Ford's Booth Says Balance-Sheet Vigilance Remains Key

Despite posting record profits in the third quarter, Ford Motor isn't forgetting the lessons learned during the financial crisis and economic downturn. And the most important of those lessons is the key role of liquidity, and the need to have liquidity in place before the company needs it, Ford CFO Lewis Booth told Treasury & Risk magazine's Alexander Hamilton Best Practices Summit in New York City.

In December 2006, Ford put in place a financing totaling $23.5 billion. Booth credits that cash with helping the auto company negotiate the financial crisis without any government assistance, unlike the other big U.S. auto companies, General Motors and Chrysler.

"That raise of liquidity back in 2006 is the big difference between where we find ourselves and where some of our competitors find themselves," Booth said.

"We did it at just the right time," he added. "If you don't have [liquidity] before you need it, it won't be there."

Earlier this week, Ford announced profits of $1.69 billion for the third quarter, up from $997 million during the same period last year.

Booth recollected in his address that after auto sales tested volume highs in 2006, commodity and oil prices jumped toward the end of 2007. And then in 2008 the credit crisis erupted.

Seeing clouds on the horizon, Ford management had already developed and begun implementing an aggressive restructuring plan that included significantly changing the mix of its products by focusing on developing smaller vehicles. The turbulent times ahead, however, would likely have halted that effort had treasury not had the foresight to arrange that $23.5 billion in financing in 2006.

To protect that liquidity, Ford drew down the final $10 billion of that bank credit in January 2009.

"We wanted to make sure a lack of liquidity didn't stop us from making the fundamental changes we needed to our business model," Booth said during his address, which focused on Ford Motor and excluded the finance division and the sale earlier in the year of Volvo.

Including that financing, which Booth described as the "largest home improvement loan in the world," Ford's liquidity topped $46 billion by the end of 2006. In 2008, even though the company posted a profit in the first quarter, cash flows through the rest of the year fell through the floor, leaving Ford with liquidity of $23.7 billion by year-end. Part of that drop stemmed from a loss of a revolving credit line provided by Lehman Brothers, which went bankrupt in fall 2008.

Nevertheless, putting into place the massive bank loan allowed Ford to avoid the managed bankruptcy fate of General Motors and Chrysler. Just as important, Ford was able to continue making significant progress on its restructuring goals.

For example, said Booth, the Ford Fiestas manufactured around the world shared few parts. "The South America Fiesta and the Europe/Asia Pacific Fiesta shared only one part," Booth said, adding, "When we recently launched the new Fiesta, they will have 65% parts commonality around the world." The new Ford Focus, coming out at year-end, he said, will have 80% of its parts in common in regions around the world.

For treasury, said Booth, the focus has been continuing to put the company's balance sheet in order. Debt pay-downs have dropped the company's overall debt to $26.4 billion as of Sept. 30, from $36.6 billion at the start of the year.

"That saves about $800 million a year" in interest payments, Booth said, noting that amount could fund a new car development program.

Ford had $23.8 billion in cash Sept. 30, up from $21.9 billion at the end of the second quarter.

Booth noted several treasury and risk lessons learned from the tumultuous previous few years, including establishing liquidity sources in preparation for crisis, instead of after one occurs, and treasury officials informing board members about potential funding needs in the future. "We found we could get approval almost instantaneously from the board," he said.

Booth noted the phenomenal growth in demand for cars in the Asia-Pacific region, and especially China, where Ford's presence remains small. As Ford "moves out of survival mode," it is looking to accelerate growth in that region, Booth said.

Global U.S. companies today are anxiously waiting to see how regulations stemming from the Dodd-Frank financial reform statute play out, including rules that may impact the car company's ability to hedge balance-sheet volatility stemming from changing exchange rates and commodity prices. Booth said after his address that regulators are still early on the rule-making process and "there's a lot still to define. But we're looking very closely at what happens."

Comments