Ford's Gleaming Before-and-After Picture

Forget over-the-top reality TV shows and hitting up Vimeo for cool time-lapse videos. If you want to see a true extreme makeover, take a look at the difference between Ford's  (NYSE: F  ) balance sheet at the end of 2008, versus the just-ended fiscal 2013 year.

Shortly after coming on board as CEO in 2006, Alan Mulally launched the "One Ford" plan, a clearly stated, four-point corporate strategy. One of the goals of this still-current plan is for Ford to "Finance our plan and improve our balance sheet." This commitment is fascinating, as so few corporations seem to reference their balance sheets when discussing business strategy. At the time the plan was launched, Ford truly needed to face its overextended debt load and lack of resources on hand to finance sustainable growth. 

Let's review the areas of notable change in Ford's resources between 2008 and the present. Unless otherwise stated, we'll focus primarily on Ford's automotive balance sheet -- the portion of the balance sheet that does not include Ford's financial services arm.

Attacking large liabilities and long-term debt
In 2007, Ford began an arduous process to reduce both its mammoth retirement liabilities and its long-term debt. It established and funded a Voluntary Employee Beneficiary Association (VEBA), the result of negotiations with its workforce, which transferred some retirement liabilities off Ford's books. Ford also issued billions of dollars of common stock between 2008 and 2013 to convert and restructure its long-term debt load. The company has also used operating cash flow to pay down debt and reduce the associated interest expense. The following table shows the difference in six years between these liability categories: 

Ford Long-Term Debt and Retirement Liabilities 12/31/2008 12/31/2013
Long-Term Debt, Including Current Portion $25.80 $15.70
Pension Obligations $11.91 $9.60
Other Postretirement Employee Benefits (OPEB)

$16.23

$5.90
Total $53.94 $31.20

 Dollar figures in billions. Source: SEC filings.

There's nothing wrong with keeping cash in the bank
What's Ford done with the profits it's generated since 2008? At least $9.4 billion of those profits have appeared on the automotive balance sheet as a combination of cash and marketable securities. The company now keeps just under $5.0 billion in cash on hand, with another $20.1 billion invested in marketable securities. This is a 60% increase in cash and securities from the $15.7 billion totals the company presented on its books at the end of 2008. Building up healthy cash balances again will serve Ford handsomely, as it gives the company more flexibility to pursue small acquisitions, as well as invest in product innovation.

Detail of Ford logo courtesy Dominic Alves under Creative Commons License. The Ford logo was famously collateralized under the company's huge borrowings in the mid-2000s, and was finally released from collateral liens in 2012.

Optimizing Inventory
Ford's inventory line item is one of the places where the company's progress really gets illuminated. Inventory at 12/31/2013 was recorded at $7.7 billion, nearly $1 billion less than the amount of automotive inventory shown at 12/31/2008. Sales climbed during the period, and Ford's automotive revenue is now about $10 billion more than 2008 levels (at $139.3 billion for the year just ended), so you would expect higher inventory on the balance sheet with increased revenue, correct?

The easy answer is yes, but by tying production as closely as possible to actual demand, a savvy manufacturer can avoid tying up excessive amounts of resources in raw materials and finished goods. Ford has made a practice of building to demand levels rather than churning out finished vehicles to place ad hoc with dealers. Thus, the company is turning its annual inventory about 15% faster than in 2008, and it's also managing the inputs of production more efficiently. While Ford is on track to reduce its global vehicle platforms from 15 to nine by 2016, the company actually produced 85% of global vehicle volume on just nine core platforms last year, so for all practical purposes, the automaker is already at its platform goal.

If there's one place to be skeptical of Ford's balance sheet, which is related to inventory, it's Ford's automotive payables, which were 1.7 times inventory in 2008, but have expanded to 2.3 times inventory at the end of 2013. The rise in payables is partially explained by the fact that Ford's trade payables tend to balloon at year-end, during December plant shutdowns, when production halts, but supplier costs continue to accrue. But higher average AP balances indicate some lengthening of days payable outstanding. This is a recent practice common among Fortune 500 companies: By shifting supplier payments back by even a few days, companies can marginally improve cash flow.

Deferred tax assets are a finance team's best friend
In certain situations, utter failure can result in balance sheet strength. This occurs when a company with steep losses carries forward net operating losses and tax credits, as Ford has done from its years in the red in the early and mid 2000s. As a result, Ford now has a net tax-deferred asset of $12.7 billion on its consolidated balance sheet. Out of this number, $8.0 billion derives from tax losses and credits that the company will be able to utilize against taxable income in the coming years. While Ford will still record income tax expense on its books, the actual cash paid to Uncle Sam for taxes should be quite low for at least the next couple of years, if not further, depending on Ford's profitability.

Shareholder equity is a great way to keep score on a balance sheet's progress
Ultimately, how do you measure if a company is managing its balance sheet well? If the company is profitable, over time, you will see a clear correlation between increased assets and a reduction of liabilities on the other side of the ledger. After all, the basic equation that governs the balance sheet is not any different from when you or I present a personal financial statement to a bank, to get a car loan or mortgage. Simply expressed,

Assets - Liabilities = Equity

A well-run company that generates profit will place a priority on converting those profits to cash. With cash, it will reduce non-productive liabilities, increase capital investment, and invest a prudent amount of  the remainder wisely in marketable securities. At the end of each year, the balance sheet position of any company is a snapshot of that organization's fiscal health, and a healthier complexion should be reflected in the Shareholder's Equity account.

In 2008, Ford's total (consolidated) Shareholder's Equity was plunged so deeply underwater that financial analysts had to don diving gear just to find it, at negative $14.5 billion. Six short years later, equity is a positive $26.4 billion. Factor out $10.5 billion of common stock issued for debt conversions and restructuring, and you'll still find a $30.4 billion positive swing. That's an extreme makeover that veteran shareholders can surely appreciate.

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Read/Post Comments (8) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 15, 2014, at 7:47 PM, funfundvierzig wrote:

    If the highly talented Alan Mullaly had joined and commanded the DuPont Company in 2006 going forward, this now severely shrunken and shrinking conglomerate might have been salvaged from its current state of identity confusion and troubled decline. …funfun..

  • Report this Comment On March 15, 2014, at 7:54 PM, colepike wrote:

    all well and good but the quality problems that actually caused the big 3 to croak are still there. if you want a car to last and perform without sitting in the repair shop buy japan. as usual the American car companies are about cash not quality.. they sell thru excellent advertising.. someday America will wake up but I have given up hope that it will come before we totally implode.

    C.

  • Report this Comment On March 15, 2014, at 10:52 PM, TMFfinosus wrote:

    funfundvierzig,

    Alan Mullaly is indeed a talented CEO, one of the best. On DD, it seems to me that the company finally seems to have some momentum over the last 4 quarters.

    colepike,

    You bring up a question that can be endlessly debated. Even the Japanese carmakers seem to be off their game quality-wise over the last few years (in my opinion), most notably Toyota, with its surprising recall problems. I do think Ford has made noticeable progress with its automobile quality.

    Thanks for the comments!

    Asit

  • Report this Comment On March 16, 2014, at 10:28 AM, Mapleview wrote:

    Why has their stock dropped recently from $18 to $15 per share?

    What do you expect it to be at the end of the year?

  • Report this Comment On March 16, 2014, at 4:33 PM, 48ozhalfgallons wrote:

    I've enjoyed every Ford auto and truck I've ever owned...... most dependable and least cost to maintain of all other makes including Japanese I've owned, repaired and disposed of. All my Fords drove over 200k without issues. GM another story.

    A couple of Mercedes', Audis, and Bimmers on my block.... always being asked to give rides to repair shops for those owners. $2800 for a clutch in an Audi !! I bought an old F100 for less than that without issues other than 250,000 miles on the odometer.

    So, does anyone believe Ford's success has anything to do with product?

  • Report this Comment On March 16, 2014, at 7:05 PM, TMFfinosus wrote:

    Hi Mapleview,

    I think that although European operations are improving, they are still a drag on the stock. As for end of the year, I personally think the stock will recover to the $17/$18 level. If the world economy continues to improve, it could move a little beyond those levels. Hard to see too much downside from here given Ford's conservative valuation. Thanks for asking!

    48ozhalfgallons,

    I had a used Volvo station wagon many moons ago, built like a tank. Really loved that vehicle, but man, repairs were not cheap!

    Best,

    Asit

  • Report this Comment On March 16, 2014, at 10:28 PM, funfundvierzig wrote:

    TMFfinosus,

    In the past 16 years, DuPont has had only two leaders, current Chieftess Ellen J. Kulllman and her mentor and predecessor, Chad O. Holliday, Jr.

    In our opinion, as long as the same inbred and isolated bosses and their same questionably competent under staffers continue to run this unwieldy conglomerate, DuPont will continue to shrink and stagnate.

    …funfun..

  • Report this Comment On March 19, 2014, at 4:19 PM, LorieJ wrote:

    I have been really impressed with the build and finish quality of Ford's vehicles of late, and really enjoy driving mine. I expect that their stock will start rising again as the economy improves- the sales of their F-150 trucks are growing, which is good.

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