Can Ford absorb restructuring costs?
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As Ford Motor Co. attempts another turnaround, one item drawing particular scrutiny is the auto maker's tightening cash situation, which has already forced the company to eliminate its dividend and could prompt asset sales or other moves in the near future.
Ford Motor is starting its latest restructuring with a sizable cash cushion -- roughly $23 billion. But that is down from $25 billion at the start of 2006 and will likely keep declining for the rest of this year and next.
Analysts and ratings firms say the cost of shrinking Ford is growing as the auto maker ponies up severance packages, early-retirement offers and buyout plans in an attempt to eliminate about 44,000 workers by the end of 2008. Ford's goal is to cut jobs, close several plants and make the auto maker profitable in North America by 2009.
Ford Chief Financial Officer Don Leclair says the company's gross auto cash position will drop by year's end to about $20 billion -- a figure supplemented by $3.4 billion taken out of a fund employers set up to pay retiree health-care costs. For all of 2006, Ford will burn through an astonishing $8.4 billion.
Ford shares, which traded at about $10 a year ago, dipped as low as $6.19 in late July but have hovered between $8 and $9 for the past month. They slipped more than $1 on Sept. 15 when Ford announced its latest restructuring plan. In 4 p.m. composite trading Wednesday on the New York Stock Exchange, Ford's stock was up 33 cents to $8.56, giving the company a market value of $15.9 billion.
Of the 15 analysts covering Ford, only one has a "buy" rating, according to Thomson Financial. The other 14 rate Ford's stock a "hold," "sell" or "strong sell." Consensus for Ford's 2007 earnings is a loss of 23 cents a share, compared with earnings of $4.36 a share at General Motors and $8.45 a share at Toyota.
The restructuring costs, combined with massive vehicle-production cuts and expected and ever-increasing quarterly losses, will keep eating away at Ford's cash, making asset sales of brands like Jaguar or Land Rover, or even Ford Motor Credit, more inevitable, say analysts.
"In going through a turnaround like this, it is clear Ford will consume a lot of cash in 2006 and 2007 through the restructuring and operating costs. They will use a lot of cash before the plan kicks in," said Bruce Clark, senior vice president at Moody's Investors Service, which last week lowered Ford's credit rating to B3, or six notches below investment grade.
"Well, if it doesn't begin to take, they will still be burning cash, and if they need another one of these, they won't have the financial cushion any longer. They simply have to get it right this time," Mr. Clark said.
He says Ford has "a sizable cushion" of cash, but notes it can erode fast. Mr. Clark said the probability of default of B3 companies is about 26 percent.
Ford has yet to say how much cash it will burn in 2007 and 2008, but it is expected to give some guidance at its third-quarter conference call late this month. Analysts like Eric J. Selle at J.P. Morgan estimate Ford will burn through about $6 billion in cash in 2007, barring the sale of an asset like Jaguar or Land Rover. J.P. Morgan has Ford shares rated "underweight." The financial-services firm owns Ford shares and has done investment-banking work and other business with Ford during the past year.
Mr. Selle and other analysts estimate a similar cash burn into 2008, potentially pushing Ford's cushion below the $10 billion level -- an amount some analysts say is close to the minimum level of cash required for Ford to operate the business.
"We think they need in excess of $10 billion in actual cash to keep running." said Kip Penniman, credit analyst for KDP Investment Advisors in Vermont. "If it gets below that level, it gets quite concerning."
Ford's Mr. Leclair acknowledged the auto maker has substantial intramonth cash swings as it pays parts suppliers and hourly payroll every week for 75,000 workers, but said "our peak-to-trough swing is not $10 billion. That is off by a lot." He wouldn't specify a minimum level of cash needed at Ford.
If cash does become a concern, Ford has several, less-discussed options before it, according to people familiar with the matter. One step is to begin issuing debt secured against its existing assets.
The new debt could, for instance, be secured against a variety of different items. Those include individual ownership stakes, such as its Mazda interest; assets at a high holding-company level; or plants and equipment in the U.S. and around the world.
Ford in the late 1990s studied selling its stamping operations, and two people familiar with Ford's plans said it could explore that option again if it could get the United Auto Workers to buy in.
Still another option, says a person familiar with the matter, would be to sell off interests in the international subsidiaries of Ford Motor Credit. The credit company maintains operations throughout Latin America, Europe and the Asian-Pacific region.
J.P. Morgan estimates a 51 percent stake in Ford Motor Credit would be valued at $6.95 billion. If the international units are worth one-quarter of that total, that gives a rough value of $1.7 billion. But Ford could elect to sell 100 percent stakes, potentially bringing in more cash.
Asked if Ford Credit is looking at selling or restructuring its overseas assets, Mr. Leclair said, "stay tuned."
J.P. Morgan's Mr. Selle, who says in a report that Ford is being "rosy" to expect $20 billion in cash at the end of the year, estimates the auto maker could get about $3.1 billion for the sale of its Aston Martin, Jaguar and Land Rover brands, with Land Rover fetching the most at $1.9 billion. He expects those brands to be sold in the next 12 months
Ford has indicated it will sell Aston Martin but says it has no plans to sell Jaguar and Land Rover.
One of Ford's biggest costs during the next year will be getting rid of people. Mr. Leclair said Ford's cash is also being eaten up by operating losses, contributions to Ford's pension plan and the 21 percent cut in the auto maker's 2006 North American vehicle production.
Mr. Selle estimates Ford will spend about $2.4 billion this year and next buying out hourly and salaried workers, with about $1.3 billion going to eliminate 27,000 hourly jobs and $1.1 billion going to eliminate 14,000 salaried jobs.
Ford spokeswoman Becky Sanch says the auto maker isn't giving guidance on the overall costs of these buyouts. At the start of 2006, Ford estimated full-year charges of $3.8 billion for the closing of assembly plants in St. Louis and Atlanta plus employee buyouts, but said on Sept. 15 that figure will be "significantly increased" because of the increased hourly and salaried job cuts.
Ford expects to contribute $1.4 billion in cash and cash equivalents to its pension plan in 2006. Ford's U.S. pension plan, which covers 345,000 people, was underfunded by $2 billion at the start of the year.
To conserve cash, Ford also eliminated its dividend of five cents a share starting in the fourth quarter, a move that will save the auto maker about $374 million a year.
Cornell University business professor Roni Michaely, who wrote a paper analyzing 887 publicly traded companies that eliminated their dividend over 25 years, said Ford is making a risky move. His analysis shows that shares in companies that eliminate their quarterly payout fall 11 percent in the 12 months after the move and 15 percent in the three years after, in part because certain funds and money managers won't hold stocks that don't pay a dividend.
First Published October 5, 2006 12:00 am
