What Is Ford Worth?

Yesterday, we discussed “The Way Forward.” The bulk of those ways involved moving jobs to Mexico while closing U.S. plants and offering worker buyouts.

One of the options being considered is taking Ford private. USA TODAY is reporting, “Ford Motor Considers Going Private”:

“Ford Motor is considering taking the company private, a move that could give the ailing automaker time to restructure operations outside the glare of critics, a source with direct knowledge of the discussions said Wednesday.

“‘The family is willing to look at anything,’ said the source, who didn’t want to be identified, because the discussions are ongoing. ‘A lot of different scenarios are being gamed out.’

“With Ford’s shares trading around an anemic $7.76, going private could cost interested parties as little as $13.34 billion…

“‘The biggest benefit to taking it private is just not having to answer to all the external stakeholders they have to answer to today,’ said Kevin Reale, an analyst with AMR Research…

“CEO Bill Ford has been criticized for several incidents since taking the job in October 2001. In 2002, he said the automaker would make $7 billion in pretax income in 2006. In April 2005, three weeks after saying it would still meet its goals, it revoked its earnings guidance and said it would no longer meet the $7 billion target, shaking investor confidence.

“Ford’s shares have traded between $6.06-10.20 in the past 52 weeks, giving it a market capitalization of $14.5 billion, a quarter of smaller rival DaimlerChrysler’s market cap.

“‘The assets are tremendously undervalued,’ said David Cole of the Center for Automotive Research. A private equity firm could be eyeing a future share price of $20-40, he said.”

The assets are “undervalued”? Huh? On what basis? What about the liabilities?

Let’s take a look at Ford’s pension and medical obligations in its latest annual report:

Cash

Balance Sheet

Ford buried pension details even further than GM did. Pension assets are buried along with “Other Assets,” and pension liabilities are buried as part of “Other Liabilities,” with some explanations in Note 15. Unfortunately, Note 15 (not shown) is useless. Note 15 lumps things together in a fashion impossible to sort out. Note 23, however, refers back to the balance sheet, and contains everything needed to continue.

Let’s start with “Amounts Recognized.” The three columns with blue and green highlights below are “U.S. Plans,” “Non-U.S. Plans,” and “Health Care and Life Insurance,” respectively, all for the year ending 2005. The columns with no circles are for 2004.

Amounts Recognized on the Balance Sheet

We see that pension and medical assets reflected on the balance sheet total $6,898. We also see that pension and medical liabilities reflected on the balance sheet total $27,399.

To be honest, I had no idea what “Accumulated Other Comprehensive Income” is. I was told by someone obviously smarter than myself that “other comprehensive income” is a reduction in shareholders’ equity when a corporation needs to reflect more liability on its balance sheet when the plan funded status falls below a certain threshold. OCI acts as the balancing accounting entry to an increase in liability. Under the proposed FASB rule, we will continue to use OCI, but the adjustment will reflect the true funded position of these programs.

Got that? If not, don’t worry about it. Let’s proceed.

Pension Obligations

Pension obligations total $43,895 + $30,700 + $39,274 = $113,869.

Pension Assets

The fair value of assets total $41,857 + $21,927 + $6,497 = $70,281. The funded status is ($2,038) + ($8,773) + ($32,777) = negative $43,588. In other words, Ford’s pension and medical liabilities amount to NEGATIVE $43.588 billion.

Not to worry, that’s all reflected on the balance sheet, right? Well, not exactly. Pension and medical assets reflected on the balance sheet total $6,898. Pension and medical liabilities reflected on the balance sheet total $27,399.

Hmmm. It seems liabilities plus assets reflected on the balance sheet net out to $6,898 – $27,399 = negative $20,501.

So…

Ford is graciously claiming liabilities of $20,501 when they are really $43,588. In other words, Ford has underreported liabilities on its balance sheet by a mere $23.087 billion.

Let’s go one step forward. Shareholder equity is listed as $12,957. If we subtract underreported liabilities, Ford is worth $12,957 – $23,087 = minus $10,130.

On the basis of pension plan analysis alone, shareholder equity is a NEGATIVE $10.130 billion.

Please consider ongoing pension plan assumptions.

Pension Assumptions

Labor Costs

Remember that union workers will receive 90% of their base pay while on temporary layoff. In April, Ford said an undetermined number of workers would be placed on indefinite layoff in October, when the company plans to slow its production rate.

In August, Ford upped the number of production cuts for both the third and fourth quarters. “Ford to Cut Fourth-Quarter Production by 21%”:

“The automaker said it would cut North American production in the fourth quarter by 168,000 units and reduce third-quarter production by 20,000 vehicles.

“‘We know this decision will have a dramatic impact on our employees, as well as our suppliers,’ chief executive Bill Ford told employees, but said it was the ‘right call.’

“He said full details of the accelerated plan would be announced in September.”

Currently, Ford is paying its laid off employees 90% of their salary to go fishing.

Ford’s two biggest problems are unfunded medical liabilities and production cost differentials (union wages). Moving jobs to Mexico will reduce production costs, but do little to help unfunded pension and medical liabilities.

In a bankruptcy, however, those benefits would likely be flushed down the toilet. The Pension Benefit Guaranty Corp. does not guarantee medical benefits at all. The irony of the situation is that Ford is worth more coming out of bankruptcy (if it can dump those medical liabilities) than it is right now.

Bear in mind that I pretty much only discuss the liability side of the equation above. Perhaps some of the assets are undervalued, but I struggle to see which ones, especially as plants are closed in the U.S. and moved to Mexico. Is the land those plants sit on undervalued or overvalued on the asset sheet? Who wants an aging plant with potential EPA cleanup costs to boot? What about the impacts of a potential recession? Where is the pentup demand for autos? What about Ford’s dependence on trucks and SUVs?

Looking at “The Way Forward” yesterday and the balance sheet today, I struggle to see how Ford survives unless and until it gets rid of those liabilities via bankruptcy. If that is the plan by taking it private in some sort of leveraged buyout (and it very well could be), rest assured those who engineer that buyout will manage in some way to protect themselves, even as small investors see their stock head to zero.

Regards,

Mish
September 5, 2006