Negative cash flow from operating losses, working capital reductions and restructuring costs could exceed $8 billion in 2007, depending on the timing and extent of the accelerated hourly buyout program. Operating results in first-half 2007 (1H'07) should benefit from the realization of lower salaried and hourly workforce levels and the effects of the health care agreement with the UAW.
However, continued share losses, adverse mix issues, lower production and profitability in Ford's key pickup segment, the termination of Taurus production in Atlanta, and pricing pressures will lead to further revenue declines in 2007 that will offset cost reduction efforts.
The decline in construction activity has hurt deliveries of pickups, which are likely to feel further share and pricing pressures upon the introduction of GM's refreshed lineup and the opening of a new Toyota pickup plant. Production cuts will also exacerbate the deep financial stresses in the supply base, resulting in higher costs and risks of inefficiencies or supply disruptions. With continued restructuring through 2007, and a relatively sparse new product lineup, Ford's progress in reducing its cash drain will be largely dependent on the extent of cost reductions. As a result of restructuring costs, working capital outflows and operating losses, Fitch expects further negative cash flow in 2007.
Offsetting factors include strength in certain passenger car segments, and the reduced impact of further declines in mid-size and large SUV's given the severity of recent sales declines. Although the passenger car segment has not been a significant contributor to profitability, volume gains and a reduction in overall costs could make contributions from this segment more meaningful. Over the intermediate term, any reversal in commodity costs would benefit cash flow on a direct basis and through lower pass-throughs from suppliers. Quicker resolution of the ACH assets should also benefit operating results over the intermediate term. Fitch also remains concerned about the impact of talent drains that could result from the difficult working environment and reduced compensation levels across Ford's professional staff. On the manufacturing side, production inefficiencies or quality issues are a risk given the substantial change in the workforce composition over the next two years. Fitch also remains concerned about the financial strength of Ford's dealer network.
Over the longer term, reversing negative cash flows will require the cooperation of the UAW, before and after the opening of the contract in 2007. The rejection of the Chrysler health care agreement also brings into the question whether the historic pattern agreement between the UAW and the domestic manufacturers will hold, given the different financial positions and requirements of the major domestic manufacturers. In addition to the recent health care agreement, it appears that a number of cost and productivity enhancement are taking place at the factory floor level through changes to work rules, job classifications, etc. Capacity utilization at Ford remains a large competitive cost disadvantage, and reaching industry-competitive levels remains a critical component of the restructuring plan. In particular, the addition of Alan Mulally could benefit Ford's ability to increase the flexibility of its manufacturing base, and to accelerate the design, engineering, manufacturing and refreshening process at Ford that currently lags the industry.
With the incremental restructuring costs in 2006, liquidity at Ford could drop below $20 billion at year-end 2006 (excluding any remaining in L/T VEBA that will likely be brought into short-term holdings). Although adequate to finance the restructuring program through 2007 at the current rate of revenue decline, it remains critical for Ford to retain a high degree of liquidity to finance domestic operation sand to keep the confidence of suppliers and customers. Asset sales could fortify Ford's liquidity position, but major disposition opportunities are limited and challenging.
