Tuesday's third-quarter results from Ford (NYSE: F) contained quite a bit of good news for investors to chew on, not least of which was a 70% year-over-year increase in profits that made Ford "the world's most profitable automaker," according to Bloomberg.
But in my mind, at least, one key statement in Tuesday's batch of good news really stood out: The company expects its cash on hand to be "about equal" to its debt by the end of the year.
Not next year, not sometime in 2013, but this year.
For a company widely thought to have barely avoided bankruptcy by taking on a crushing debt load just a few years ago, that's a remarkable statement.
Ford's focus isn't just about product
Ford's turnaround has been spectacular, but any mention of the company's successes is inevitably tempered by a note about that debt load. While General Motors and Chrysler were able to shed debt through bankruptcies, and competitors such as Toyota (NYSE: TM) glide along with investment-grade credit ratings, some say that Ford's debt -- which exceeded $30 billion at its peak -- has held the company back.
There's surely some truth to that line of thinking. Ford has brought forth an impressive product renaissance, but imagine how much more impressive that renaissance would have been had the company had another $10 billion or so to spend. Instead, the company has (to its credit) spent $10.8 billion on reducing that debt load since the end of 2009, in the process saving itself about $800 million a year in interest payments alone. That's enough to develop an all-new model from the ground up, every year.
Ford's debt-reduction efforts are believed to be about a year ahead of the already aggressive schedule included in its turnaround plan. The debt load stood at $26.4 billion as of the end of September, and the company is set to bring it down further:
- Paying down the credit line. On Sept. 9, Ford paid off $2 billion of the balance on its credit line, arranged by JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), and Citigroup (NYSE: C) as part of a comprehensive financing plan in 2006. In a statement, the company said the payment "lowers Ford's interest expense without impacting its overall liquidity." Translation: Ford still has plenty of cash. CFO Lewis Booth reported that the company currently has $25.9 billion. That's the fifth-largest cash reserve of any U.S. company, according to Moody's.
- No more VEBA. Ford said it would pay off its last remaining obligation to the UAW's health-care trust, established as part of a landmark labor agreement in 2007. The $3.6 billion payment, which the company said it would pay in cash by the end of this past week, will save $330 million a year in interest payments. Not only is that savings enough to fund about half of a new vehicle program every year, but it also removes an expensive obligation from the company's balance sheet years ahead of schedule.
- Tender loving offers. On Friday, Ford notified the SEC that it's making tender offers to holders of two series of convertible bonds. The bonds are convertible to stock at the holders' option, and Ford is offering a cash inducement to entice holders to convert by Nov. 23. These offers could take as much as $2.6 billion of debt off Ford's balance sheet.
What's next for the Blue Oval
Ford executives said on Tuesday that they'll announce further debt-reduction plans when the company presents its fourth-quarter results early next year. Booth has been been clear that one of the company's chief goals is to return to an investment-grade credit rating -- a point CEO Alan Mulally also emphasized when I spoke with him a few weeks ago.
A return to investment grade will be a symbolic milestone, but more to the point, it will reduce Ford's future borrowing costs significantly. That, in turn, will free up hundreds of millions more for product development and efforts to expand more aggressively in markets such as China and India.
Analysts have predicted that Ford, which hasn't paid a dividend since 2006, might resume dividend payments in 2012. I suspect that won't happen until (and unless) the debt is reduced to the point where it's a minor issue, but the possibility seems much more reasonable now than it did even a few months ago. For the world's most profitable automaker, suddenly all sorts of things seem possible.
