Ford to Cut Debt by $4B in Cash Payments
Alan Mulally, chief executive officer of Ford Motor Co. Photographer: Bradley C. Bower/Bloomberg
Ford Motor Co. will pay about $3.8 billion in cash to a union health-care fund, a sign the automaker is confident that Chief Executive Officer Alan Mulally’s focus on the namesake brand will produce profits.
Ford was required to pay $859 million to the United Auto Workers Retiree Medical Benefits Trust by June 30 to fund benefits for former hourly workers. Ford paid cash even though it had the option to pay as much as $610 million in stock under an agreement reached with the union last year. It also prepaid $2.9 billion toward its health-care obligations, it said today.
Ford defied the expectations of analysts who had said the automaker would pay a portion of its obligation in stock because the second-largest U.S. automaker’s shares have been trading down since closing at a 52-week high of $14.46 on April 26. The chief of Ford’s Americas unit also warned analysts the U.S. auto market had “flat-lined” since last year’s third quarter as consumers avoided making big purchases.
“There was speculation that they would pay with equity; that would have been a bit alarming,” said Colin Langan, an analyst with UBS Securities. “With all of the risk out there, it’s a good sign that they feel they can pay with cash.”
Ford rose 50 cents to $10.38 at 2:08 p.m. in New York Stock Exchange composite trading, reversing a five trading-day decline.
Ford said it will pay $3.8 billion in cash to the UAW trust, dropping its balance owed to the fund to $3.6 billion. The Dearborn, Michigan-based automaker said it is also paying $255 million in deferred dividends to another trust held by other investors.
Debt Reduction
Added with other debt payments made in the second quarter, Ford said it has reduced debt by $7 billion in the quarter, reducing annual interest payments by $470 million. At the end of the first quarter, Ford had $34 billion in debt. This should reduce Ford’s debt to as low as $27 billion.
“Our One Ford plan to profitably grow our business is working, and we are increasingly confident about our future,” Mulally said in a statement. “We expect to continue to improve our balance sheet as we deliver on our plan.”
Ford used cash for its first payment of $610 million in December and pre-paid an additional $500 million after its shares had a fourfold annual gain last year. The company said at the time that it paid in cash because the stock’s volume- weighted average share price in the period before the payment, which determines the price of the stock it issues to the trust, was $9.13, less than the $10 the stock closed at on Dec. 31.
The stock closed yesterday at $9.88, 13 percent below the average of about $11.35 in the 30 trading days ending June 28. The company has 3.34 billion shares outstanding.
Cash Surprise
Kristin Dziczek, director of the labor industry group at the Center for Automotive Research in Ann Arbor, Michigan, said she had expected Ford to make payments to the union’s trust in stock, which would have preserved cash while producing minimal dilution for shareholders.
“It was a big surprise,” she said. “This is a move to try to get on equal footing with other auto companies. Ford still has a dirty balance sheet.”
Ford has $22.3 billion in automotive gross cash after paying $3 billion on its revolving credit line in April, said Mark Fields, the company’s president of the Americas. Ford also has $31.3 billion in automotive debt, higher than rivals such as General Motors Co., the largest U.S. automaker, he said.
Of the $4 billion, $1.3 billion will come from Ford Credit, reducing the drain on automotive cash. In the first quarter, Ford earned $2.1 billion in cash flow from operations.
2006 Borrowing
Ford borrowed $23 billion in late 2006, giving it a cash cushion that helped it withstand losses and avoid the bankruptcies that befell its U.S. rivals last year. The company was able to develop new models as the U.S. auto market fell to its lowest level in 27 years in 2009. Ford has said the debt load now puts it at a disadvantage against GM and Chrysler, which had their obligations cut in bankruptcy.
The UAW, GM, Ford and the predecessor of Chrysler Group LLC agreed in 2007 to create retiree health-care trusts to remove those liabilities from their labor costs. Prior to the payments Ford has made, the company owed $13.2 billion to the union-run health-care trust, also known as a Voluntary Employee Beneficiary Association, or VEBA. Ford has annual payments scheduled through June 2022, according to company filings.
Ford’s U.S. sales have risen 30.3 percent this year, almost twice as much the overall gain in industry sales. Chief Executive Officer Alan Mulally expanded the namesake brand and improved quality, helping the company earn $2.7 billion last year after three years of losses. Mulally has said the automaker will be “solidly profitable” this year.
To contact the reporters on this story: David Welch in Southfield, Michigan, at dwelch12@bloomberg.net: Keith Naughton in Detroit at Knaughton3@bloomberg.net.
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