By Mike Colias and Matt Grossman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (March 20, 2020).
Ford Motor Co. said Thursday it would shore up its balance sheet
by drawing on credit lines and suspending dividend payments, a
signal of the looming financial damage facing global auto makers as
the Covid-19 pandemic continues to depress sales and shut down
manufacturing lines.
The company also withdrew its guidance for 2020 issued in early
February, citing economic uncertainty, and plans to provide a new
outlook next month. Ford had forecast adjusted earnings per share
of 94 cents to $1.20.
The automobile giant told its lenders it would draw down the
entirety of two lines of credit -- $13.4 billion from a corporate
credit facility and $2 billion from a supplemental facility -- to
boost its cash position as it temporarily shuts down plants in
North America.
Ford also suspended its dividend for the first time since before
the financial crisis, a move aimed at improving financial
flexibility in the short term, it said. The dividend suspension
could save the company roughly $2.4 billion annually.
The economic fallout from the widening pandemic has prompted
auto analysts to scrutinize auto makers' balance sheets to assess
companies' preparedness for a severe drop in production.
Ford, the U.S.'s second largest car maker by sales, was already
wrestling with falling sales, troubles overseas and a slumping
stock price before the health crisis hit.
Chief Executive Jim Hackett had been fending off questions from
investors about the pace of his plan to reverse a yearslong profit
decline. Ford has missed Wall Street earnings forecasts in three of
the past five quarters, battering shares even before the recent
coronavirus-driven selloff. Some analysts in recent days have
questioned whether Ford would cut its dividend to preserve
cash.
Making cars is a capital-intensive, low-margin business; auto
makers typically carry global operating margins of less than 10%,
leaving car companies vulnerable to sharp economic downturns.
"While we obviously didn't foresee the coronavirus pandemic, we
have maintained a strong balance sheet and ample liquidity so that
we could weather economic uncertainty and continue to invest in our
future," Mr. Hackett said in a statement.
Ford last suspended its dividend in 2007, ahead of the last
financial crisis, during which it narrowly avoided bankruptcy. It
restored its dividend in 2012.
Ford's decision on Wednesday to temporarily close all its
factories in North America through at least March 30 will have an
immediate financial impact because car makers book revenue as soon
as they ship vehicles from the plant to the dealership.
The company relies on the North America market and its in-house
lending arm for virtually all of its global profit, having swung to
losses overseas. A protracted shutdown of its plants in the U.S.,
Canada and Mexico would severely dent its cash flow and operating
profit, analysts say. The company also has suspended some
production in Europe.
Ford is in the midst of an $11 billion multiyear restructuring
that has crimped its cash flow, which has already dwindled in
recent years.
As Ford's shares have dropped in recent years, its dividend
yield has climbed, rising to over 13% as of Thursday's close and
giving investors a reason to hold on to the stock. The Ford family,
which controls 40% of the voting shares through ownership of all of
its Class B stock, is also a big beneficiary of the dividend
payouts.
Company executives have said the dividend is being funded from
cash on the balance sheet, rather than cash flow, but had planned
to continue paying it.
"We like to return value to shareholders," Mr. Hackett said
during a conference call with analysts in February. "The dividend's
been a legendary value creator at Ford...I want to continue
that."
Ford shares fell 1% Thursday. This year the stock has fallen
52%.
Ford's balance sheet is in far better shape than it was heading
into the last downturn, when the then-cash-strapped auto maker
mortgaged factories, office buildings and even its iconic blue oval
trademark to provide a cash cushion to weather the recession. Last
year, Ford had $22 billion in cash and total liquidity of $35
billion, the company said.
Credit Suisse analyst Dan Levy said Thursday that Ford's
dividend cut helps to leave the auto maker with "likely ample
liquidity at moment." But he said the company is still at risk of
an investment downgrade, which would raise Ford's borrowing costs.
Moody's Investors Service cut Ford's rating to junk status last
year, though it still has investment-grade ratings from Standard
& Poor's and Fitch Ratings.
RBC Capital analyst Joseph Spak estimates Ford has the cushion
to last roughly 18 weeks without making vehicles in the U.S. "We
would expect other auto companies to also draw on facilities and
potentially suspend dividends," Mr. Spak wrote in an investor note
Thursday.
Ford's pretax profit and cash flow forecast outlined to
investors last month hadn't factored in the potential coronavirus
impact, yet it still disappointed Wall Street. The company had
expected pretax profit of $5.6 billion to $6.6 billion, compared
with $6.38 billion last year. It forecast adjusted free cash flow
of $2.4 billion to $3.4 billion, although some of that was expected
to be siphoned off to pay for restructuring in Europe and South
America.
Mr. Hackett said in February the company has redoubled its focus
on generating free cash flow, including tying it more closely to
executives' incentive plans. Ford on Thursday also released a plan
to relieve customers of payments on some new cars. For buyers of
2019 and 2020 model-year vehicles, the company said it would cancel
three months' worth of payments and defer three additional
months'.
Write to Mike Colias at Mike.Colias@wsj.com
(END) Dow Jones Newswires
March 20, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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