By Jeff Bennett
DETROIT (Dow Jones) – Ford Motor Co. (F) swung to its first annual net profit in four years and said it will remain profitable–on a pre-tax basis during the next two years.

The second-largest U.S.-based auto maker must now weather a fragile automotive market, especially in Europe, where the loss of incentive programs is expected to reduce overall industry sales by as much as 2 million vehicles this year.

“Consumer spending growth in the U.S. and Europe is likely to remain below trend in 2010,” Chief Executive Alan Mulally said during a conference call Thursday. “The economy remains soft in many areas of the world.”

Meanwhile, the company will have to shrink its debt of $34.3 billion at the end of the year, almost twice the size of General Motors Co. which, along with Chrysler Group LLC, filed for bankruptcy protection earlier this year.

“We are not kidding ourselves about our debt,” Chief Financial Officer Lewis Booth said in an interview following the earnings release. “We have an uncompetitive balance sheet and we are working on it. We are acutely aware that we have too much debt on our balance sheet.”

Booth declined to say if he would issue new equity to reduce the debt. He said the company will concentrate on producing a positive operating cash flow. Booth also said he is keeping an eye on rising commodity prices which already began increasing in the third quarter. Those increases will boost vehicle prices “a bit” this year, Booth said.

The results give Mulally bragging rights on his turnaround plan since he wasn’t anticipating an annual profit until 2011. Mulally has worked internally to improve production, slash jobs, sell off brands and unite the company since his arrival in 2006.

However, JP Morgan analyst Himanshu Patel said Ford’s results were not as “high quality” as recent quarters since most of the profit was driven by the auto maker’s lending arm, Ford Motor Credit. The unit reported a profit of $1.3 billion compared with a loss of $1.5 billion for the same period a year earlier.

The auto maker’s profit was “entirely driven by volatile financial services profits which benefited substantially from unsustainable lease residual gains in the fourth quarter,” Patel said in a research note Thursday.

Booth said Ford Motor Credit will remain profitable this year although it will be lower than the 2009 results.

“Our receivables will take a substantial hit in 2010 as the industry continues to downsize and we are rolling off receivables from Jaguar, Land Rover and Volvo,” Booth said.

Net income for the fourth-quarter was $868 million, or 25 cents a share compared with a loss of $5.98 billion, or $2.51 a share. Excluding items, the company reported a 43-cent earnings-per-share profit, exceeding the Thomson-Reuters analyst estimate of 26 cents a share. The auto maker’s fourth-quarter revenue was $35.4 billion.

Ford’s full-year 2009 profit was $2.7 billion, compared with a loss of $14.7 billion the previous year. Revenue for the full-year was $118.3 billion.

Booth and Mulally declined to comment directly on the Toyota Motor Co.’s (TM) vehicle recall cause by a sticky accelerator pedal. Ford, along with General Motors Co., is offering $1,000 to customers who trade in Toyota, Lexus, Scion, Honda or Acura vehicles with model-years between 1995 and 2010.

Mulally did say, however, that the company’s move to halt production of its Transit Classi commercial vehicle in China is an isolated incident. Mulally said the company is reviewing the vehicles since they use the pedal designed by CTS Corp., which is part of the Toyota recall.

During the quarter, all of Ford’s units reported profits except Volvo. The North America automotive unit had a pre-tax profit of $707 million compared with a loss of $1.9 billion a year earlier. The improvement came from higher sales and increase in automotive prices.

South America’s pre-tax profit rose to $369 million while Europe swung to a pre-tax profit of $305 million compare with a $338 million loss. The Asia, Pacific Africa unit also had a profit of $19 million compared with a loss of $19 million.

“South America should be a growing area and a significant contribution to our profit stream,” Booth said. He added that the company’s plants are running at full capacity in that region.

The company’s Volvo unit, which is in the process of being sold to Geely Holding Group Co. LTD, a privately-owned Chinese automotive group, reduced its pre-tax operating loss to $32 million from $736 million a year earlier.

The Dearborn, Mich., auto maker increased its first-quarter production forecast, saying it will now build about 570,000 vehicles compared with its earlier estimate of 550,000.

Ford said it will pay profit sharing to about 43,000 U.S. hourly workers as part of its improved 2009 U.S. financial performance. The average amount will be about $450 per employee. The auto maker,however, will not pay salaried employees bonuses for 2009 although they are eligible for merit increases this year. The company also reinstated its matching 401(k) program on Jan. 1.

Shares of Ford rose by 1.9% or 25 cents to $11.80 in earlier trading Thursday.

-By Jeff Bennett; Dow Jones Newswires;

jeff.bennett@dowjones.com; 248-204-5542

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