Is Ford 'burning' through cash too quickly?

[TStag]

The reason I ask:

 

http://business.bostonherald.com/businessN...ticleid=1006267

 

It would explain why Ford may need to sell Land Rover and Jaguar (when the XF is 90 days away).

Edited June 14, 2007 by TStag

[silvrsvt]

Ford may be more interested in selling the two British brands now because the U.S. automotive market has softened in recent months and Ford may be in need of more cash, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

 

I'd like to know where he's getting his numbers from....or is he pulling them out of his ass?

[igor]

I'd like to know where he's getting his numbers from....or is he pulling them out of his ass?

yup .. trying to say anything besides I do not know.

 

Igor

[68Cougar]

Does TStag spend all his time looking for gloomy Ford news on the internet?

 

Get a life already!!

[TStag]

Does TStag spend all his time looking for gloomy Ford news on the internet?

 

Get a life already!!

 

No it's just what a lot of press reports have said may be causing the sale of Land Rover/ Jag (which I happen to be interested in).

 

I don't know whether Ford is loosing money too quickly or not. What's the feeling on here? Were sales as predicted last month? Or are they a lot worse in the USA? How badly are sales dropping in the USA?

[silvrsvt]

I don't know whether Ford is loosing money too quickly or not. What's the feeling on here? Were sales as predicted last month? Or are they a lot worse in the USA? How badly are sales dropping in the USA?

 

Sales are still not quite up to expectations, but the biggest thing hurting Ford is material costs according to their internal report car they issue (and gets leaked out) every month. It was in the Det News, but Ford said they are still on target for turning a profit in 2009.

[bb62]

..... but Ford said they are still on target for turning a profit in 2009.

 

Yeah, just like they said that they we on target to make the $6 Billion profit target by mid- decade that Billy announced to the world and stuck to right up until the massive losses started pouring in.

[focus05]

Just my two cents, but I doubt Ford is burning through cash that quickly right now. Somehow I doubt Mulally and team would have underestimated Ford's cash needs by that much. Burning through cash means that you are spending excess money beyond what you are reporting in your financial statements. Ford lost $300 mill in Q1 and will probably lose $2 billion total this year along with maybe $2 billion in charges. That's $4 billion. If they cover their losses in product dev, then they have lost $4 billion in cash leaving them with something like $20 billion. I would assume that that is inline with expected costs of restructuring and product development. I can imagine that there is even a bit of buffer in there just in case the cost of new products goes up 20% or something crazy.

 

My guess is that if it's true there is something even bigger going on. If the rumors about a shored up pension and health care plan (ala GE) is true, then I'm betting Ford is looking for a way to throw enough cash in there to rid themselves of uncertain costs. That could burn through cash, but that's a very positive reason to burn through cash.

 

This whole "doom and gloom" of they're burning through cash just because they're terrible I think is a bit overstated. We'll see over the next six or so months, but my guess is that if Jag and LR are sold (or Volvo), I expect that cash infusion to be followed by an announcement of a plan to set up a protected health care and pension system like the one GE negotiated with its workers a few years back. That alone will probably cut Ford's costs about 15-20% and would be a huge step forward for Ford.

[RichardJensen]

David Cole is one of the more bullish analysts out there. For him to say that the American auto market is soft....

 

And let's face it. The only decent month this year has been May, and that because every mfr. poured on the incentives. Toyota's incentives were up like 50% year over year, Honda's, 40%, etc.

[bb62]

Burning through cash means that you are spending excess money beyond what you are reporting in your financial statements. Ford lost $300 mill in Q1 and will probably lose $2 billion total this year along with maybe $2 billion in charges. That's $4 billion. If they cover their losses in product dev, then they have lost $4 billion in cash leaving them with something like $20 billion.

 

Focus05, It doesn't quite work that way. For those financials that are expensed, yes you would see that reflected right away. but the majority of ford spending would be capitalized equipment that would be written off over a longer period of time and would not impact the current income statements. but it would impact the balance sheet and cash flow statements. Ford could easily lose your $4 Billion and go though $20 Billion in cash.

 

Keep in mind that the losses from last year are also managed losses. Ford threw in everything and the kitchen sink to make the loss as great as possible. The logic here is that a loss of $10 Billion is no different to the markets than one of $12 Billion. This then allows a minimum of assets written off in the follow-on years making them "look" better for a short while. But only for a short while.

 

With all the plant closings (re: written off expenditures), new expenditures will need to be made for the remaining product to maximize the flexibility necessary for the company to survive. These expendures will NOT be seen other than by those financial types looking at the balance sheet.

[NickF1011]

Better yet, "Is TStag 'starting' too many useless posts?".

 

Has he started one that isn't?

[TStag]

Were the big losses swallowed up last year, not sure I understand why people say that? Were most of last years losses provisions for future losses? Trying to do the maths on this seems far to difficult but as I understand it there is far more to come:

 

http://www.washingtonpost.com/wp-dyn/conte...7061400784.html

 

17 billion dollars sounds a lot to get through over 3 years but maybe it's just a bit too tight after all....

[ZanatWork]

Put simply, the buyouts and closings add huge one-time fees to the situation...a situation that has included a soft truck market this year, as well as other industry-wide issues. Remember also that Ford's rental fleet sales were cut immensely this year.

 

This is the "pain" period, and that's why they don't expect profitability til '09. I actually believe that may be slightly pessimistic.

[TStag]

Put simply, the buyouts and closings add huge one-time fees to the situation...a situation that has included a soft truck market this year, as well as other industry-wide issues. Remember also that Ford's rental fleet sales were cut immensely this year.

 

This is the "pain" period, and that's why they don't expect profitability til '09. I actually believe that may be slightly pessimistic.

 

Ok so last year Ford lost 12.6 bllion dollars. These losses were attributed to restructuring and a slump in sales. In 2007 ford is concentrating on less but more profitable sales, hence the loss of sales to the fleet rental market. So I presume Ford would expect another big loss this year with much smaller losses in 2008 and 2009. Does another 12 billion dollar loss for 2008 sound about right, do we think?

[focus05]

Focus05, It doesn't quite work that way. For those financials that are expensed, yes you would see that reflected right away. but the majority of ford spending would be capitalized equipment that would be written off over a longer period of time and would not impact the current income statements. but it would impact the balance sheet and cash flow statements. Ford could easily lose your $4 Billion and go though $20 Billion in cash.

 

Keep in mind that the losses from last year are also managed losses. Ford threw in everything and the kitchen sink to make the loss as great as possible. The logic here is that a loss of $10 Billion is no different to the markets than one of $12 Billion. This then allows a minimum of assets written off in the follow-on years making them "look" better for a short while. But only for a short while.

 

With all the plant closings (re: written off expenditures), new expenditures will need to be made for the remaining product to maximize the flexibility necessary for the company to survive. These expendures will NOT be seen other than by those financial types looking at the balance sheet.

 

That was definitely hastily written...

 

What I'm eyeing is the continuing sale of non-core related plants and assets will give Ford a cash boost and make what once were probably large capital expenditures ammortized over time turn into supplier costs that are regularly expensed. The point here is that Ford's cash balance is not just static or decreasing. As they sell different non-core operations, their cash balance is boosted and further will have to incur even fewer future capital expenditures and instead have predictable supplier costs.

 

So, I assume Ford has cash coming in from those sales. Obviously Ford will have to burn probably $4 billion in labor packages and plant closings this year, but they will probably bring in $2 or so billion from sale of assets (assuming they don't sell PAG). Cash flow from continuing operations I'm not sure about, but I would guess it is close to flat, maybe down a little ($500 million?). So, then you spend cash on capital. I would guess $2-3 billion this year, which is $4-5 billion of cash burned. However, I could very well have under guessed. It could be that because of the number of product changes coming in Q1 and Q2 of '08, they have to burn through $2-3 billion more, otherwise I expect 2008 to be the big year of cash burn as the 2009MY looks a bit more crammed with intros than the next six months.

 

Then, if Ford is truly profitable in 2009, they will be bringing in cash without selling assets and might still have a negative cash flow, but much less negative than they currently have. If they are still selling off plant and equipment assets, I can imagine cashflow being positive by 2010.

 

The only reasons I can think for needing that much more cash are two things: 1) Ford will not be profitable by 2009, which is very possible. 2) The economy and car market specifically is going to tank, less probable, although it will remain soft, I think. It could be that Ford's mix is expected to remain weak for much longer than originally expected, which woudl tie back to number 1. 3) The UAW will strike, I give it a 1/3 chance, but they'd just be digging their own grave. 4) Ford is planning to make much larger capital expenditures than originally expected.

 

Now, it could be that the number of plants Ford is looking to build and upgrade for production is higher than originally thought - maybe the positive economics of doing things out of the US has boosted the amount of cash Ford plans to invest in other countries - but over the next three or so years, I don't see that being more than what they have on hand and coming in through operations (maybe I'm missing something). The other big expenditure is creating health care and pension blocks for the UAW. Now, that would be billions of unexpected cash that might require the sale of much larger assets.

 

But they had $23 billion on hand at the end of 2006. If they burn through $6 billion to pay off labor packages and spend maybe $2 billion on non-core assets and then gain $2-3 billion from sale of assets, that leaves Ford with $17 billion. I figure they need $5 billion in the bank at all times to remain operational (ie - pay their suppliers and employees), which still leaves them with $12 billion for capital expenditures separate from any additional cash balance coming in from continuing operations. On the surface, there would have to be a somewhat significant shift in something watched by the management to consider trying to raise $5-8 billion in cash. $5-8 billion doesn't just appear from nowhere, even if a lot of what Ford is doing is very expensive stuff.

 

So, all I'm saying is that their cash situation while tight is not dire yet, at least not dire enough to sell an asset like Jag, LR and Volvo that could bring in good money for Ford starting next year at a time when cash will be a little lighter and the need for profits greater. It could also be that Ford sees some large expense coming too soon with Jag, LR and/or Volvo and is looking to offload those capital costs specifically, but that would factor into the selling price, I would imagine.

 

Anyway, way too long a response, but just an observation.

[TStag]

Ok done a bit more digging around and found the Q1 figures for 2007:

 

http://www.blueovalforums.com/forums/index...showtopic=12743

 

The interesting thing about those figures is what happens if you take PAG and Ford Europe's increased profits out the equation. It suggests pretty clearly that mucking around too much with PAG would be a dangerous thing to do. I mean PAG's increased profits are probably down to Land Rover's fast growth rate. I can't really see any value in selling Jag and Land Rover (other than to reduce risk from exposure at Jag). The real concern is that Ford America doesn't bleed money faster than the rest of it's operation's and that PAG and Ford Europe don't see profits drop.

 

Think maybe things are better than I feared, hopefully Ford might halve losses this year...who can tell anyway?

[LincolnFan]

Tstag, no offence but can the topics about how important PAG to Ford is stop?

[suv_guy_19]

Tstag, no offence but can the topics about how important PAG to Ford is stop?

 

not until Ford sells rebadged lincolns as rovers in europe

[Extreme4x4]

I'm starting to really want Ford to sell Land Rover and Jaguar. Someone said they would leave then.

 

BTW, to sum things up.............. according to Tstag.

 

Ford USA bad

Ford Europe good

Land Rover FANTASMAGORICALLY EXCELLENT !!!

 

Ford International bad

Splitting up Ford into bitty pieces FANTASMAGORICALLY EXCELLENT !!!

 

Yawn.

[bb62]

That was definitely hastily written...

 

What I'm eyeing is the continuing sale of non-core related plants and assets will give Ford a cash boost and make what once were probably large capital expenditures ammortized over time turn into supplier costs that are regularly expensed. The point here is that Ford's cash balance is not just static or decreasing. As they sell different non-core operations, their cash balance is boosted and further will have to incur even fewer future capital expenditures and instead have predictable supplier costs.

 

 

No, Ford is not "selling" any of their assets, they are putting the shutters on them and writing them off. Big Difference. Take the Atlanta facility, nobody wants that facility even though it was the most efficient plant in the US just a year ago. Yes some of the assets have been sold, but at 5 cents on the dollar. There is little or no cash benefit to any of these plant closings or asset reductions.

 

So, I assume Ford has cash coming in from those sales. Obviously Ford will have to burn probably $4 billion in labor packages and plant closings this year, but they will probably bring in $2 or so billion from sale of assets (assuming they don't sell PAG).

 

Again - no. There is no cash coming in from the sale of those assets. You have to consider who might purchase these nebulous assets. The entire industry is over-capacitized and does not value all this capacity as being worth anything. Ford is just recognizing they are the losers in this market share sweepstakes. This is what allows them to write off the existing overcapacity. AGAIN - NO CASH from these assets.

 

Cash flow from continuing operations I'm not sure about, but I would guess it is close to flat, maybe down a little ($500 million?). So, then you spend cash on capital. I would guess $2-3 billion this year, which is $4-5 billion of cash burned. However, I could very well have under guessed. It could be that because of the number of product changes coming in Q1 and Q2 of '08, they have to burn through $2-3 billion more, otherwise I expect 2008 to be the big year of cash burn as the 2009MY looks a bit more crammed with intros than the next six months.

 

Continuing operations includes the depreciation element of capital investment. Look at an old ford incomes statement for the depreciation to get a sence for the investment spent on a yearly basis on capital equipment. The number would be between $5 and $7 Billion. So consider that with a no income assumed income statement, they can still burn through $15 to 20Billion of cash. And if those assets don't deliver, then they too get written off for yet another huge loss. Then you have to consider the servicing of the debt - a huge addition to their prior obligations (at the higher junk bond rates) as an incremental change to prior cash flow statements.

 

 

Then, if Ford is truly profitable in 2009, they will be bringing in cash without selling assets and might still have a negative cash flow, but much less negative than they currently have. If they are still selling off plant and equipment assets, I can imagine cashflow being positive by 2010.

 

With all due respect, I'm not sure you know how to understand financial statements, nor what happens when assets get retired or written off. The rest of your post is pure speculation. In simple terms, they need to find a process that minimises their engineering expenses (which they haven't done short of cutting personnel). They have to add expensive flexibility to their current facilities (which they are doing slowly), they have to cut variable cost while maintaining customer features (which they generally haven't done in existing platforms), and they have to improve their structural position (union wages, healthcare, etc.). The other side of the equation is that while making all these cuts, they need to DRAMATICALLY increase their products into the market. In my mind, there has not been enough progress in this arena and they will likely continue to lose market share. They are fighting the demographic curve that shows Ford customers gradually aging compared with competition. This is the kiss of death to any car company and for Ford, they risk becoming another "Oldsmobile".

[LincolnFan]

not until Ford sells rebadged lincolns as rovers in europe

 

That's a one way ticket to chapter bankruptcy.

[suv_guy_19]

That's a one way ticket to chapter bankruptcy.

but it has to be a good idea....i mean every extra sale you get is a good thing right....lol

[Edstock]

Well, it might not be that stupid an idea.

 

Consider the Z and S. BMW 5 and 7 size, 3.5-3.7 liter. Regular gas for the Z in a $6 gallon world.

 

If the US dollar continues to slide against the Euro, that Lincoln grille could do real well on the Continent.

 

A Euro-Z with tighter suspension and re-worked AWD and bigger brakes might be a surprise. A TT option could be a BMW 540's worst nightmare.

 

Again, if the dollar continues to decline, IMHO it would be too good an opportunity to pass on. It allows the Ford brand to get into the EU in the "above Mondeo" level, without developing a European Ford über-sled, that would have all the Ford nay-sayers wringing their hands about an expensive leap into uncharted luxo-territory.

 

It's just opinion, but I think a lot of Europeans might delight in an alternative to the M-B/BMW/Audi mainstream without getting into the somewhat off-beat senior Citroens, and without turning Japanese. The Z grille is wonderfully American, and the car does everything well with modern tech, and if the price-point is right . . . .

 

This would be even more desirable if Ford sold off Jaguar.

 

It's just an opinion. I could be wrong.

[LincolnFan]

Unless it's a British Brand.

[wescoent]

No, Ford is not "selling" any of their assets, they are putting the shutters on them and writing them off. Big Difference. Take the Atlanta facility, nobody wants that facility even though it was the most efficient plant in the US just a year ago. Yes some of the assets have been sold, but at 5 cents on the dollar. There is little or no cash benefit to any of these plant closings or asset reductions.

Again - no. There is no cash coming in from the sale of those assets. You have to consider who might purchase these nebulous assets. The entire industry is over-capacitized and does not value all this capacity as being worth anything. Ford is just recognizing they are the losers in this market share sweepstakes. This is what allows them to write off the existing overcapacity. AGAIN - NO CASH from these assets.

Continuing operations includes the depreciation element of capital investment. Look at an old ford incomes statement for the depreciation to get a sence for the investment spent on a yearly basis on capital equipment. The number would be between $5 and $7 Billion. So consider that with a no income assumed income statement, they can still burn through $15 to 20Billion of cash. And if those assets don't deliver, then they too get written off for yet another huge loss. Then you have to consider the servicing of the debt - a huge addition to their prior obligations (at the higher junk bond rates) as an incremental change to prior cash flow statements.

With all due respect, I'm not sure you know how to understand financial statements, nor what happens when assets get retired or written off. The rest of your post is pure speculation. In simple terms, they need to find a process that minimises their engineering expenses (which they haven't done short of cutting personnel). They have to add expensive flexibility to their current facilities (which they are doing slowly), they have to cut variable cost while maintaining customer features (which they generally haven't done in existing platforms), and they have to improve their structural position (union wages, healthcare, etc.). The other side of the equation is that while making all these cuts, they need to DRAMATICALLY increase their products into the market. In my mind, there has not been enough progress in this arena and they will likely continue to lose market share. They are fighting the demographic curve that shows Ford customers gradually aging compared with competition. This is the kiss of death to any car company and for Ford, they risk becoming another "Oldsmobile".

 

 

Just as a side note, Mr CPA, this is an example of selling a non-core asset:

 

http://yahoo.reuters.com/news/articlehybri...News&rpc=44

 

Ford IS getting cash from a deal like this. He wasn't talking about sales of Wixom or Atlanta, which is CORE business.

 

How exactly did you derive a capital spending assumption from the depreciation figure? Ford has a ridiculously diverse asset base, when you consider all the different depreciation classes, its hard to nail down an exact figure, since we don't know where Ford's assets are on their depreciation schedules. Besides... it pretty clearly lists cash flow from capital expenditures in the cash flow statement.

 

Ford took a 16 billion dollar hit last year in depreciation. They also borrowed 15 billion, and lost 23 billion on investments. The last figure is irregular compared to prior cash flow statements. So, once you factor back in that non-cash "loss" on the balance sheet for depreciation, and you don't expect Ford to lose another 23 billion on investments this year, Ford isn't really in THAT bad shape.