Interesting note at the bottom that mentions Mustang sales down 9% this year.
http://aol.businessweek.com/technolo...525_098532.htm

MAY 25, 2006

News & Analysis
By David Kiley


Ford: Fearful of Cash Crunch?
Ford Motor Credit refinances its debt at the highest rate it has ever paid to conserve cash with the threat of tough times ahead


Ford Motor (F) is conserving cash to brace for what could be a tough 18 months ahead. Evidence is the auto maker's offer to investors on May 24 to replace Ford Motor Credit bonds maturing this October with bonds that don't come due until 2010 and 2011 -- at the highest rate of interest Ford has ever paid. Advertisement

Under terms of the offer, which is being made privately, holders of about $2.5 billion in bonds with coupons as low as 4.95%, coming due this fall, can swap them for bonds that pay as much as 10.6%. While small in the whole scheme of Ford Motor Credit's debt -- the finance unit has $21 billion in bonds coming due this year -- it shows that Ford is in sore shape: It is refinancing debt that it took on when its credit rating was a lot stronger than today and replacing it with much more expensive capital. The deal, which will allow Ford to hold on to more of its cash this year, will cost the finance unit an estimated $90 million per year.

Ford Motor has about $21 billion in cash, according to its first-quarter financial statement. And the finance unit had $16.6 billion in cash at the end of March. So, why does Ford need to conserve cash? Because the auto maker is in the midst of its second restructuring in five years.

IDLE SPENDING. The current plan calls for lowering fixed costs, such as factory capacity, employee head count, and labor to bring those expenses in line with Ford's declining market share. It is going to cost Ford big pots of cash to close unneeded plants and buy out employees. And it is also facing the possibility of a cash- and profit-eating labor strike in the fall of 2007 when it goes to the United Auto Workers (UAW) looking for deep cuts in its blue-collar workforce.

Ford's borrowing costs for both the company and the finance unit have risen in the last two years as its credit ratings have worsened. Ford lost its investment-grade credit rating a year ago and currently has $121 billion of junk-rated debt.

By some estimates, Ford is now utilizing only about 75% of its North American manufacturing capacity. Any time an auto maker falls below 80-85% utilization, it tends to burn much more cash than it takes in from auto sales and financing because workers have to get paid whether they are making vehicles or not, and machinery does not pay for itself if it's not assembling cars and trucks.

PREPARING FOR WORSE. Ford has announced a plan to close seven North American assembly plants, plus an additional seven parts and components facilities, cutting its manufacturing capacity by about 25%. But it will take five years for those closings to occur as Ford's market share dwindles and it is forced to spend more money to discount its big, and slow-selling, sport-utility vehicles.

"As difficult as it is now for Ford, they have to be prepared for worse times ahead," says John Casesa of Casesa Strategic Advisers, a New York firm specializing in auto-industry investments, including valuations of dealerships.

Ford plans to spend $250 million this year to cover the cost of shedding unionized workers and $220 million to close plants. While Ford has "plenty of liquidity," according to Casesa, through its cash and credit lines, the disaster looming in front of Ford is the possibility of a UAW strike in the fall of 2007 if the union decides to fight Ford on the number of plants it wants to close.

EXPENSIVE WORRIES. When Ford announced the plan last January, the union said: "The restructuring plan announced this morning by Ford is extremely disappointing and devastating news for the many thousands of hardworking men and women who have devoted their working lives to Ford. The impacted hourly and salaried workers find themselves facing uncertain futures because of senior management's failure to halt Ford's sliding market share." A strike at an already weakened Ford, analysts agree, could be devastating.

It might not be as devastating, but it would prolong the auto maker's turnaround plan, should the company have to back off and keep open some plants it says it doesn't need. If that becomes the case, Ford will need bigger cash hoards to either keep them open or pay higher buyout packages to workers. The bond swap at Ford Motor Credit affects the finance unit's cash and debt, not the parent company's. But the finance unit is a wholly owned subsidiary of the parent.

A Ford spokesman said the company would not comment on its cash requirements or the private bond-swap offering. But concern over short-term cash is the only reason a company delays paying off bonds at such dramatically higher interest rates.

Ford President Mark Fields, one of the architects of the current turnaround plan, says Ford's new product launches in the next three years will be key to arresting Ford's market-share slide, which has a direct impact on how the credit-rating agencies assess the auto maker's prospects. But few of the vehicles Ford has previewed for Wall Street and the media in the last six months have met with standing ovations. Operating under strained financial conditions and substantial management churn in the last five years has hobbled Ford's product development and design.

BROAD SALES DROP. Fields's goal was to stop market-share decline in 2006, but he has recently had to retreat from that because of the worse-than-expected effect of higher gas prices on Ford's SUV sales. Sales of Ford-branded cars and trucks are off about 4% this year, and its market share has dropped by more than half a percentage point through April.

Market shares of Jaguar and Volvo are also down, while Lincoln and Mercury market shares are flat. Sales of onetime juggernaut Ford Explorer are off 30%. The Expedition SUV, despite a redesign, is off 25%. Even sales of the Mustang, Ford's hot passenger car last year, are off almost 9% this year. The Ford brand's share of U.S. light-vehicle sales fell to 14.8% in April, compared with 15.7% a year earlier and 25.7% a decade ago, according to Autodata.

Ford shares closed on May 24 at $6.93, up 1.2%. Ford shares are trading 40% below their 52-week high.