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Ford: Labor Agreement Will Keep Costs in Check

Ford Motor Co.’s new four-year contract with the United Auto Workers will allow it to keep its annual labor cost increases under 1 percent, company officials told the financial community this morning.

October 20, 2011

Ford Motor Co.’s new four-year contract with the United Auto Workers will allow it to keep its annual labor cost increases under 1 percent, company officials told the financial community this morning.

“Overall, this agreement allows Ford to better respond to market demand,” said Mark Fields, Ford’s president of the Americas in a conference call.

UAW-represented workers at Ford ratified the contract Oct. 19. Members voted 63 percent in favor of the agreement, the UAW said in a written statement.

Ford’s estimate of its labor cost increase confirms a previous estimate made by UAW president Bob King. General Motors Co., in its contract agreement, has a comparable labor cost increase.

Also today, Ford said:

• Base lump sum payments and other benefit changes in the labor deal would take a $270 million cut into net income in 2011, $60 million in 2012 and about $80 million each in 2013, 2014 and 2015.

• The total impact on net income would be determined by profit-sharing payouts, buyouts and changes in workplace rules and practices.

• The new contract allows Ford “to increase manufacturing utilization and efficiency, increasing our ability to match quickly supply to demand.”

• Having plants producing at their highest efficiency relative to their size, also called capacity utilization, “represents substantial profit opportunity.”

“It will improve utilization of our facilities,” Fields said.

Ford is adding 12,000 hourly jobs in its U.S. manufacturing facilities through the four-year contract. Of those, 5,750 are new jobs, making it the most generous of the new labor agreements negotiated with Detroit automakers.

Fields said Ford believes the U.S. sales volume will support the staffing additions.

“We’re seeing demand for our product even in a 13 million unit industry, so we’ll need these workers,” Fields said. “Our current assumptions right now support the addition of these positions during the contract period.”

The labor deal could help improve Ford’s credit rating and may allow the company to resume paying shareholder dividends.

Ford’s CFO Lewis Booth declined to say if he expects Standard & Poor’s or Moody’s to return Ford to investment grade now that it has a ratified agreement with the UAW. He also declined to discuss the possibility of Ford paying a dividend to shareholders.

“The rating agency has made it pretty clear they’re expecting to revisit this again after the contract is cleared,” Booth said. “There is an opportunity to think about a dividend, not directly related to investment grade, but we’re not ready to talk about that.”

In September, just a day after UAW workers at General Motors ratified their labor contract, Standard & Poor’s raised GM’s corporate crediting rating two notches to “BB+.” S&P said the labor deal allowed GM to continue to generate cash and be profitable in North America. BB+ is one notch below investment grade.

At the time, S&P said it anticipated raising Ford from its current “BB-” to “BB+” with a stable outlook if the UAW ratifies Ford’s agreement and the deal does not put Ford at a disadvantage relative to GM.

Returning to investment grade would make it much less costly for Ford to invest money, analysts say. It also signifies to Wall Street that Ford has a conservative balance sheet, which investors favor.

Ford’s UAW contract contains a $6,000 signing bonus and other lump-sum payments. But Ford was able to prevent an increase in its fixed labor costs, including pay raises for traditional workers or restoration of cost-of-living allowances lost during concessions in 2009.

About 65 percent of GM’s workers voted to ratify their agreement with GM last month.

Chrysler’s 23,000 UAW workers began voting on a tentative agreement this week. The results are expected by month end.

GM workers received a $5,000 signing bonus and at least $3,000 more in subsequent years. GM will create 6,400 jobs and reopen an assembly plant in Tennessee.

In addition, Ford and GM will offer financial incentives of $10,000 to $100,000 to entice production and skilled trades workers to retire.

Dave Barkholz contributed to this report.

Jamie LaReau and David Phillips write for Automotive News, a sister publication of Workforce Management. To comment, email editors@workforce.com.

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