Ford Motor Co.'s success over the next four years has a lot riding on UAW contract negotiations currently under way.
America's second-largest automaker has engineered a remarkable turnaround, earning more more than $9 billion in profits the past two years after teetering at the brink of bankruptcy. But to get that next boost, the company needs a new labor contract that keeps costs under control.
Should Ford successfully contain labor costs in a new, four-year UAW contract, the company's borrowing costs against $14 billion in outstanding debt could be noticeably reduced by virtue of an upgrade to an investment-grade credit rating.
That, combined with controlled labor costs for four years, is just what Ford's stock needs to get moving again.
Currently, Ford's credit rating is two notches below investment-grade credit. The company lost its investment-grade rating in 2005, when Ford's financial troubles became severe amid falling sales and bloated costs.
But Ford's chief financial officer, Lewis W.K. Booth, says contract negotiations with the UAW to replace the current contract -- which expires on Sept. 15 -- are critical in that endeavor.
"We're doing everything we can to improve our business," Booth told The New York Times. "We expect to get to investment-grade sooner rather than later."
Ford posted a second-quarter profit Tuesday before the market open of $2.4 billion, or 59 cents a share, down 8 percent from $2.6 billion, or 61 cents per share, in the second quarter of 2010.
Ford did not file bankruptcy or take government bailout money during the financial crisis two years ago. Global product sales rose in the second quarter for Ford, but the company says it spent more on materials and product development and debt reduction, chipping away at profits.
Revenue increased 13 percent to $36.5 billion in the quarter for Ford, beating expectations of analysts who were expecting revenue of $31.15 billion. Ford's stock has dropped to near $13 in recent months after reaching $18.97 earlier in the year despite the company's continued rebound -- success that CEO Alan Mulally calls "one heck of a story."
Ford has earned a profit for nine straight quarters, but the investor market is now waiting for that next push, and the key to that is the last big hurdle remaining -- successfully negotiating a new UAW contract that keeps labor costs in check for the next four years.
If Ford can get that done, the company will likely get a credit ratings increase, greatly reducing the costs it pays to service $14 billion in debt, and the company will get four years of controlled labor costs -- allowing a good chance to keep the momentum going with the double whammy, likely get its stock moving advancing again.
Labor negotiations began Monday in Detroit as the UAW picked Chrysler as its "focus" company, but the results from those talks set the stage for agreements with the other two Big Three automakers, General Motors and Ford. Talks began cordially Monday at Chrysler's headquarters with traditional pledges of mutual benefit and handshakes. Both sides wore maroon jackets to signal unity, but the differences to be hashed out are clear.
The UAW wants two things: an increase in guaranteed wages and benefits in line with current profitability of the companies, and more union jobs created since so many UAW union jobs have been lost in recent years. Management from Detroit's Big Three, including Ford, want to further reduce labor costs.