. Inc. in Memphis, Tenn., said Ford was applying a shortcut accounting method in the past.

"It's sloppy accounting that they didn't realize that they needed to not apply the shortcut method," Hastings said.

Other companies have had to make similar corrections due to rule clarifications by the Financial Accounting Standards Board, Hastings said.

The corrections caused Ford to reduce its retained earnings as of Dec. 31, 2000 by $629 million. The company also said its 2001 net loss narrowed from $5.5 billion to $4.8 billion due to the changes, while a $1 billion loss in 2002 became a profit of roughly $900 million. For 2003, when interest rates began rising, the company's net income of $500 million was reduced to $200 million, and in 2004, Ford's net income dropped from $3.5 billion to $3 billion. A $2 billion net income in 2005 dropped to $1.4 billion, the company said.

During a conference call to explain the changes, Ford chief financial officer Don Leclair gave a presentation designed to counter analysts' skepticism about the company's plan to make money in 2009.

He said the company expects $5 billion in cost reductions through 2008 and further reductions in 2009, but he would not give a specific dollar figure. The reductions in the next two years are structural, coming as the company reduces manufacturing capacity by closing plants and shrinking its work force, Leclair said. By 2009, he said, the cuts shift more to savings from building cars across the world on the same underpinnings with more common parts.

"We're not stopping our cost reductions at 2008," Leclair said. "We're not stopping at 2009. We understand that we have to reduce our costs."

But Goldman Sachs analyst Robert Barry questioned whether there were more specifics about the company's turnaround plan that were yet to be announced.

"I don't know that that is just very confidence-inspiring unless there was another layer or two to come in terms of all the elements here," Barry said.

Hastings said he, too, was concerned about the lack of specific numbers.

"I was discouraged by the lack of clarity and lack of granularity in the path for them to achieve profitability," Hastings said.

Leclair also said Ford is near an announcement on borrowing secured by the company's assets, something that it has not done in the past. Since the company expects to lose money through 2008, it could need additional cash to cover expenses.

But Leclair would not say when such an agreement would be announced.

Hastings said the change to secured borrowing is a result of Ford's sliding credit rating. In past years the rating was so good that Ford could get favorable interest rates without collateral, he said.

"Now the credit rating is such that they need to put up collateral in order to gain an attractive interest rate," he said.

Leclair also said the company is encouraged by the number of production workers who have taken buyouts or early retirement offers to leave the company. The deadline for the 75,000 workers to make a decision is Nov. 27.

Ford shares fell three cents, or 0.34 per cent, to $8.84 in afternoon trading on the New York Stock Exchange.

Author: TOM KRISHER
Source: http://www.cbc.ca/

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