At Ford, $37 billion in the bank and strapped for cash

A worker fits wheel hub badges on the Ford Focus automobile assembly line inside the Ford Motor Co. factory in Saarlouis, Germany, on Wednesday, Sept. 25, 2019. Ford expects hybrid electric vehicles and battery electric vehicles (BEVs) to make up over 50% of its European passenger vehicle sales by year-end 2022.

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How can a company have $37 billion in cash and short-term assets on the balance sheet and still be strapped for cash?

At Ford Motor Co. the market is finding out the answer to that question right now. Despite the automaker's being among the 10 U.S. companies flush with the most cash — Berkshire Hathaway, Apple and Microsoft are others, according to FactSet data — both stock and bond analysts say Ford faces so many challenges over the next few years that it needs to hold on to every penny.

Begin with two related, near-term challenges: Ford has announced a multi-year restructuring, primarily in Europe and South America, that will cost an estimated $7 billion in cash, according to Moody's Investor Service bond analyst Bruce Clark. Then, factor in billions for an overdue refresh of key vehicles including the company's best selling F-series pickup line, and an estimated $11.5 billion more to get Ford ready to cope with the rush into electric and autonomous vehicles highlighted by the Mustang Mach E crossover announced Sunday. With seven electric models due by the end of 2020, Ford's effort is seen as smaller and less ambitious than many rivals' moves, said CFRA Research stock analyst Garrett Nelson.

At the same time, because Ford is redoing more expensive vehicles likes its Explorer SUV while phasing out cheaper sedans that are no longer popular with consumers, especially in the U.S., the company is in the process of replacing 75% of its North American lineup, measured by sales volume, by the end of 2020. And car making is such a cash-intensive business that Ford needs to make sure its cash balance stays above $20 billion to cope with a recession whenever it may come, bond analysts say. Predictions about a recession are a notoriously poor science, but it is ultimately a matter of when, not if.

Staying ahead of a recession

"The auto industry is ruthlessly cyclical," Moody's Clark said in an interview. "In a downturn, you can burn through cash very quickly. You always know there is a down cycle and you don't know when it will occur."

Ford spokesman Said Deep did not respond to an interview request, but the company has been open about the fact that its agenda will require an unusual amount of financial flexibility.

"We are experiencing more headwinds than expected in our fourth quarter," CEO James Hackett said on Ford's third-quarter earnings call, announcing a guidance cut that helped send shares 7% lower. Over the last 12 months, Ford's shares are down more than 3% versus a return of 18% for the S&P 500.

"We have lowered our adjusted [earnings before interest and taxes] guidance range to $6.5 billion to $7 billion, which suggests we will not grow adjusted EBIT this year as we intended," Hackett said. "Of course, we are disappointed in this. But we are confident that we are laying the groundwork for sustained improvement in profitability and cash flow over time."

Debt concerns

Moody's cut Ford's rating to Ba1, the agency's highest junk-bond rating, on Sept. 19, finding that Ford's debt has what the agency's ratings scale calls "speculative elements.''

"The Ba1 ratings reflect the considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan," Clark wrote in the downgrade report.

Ford announced in June that it was cutting 12,000 jobs at operations across Europe by the end of 2020, as it prepared to close or sell off six of its 24 European plants. Earlier in 2019, it announced the closure of its oldest factory in Brazil and exit from its heavy commercial truck business in South America, with many of the overseas moves focused on eliminating areas where the business outlook was already weak. The U.S. market remains more profitable, but even domestically, Ford has announced layoffs this year.

"Ford is undertaking this restructuring from a weak position as measures of cash flow and profit margins are below our expectations, and below the performance of investment-grade rated auto peers," according to Moody's downgrade report on Ford. "Moreover, these measures are likely to remain weak through the 2020/2021 period, including a lengthy period of negative cash flow from the restructuring programs."

We're in the longest cyclical expansion ever in the U.S. auto market — we've never seen four straight years of 17 million unit sales. The question is, what inning are we in? I don't think Ford knows that.

Garrett Nelson

CFRA Research analyst

Going into the restructuring, the new product lines and the recession preparation, Ford was already losing market share, especially outside the United States, and profit margins in its automotive operations (reported separately from Ford Motor Credit's results, which are looked at more like those of a bank) lagged those of global competitors, Nelson said. Ford's global EBIT (earnings before interest and tax) on automotive production have declined to 4.8% in the third quarter from 6.1% for the full-year 2017 period

"We're in the longest cyclical expansion ever in the U.S. auto market — we've never seen four straight years of 17 million unit sales," Nelson said. "The question is, what inning are we in? I don't think Ford knows that."

The average postwar recession has cut U.S. automotive demand about 18.7%, according to an analysis from Standard & Poor's.

The product changes are beginning now, but they haven't been easy.

Ford has already launched its new Lincoln Aviator SUV, available as a plug-in hybrid, but sales have been slow and there have been reports of quality problems. The launch of a redesigned Explorer SUV for 2020 was also slowed this summer, by problems getting a retooled factory in Chicago up to speed. The problems led to a 50% drop in third-quarter Explorer sales.

"This is a rarity," Ford automotive president Joe Hinrichs told The Detroit News. The paper quoted him as saying the company took on too much at one time as the new Explorer moved from a front-wheel-drive architecture to a new rear-wheel-drive platform.

More new models are just reaching showrooms or due by the end of next year, from a redesigned F-series truck to a plug-in hybrid version of the Escape mid-sized SUV with an estimated all-electric range of only 30 miles.

Electric vehicle innovation is coming for the pickup truck, the best-selling vehicle in the U.S. Tesla unveiled its "cybertruck" in Los Angeles on Thursday, and GM just announced that its first electric pickup will go on sale in Fall 2021.

For help with EVs, Ford has a partnership with Volkswagen, which has a much larger EV effort, to let Ford use VW's MEB platform as the basis for at least one yet-undisclosed model expected to launch around 2023. Even in 2030, Nelson expects battery electric vehicles to account for just 5% of Ford's U.S.-based sales — echoing a 2018 forecast from the Edison Electric Institute — which would match by percentage of sales other U.S. auto manufacturers, including GM and Fiat Chrysler. BMW and Mercedes may hit 20%–25% of U.S. sales being battery electric, according to the EEI forecast.

Ford has forecast more than 50% of passenger vehicle sales in Europe being "electrified" — including all hybrid categories and battery electric — by the end of 2022.

"A lot of U.S.-branded automakers are far behind the Europeans,'' Nelson said. "Surveys have shown that vehicle range is the second most important characteristic behind price in the eyes of potential EV buyers, so we think [the Escape] could be setting them up for disappointment from a sales perspective."

Ford's financial tightness is a significant but not life-threatening issue, Standard & Poor's said when it, too, cut Ford's bond rating in October. S&P's new Ford rating of BBB- is the agency's highest sub-investment grade call, and analysts led by Lawrence Orlowski said S&P's unlikely to lower the rating again absent a more severe recession than it sees coming, or unless Ford's cash balance fell below $20 billion.

"Ford's long-term target for total automotive liquidity (cash and credit facility availability) is about $30 billion, reflecting prudent financial risk management," Orlowski wrote in the downgrade.

For now, the company hasn't given any sign of wanting to cut its dividend, which works out to a 6.74% annual yield on its stock price, despite cutting earnings guidance twice this year. Nelson has a hold on the stock because of its high yield and relatively small debt load. But no one on Wall Street is openingly expecting Ford's cash to end up funding traditional uses of excess cash like expanded stock buybacks or any dividend hikes.

"Its yield is 6% and the yield is secure," Nelson said. "They're just not going to see much uplift in their cash flow for the next two years.''


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