Ford profits despite economy, rising costs (Reuters)

DEARBORN, Michigan (Reuters) – Ford Motor Co's profit held up well in a second quarter marked by the impact of Japan's earthquake, the shaky U.S. economy and high commodity costs, but the automaker remained cautious about consumer demand going forward.

Ford, the only U.S. automaker that did not accept a government bailout in 2009, has posted a net profit for eight straight quarters. It racked up net losses of $30 billion from 2006 through 2008 when it cut jobs, sold unprofitable brands and reshaped a lineup laden with large SUVs and pickup trucks.

"These results are pretty good considering some of the stumbling blocks in the economy," said Mirko Mikelic, senior portfolio manager with Fifth Third Asset Management, which owns Ford shares.

"Even after we came out of the recession, this is still a fragile recovery," he added. "It's really tied to employment and the housing market."

However, Ford, scheduled to begin talks on Friday with the United Auto Workers union for a new labor deal, also said it expects U.S. industry sales this year to finish at the low end of its previous forecast.

Ford shares were down 1.5 percent at $12.97 on Tuesday afternoon, after rising as much as 2 percent in the morning. The S&P 500 index at the same time was down 0.3 percent.

Smaller rival Chrysler also reported on Tuesday, posting a wider second-quarter net loss after the U.S. automaker repaid $7.6 billion in debt stemming from its 2009 federal bailout.

North America was the only region where Ford's profit improved but pricing rose in every region, helping to offset higher commodity costs. North America was particularly strong, with higher prices for vehicles accounting for $900 million in gains, almost evenly split between higher prices and lower incentives.

"While pricing has been a positive story for Ford for much of this cycle, the pricing gains have accelerated despite heightened incentives at selected Korean manufacturers," Jefferies analyst Peter Nesvold said in a research note.

He said the auto business saw pricing rise $1.1 billion over last year, almost double his estimate.

Ford's net income in the second quarter fell to $2.4 billion, or 59 cents per share, from $2.6 billion or 61 cents per share as it reduced debt by $2.6 billion to $14 billion.

Lowering debt saved Ford $700 million in interest payments in the first half of 2011 compared with the same period in 2010.

In North America, Ford's pretax profit for the second quarter rose 0.5 percent to $1.91 billion.

"They're doing a great job holding (market share)," said Citi analyst Itay Michaeli. "That's why you're seeing a quarter like this, where they're realizing $900 million in positive pricing on a year over year basis in North America. We were expecting $700 million."

Excluding one-time items, Ford's quarterly profit of 65 cents per share was 5 cents better than what analysts polled by Thomson Reuters I/B/E/S had expected.

Revenue rose 13 percent to $35.5 billion. Analysts had expected $31.6 billion.

"In contrast to the earnings and guidance volatility seen to date this automotive earnings season, Ford delivered a quarter that was, like some of its cars over the years, boring but reliable -- and we mean that as a compliment," Barclays Capital analyst Brian Johnson said in a research note.

Ford Chief Financial Officer Lewis Booth told reporters. "This wasn't the easiest of quarters. We've gotten through the Japanese tsunami issues very well. We lost some units (vehicle production) in Asia Pacific, but managed to lose a lot less than we expected and we didn't really lose any significant units anywhere else in the world."

However, Booth added Ford now sees U.S. sales for the full year at the bottom end of its previous forecast of 13 million to 13.5 million vehicles. Earlier in the year, Ford had expected the higher end of the range.

Ford's forecast includes medium and heavy trucks, which account for 250,000 to 300,000 in annual sales.

The shift in outlook echoed comments previously made by rival General Motors Co and comes after disappointing U.S. industry sales in May and June.

Booth reiterated comments that Ford expects the second half of 2011 to show weaker financial results than the first half, in part because of seasonal factors.

INVESTMENT GRADE PROGRESS

Ford is striving to return to an investment grade rating by the major ratings agencies. Booth said he could not predict when the company might return to investment grade, but expects that to occur "sooner rather than later."

Most major agencies have Ford rated two notches below investment grade. Ford was last at investment grade in May 2005.

However, Booth said he expected a reexamination by the agencies once talks for a new labor deal with the UAW are completed. The union represents about 41,000 Ford hourly workers. [ID:nN1E76N0DA]

Ford's hourly "all-in" labor cost per worker is about $58, compared with about $50-$51 per hour for Chrysler and about $57 per hour at GM.

The gap between Ford and its Japanese rivals with U.S. plants has narrowed from about $25 to $30 in 2007 to about $5 to $10 now, according to the Center for Automotive Research of Ann Arbor, Michigan.

Ford's labor costs are higher than Chrysler mainly because it has hired fewer than 100 so-called second-tier workers who make about half the pay of veteran UAW-represented workers, while about 12 percent of Chrysler's 22,800 union auto workers make the lesser wage.

The Center for Automotive Research also said Ford's estimated U.S. auto production labor costs are about $5.1 billion annually.

Booth said Ford's profit was hampered by higher commodity costs related mainly to higher oil prices. He said prices for plastics, steel, aluminum, cooper and precious metals are all on the rise and affecting profit margins.

"As we continue to see growth in Asia, commodities stay under pressure," he said.

In its home U.S. market, the No. 2 U.S. automaker had a 16.9 percent market share through the first half of this year, compared with 17 percent a year ago.

"We continue to expect commodities and structural costs to each increase by about $2 billion compared with 2010," Booth said.

He said the higher structural costs are linked to product development, a key for Ford's business plan, and that as a percentage of net revenue those costs will be less than in 2010.

Ford's sales in the first half of the year rose 12 percent versus a 17 percent rise for GM and 20 percent for Chrysler Group LLC.

(Additional reporting by Ben Klayman; Editing by Derek Caney and Matthew Lewis)

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Obesity rates still rising in many states (AP)

By MARY CLARE JALONICK, Associated Press Mary Clare Jalonick, Associated Press – Thu?Jul?7, 10:16?am?ET

WASHINGTON – In 1995, no state had an obesity rate above 20 percent. Now, all but one does.

An annual obesity report by two public health groups looked for the first time at state-by-state statistics over the last two decades. The state that has the lowest obesity rate now — Colorado, with 19.8 percent of adults considered obese — would have had the highest rate in 1995.

"When you look at it year by year, the changes are incremental," says Jeffrey Levi, executive director of the Trust for America's Health, which writes the annual report with the Robert Wood Johnson Foundation. "When you look at it by a generation you see how we got into this problem."

The study, based on 2010 data, says a dozen states top 30 percent obesity, most of them in the South. Mississippi topped the list for the seventh year in a row, with Alabama, West Virginia, Tennessee and Louisiana close behind. Just five years ago, in 2006, Mississippi was the only state above 30 percent.

No state decreased its level of obesity, which is defined as a body mass index of 30 or more. The body mass index is a measurement based on weight and height.

There was a bit of good news in the report: Sixteen states reported increases in their obesity rates, down from 28 states that reported increases last year. Levi says those increases have been gradually slowing, most likely due to greater public awareness of health issues and government attempts to give schools and shoppers better access to healthier foods.

"We're leveling off to some degree at an unacceptably high level," Levi said.

First lady Michelle Obama has tackled the issue with her "Let's Move" campaign, pushing for healthier school lunches, more access to fruits and vegetables and more physical activity. Republicans in Congress have pushed back somewhat against some of those programs, however, saying a rewrite of school lunch rules is too costly and questioning an Obama administration effort to curb junk food marketing aimed at children.

As in previous years, the study showed that racial and ethnic minorities, along with those who have less education and make less money, have the highest obesity rates. Adult obesity rates for African-Americans topped 40 percent in 15 states, while whites topped 30 percent in only four states. About a third of adults who did not graduate from high school are obese; about a fifth of those who graduated from college are considered obese.

Dr. Mary Currier, Mississippi's state health officer, says her state has struggled to drop its No. 1 status and it has been challenging because much of the state is poor and rural.

"We live in an area of the country where eating is one of the things we do, and we eat a lot of fried foods," she said. "Trying to change that culture is pretty difficult."

She says the state has had some success by making school lunches healthier, taking high-calorie foods and drinks out of school vending machines and trying to find more low-cost exercise facilities for residents of rural areas.

"It is frustrating, but we've had some progress," Currier said. "We just have to continue to work at this. It's not something that's going to change overnight."

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Online:

Calculate your body mass index: http://www.nhlbisupport.com/bmi

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Recession hits transit budgets despite rising need (AP)

BOSTON – Cash-strapped and debt-ridden, public transit systems across the nation are trimming service, raising fares and postponing badly needed upgrades just to maintain daily operations, even as rising gas prices increase demand and experts call modernization critical to cities' futures.

The economic downturn and cuts in government support have forced transit agencies to pare down, complicating the daily lives of commuters who depend on trains, trolleys and buses. Frustration comes easily.

"I can't rely on it at all," said Frank Summers, who has been commuting to Boston from suburban Ashland on commuter rail for about seven years and believes service is declining. "It's always jammed-packed and rarely on time."

The trains, operated by a company under contract with the Massachusetts Bay Transportation Authority — a network that includes the nation's oldest subway and is known to Bostonians simply as the T — were plagued by equipment problems during the past winter.

The fleet of 80 aging locomotives had, among other woes, trouble starting, keeping auxiliary power functioning for lighting systems and maintaining enough air pressure for braking systems, according to transit officials.

On one cold February night, a commuter train bound for Worcester broke down outside Boston, transforming passengers' usual 80-minute commute into a four-hour nightmare.

The T bought two new commuter rail locomotives this year — the first new ones in 20 years — and is pledging to continue efforts to modernize the line. But financial struggles are hardly unique to Boston or other big cities, and are reflective of the vast majority of transit systems large and small.

By one survey, more than 80 percent of U.S. transit systems had cut service, raised fares or both since the economic downturn started. The Federal Transit Administration has pointed to tens of billions of dollars in deferred maintenance nationwide, a problem particularly acute for older urban systems.

William Millar, president of the Association of Public Transportation Agencies, said that there are signs of financial improvement, but that it's not enough to make up for the needs.

"We still have a significant majority of systems that are still running unfunded deficits, that are still going to have to consider further fare increases and further service cuts, though they certainly don't want to do those things," he said.

Especially when ridership is growing. In Boston, for example, May was the busiest month on record for the T's subway system, and overall ridership is up more than 5 percent from a year ago.

"Almost universally, across the political spectrum, people are saying rising gas prices are making them nervous, that they really want to have more and better transit options," said David Goldberg, communications director for Transportation for America, a coalition representing the interests of transit users.

More riders represent a mixed bag for operators. Fare revenue goes up, of course, but the gains can easily be offset by the higher fuel costs that systems must incur.

An influx of riders also might generate greater political support for mass transit, but the added strain on aging and overtaxed equipment could frustrate commuters and leave them ready to return to their cars when gas prices ease.

A 2009 FTA study that examined the "state of good repair" of the nation's seven largest rail transit agencies — New York, Boston, Philadelphia, Washington, D.C., Chicago, San Francisco and the New Jersey Transit System — found anything but good repair.

The report found that 35 percent of all rail assets of those agencies were in subpar condition. Another 35 percent were deemed adequate and only 30 percent were in good or excellent condition. Upgrades would cost the seven largest systems $50 billion, the agency estimated.

Add in the rest of the country's public transit systems, and the maintenance backlog mushrooms to $78 billion.

Millar's group surveyed its 1,500 agencies and found that at least 40 percent were delaying capital improvements.

"The problem is to try to keep fares to a reasonable level, to try to keep services at a reasonable level, they have had to let some maintenance practices slip," he said. "Of course they are concerned about safety, so they try hard not to defer anything of a major safety need."

It's not just the major systems that are being forced to scrimp.

The Transit Authority of River City, which provides bus service for five counties in the greater Louisville, Ky., region, laid off 42 operators and mechanics last year and 10 administrative employees the previous year.

The authority's executive director, J. Barry Barker, said the system also was forced to reduce service and raise fares by $1 to $2.50 for express buses. Preventing further cuts or steeper fare hikes has meant sacrificing some improvements.

"The feds have a guideline that you can replace a full-size, 40-foot bus every 12 years. Basically I don't know anybody in the business who is replacing them after 12 years, and it's typically 14-16 (years)," he said.

Over the past several years, the authority has purchased only about half the replacement buses needed to meet even the longer cycle.

Federal support for mass transit comes largely in the form of the gasoline tax, with 2.86 cents per gallon of the federal tax earmarked for transit. But revenue has been declining as fewer Americans drive and many who do have switched to more fuel-efficient vehicles.

Federal funding also has strings attached.

Transit systems in larger cities can apply it only toward capital improvements, while systems in areas with populations of 200,000 or less can use federal money to pay operating expenses. Federal stimulus money, now ending, provided a short-term boost with 1,072 grants worth $8.8 billion for special transit projects. That included the purchase of new buses and rail cars, according to the Federal Transit Administration.

Going to the ballot box has become a popular tool for systems trying to raise revenue, and voters have generally seemed receptive.

In 2010, voters nationwide approved 73 percent of transportation-related ballot questions, many calling for increases in sales or property taxes.

St. Joseph, Mo., boasts of having one the nation's oldest public transit systems, dating to when horses pulled large coaches before the Civil War. But with revenue falling and costs increasing for fuel, health insurance and liability coverage, the system had to go to local voters for a one-quarter cent sales tax increase in 2008 to avoid shutting down some of its eight bus routes.

But it may be only a temporary patch.

"We raised our sales tax, but the people haven't been buying as much stuff. It's not producing the revenue we would have hoped," said Andrew Clements, assistant director for St. Joseph public works. "As the future looms, eight to 10 years from now, we may be looking at a much harder challenge."

The public transit system serving Grand Rapids, Mich., won voter approval of property tax measures in 2000, 2003 and 2007 — allowing it to expand from 63 buses in 1999 to 105 buses this year at peak hours and more than double its ridership, said Peter Varga, chief executive officer of The Rapid.

The agency hasn't run a deficit in a decade, nor has it increased fares or cut service, he said, even as Michigan's economy has tanked.

The financial crunch has prompted creative approaches to generate additional money for transit systems.

To help close a projected $127 million operating deficit, the Boston-area system adopted a plan to sell bonds secured by future parking revenue at nearly 100 lots and garages. Proceeds from the bond would also be used to pay off future debt. The agency also hoped to sell more advertising space at stations and on trains and buses, and move its unionized employees to a more flexible state-run health insurance plan.

Passengers no longer will get a free ride if their bus or train is more than a half-hour late, but fare hikes, for now at least, are off the table.

Historically, fares have accounted for 30 percent to 40 percent of total transit revenue nationwide.

Experts who point to more modern and reliable systems around the world say U.S. cities must find ways to overcome financial hurdles and invest in public transit.

In Los Angeles, voters agreed in 2008 to pay a half-cent sales tax over the next 30 years to fund a massive expansion of public transportation. But Mayor Antonio Villaraigosa doesn't want to wait that long for the projects to be completed, so he's proposed borrowing billions from the federal government so the work can be done in just a decade.

"It's becoming clear that (cities) have to remain healthy and vital, and it's also becoming increasingly clear that a functioning transit system is a big part of that," said Robert Puentes, a transportation expert with the Brookings Institution.

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Associated Press writers David Lieb in Jefferson City, Mo., and Russell Contreras in Boston contributed to this report.

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