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Ford flexes muscle with a $4-billion message


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Ford flexes muscle with a $4-billion message

It gains 20 cents in tough time on Wall St.



Ford, which watched its shares dive under $10 apiece earlier this week, sent a bold message to Wall Street on Wednesday that it's thriving despite the still-weak economy by paying off a big chunk of its debt earlier than required.

The Dearborn automaker was required to pay the UAW's retiree trust fund $860 million Wednesday -- and could have used stock for a big part of the payment. Instead, Ford paid $3.8 billion. In cash.

Ford also paid off another $255 million in debt, bringing its combined debt and pension obligations to about $38 billion. That's below General Motors' post-bankruptcy debt and underfunded pension, which totals $42 billion, Brian Johnson, an auto analyst with Barclays Capital, observed in a note to investors Wednesday. Ford's move, he said, "shows confidence in cash."

Under CEO Alan Mulally, Ford has made impressive progress in its turnaround, reporting a $2.1-billion profit during the first quarter.

Ford's U.S. market share increased 1.7% through May as consumers have embraced new products, such as the redesigned, highly profitable Super Duty pickup. A new Fiesta subcompact is reaching dealerships now, and Ford's momentum shows no signs of slowing.

But Ford's progress hasn't been reflected in the stock price lately. It's been dropping since late April. However, Ford's big, early debt payment might begin to change that.

"Paying debt off early is the way to go," said Sean McAlinden, economist with the Center for Automotive Research in Ann Arbor.

Paying on debt boosts Ford stock

Ford's stock rose 20 cents or 2% to close at $10.08 per share Wednesday after the company announced it had used cash to pay off more than $4 billion in debt.

The payments cut Ford's total debt -- viewed as a hindrance to the company's full financial recovery -- from about $31 billion to about $27 billion.

Mirko Mikelic, portfolio manager at Fifth Third Asset Management in Grand Rapids, said the market's reaction to Ford's payment was muted by the closeout of a bad quarter on Wall Street.

The Standard & Poor's 500 index and Dow Jones Industrial Average both lost more than 10% in the quarter and are at their lows for 2010.

"The repayment shows that Ford's progress is accelerating," Mikelic said. "But the economic data continues to be poor."

Ford's stock has declined by more than 30% since late April even though it reported a profit of $2.1 billion for the first quarter.

Analysts said Ford's aggressive debt payment was designed to send a message that Ford's turnaround is on track.

"They must be achieving significant positive cash flow this quarter," said McAlinden. "That's what they are telling the world."

Still, Ford Treasurer Neil Schloss said the move was more about prudent fiscal management.

"The bottom line is we feel comfortable with our plan and the progress we are making," Schloss said. "That gives us confidence that we can take the cash generated from our business and to use to improve our balance sheet faster than folks anticipated."

Ford used $2.65 billion of its own money and $1.3 billion from its subsidiary, auto loan and finance arm Ford Motor Credit, to pay $3.8 billion to the UAW trust and to retire $255 million in other securities.

Ford has three years to pay off the remaining $3.6 billion it owes the UAW Retiree Medical Benefits Trust that was created as the result of labor talks with the union in 2007.

Schloss declined to say how much cash Ford has on hand. Ford plans to report the figure with its second-quarter financial results later this month.

Ford ended the first quarter with $25.3 billion in cash.

At the time, Ford expected to generate cash for the full year -- a reversal from the first quarter of 2009 when Ford burned through $3.7 billion in cash and fully tapped its credit.

Ford is the only domestic automaker to survive the worst recession in decades without emergency federal loans because it borrowed $23 billion in 2006.

Ford President and CEO Alan Mulally has said debt reduction is a priority.

Schloss said Wednesday that goal won't change. "The reality is ....we have too much debt, and we need to reduce it," he said.

Today, automakers are scheduled to report disappointing car and truck sales for June, but Jesse Toprak, an industry analyst for vehicle pricing Web site TrueCar.com, said he expects Ford's market share to increase.

Toprak expects Ford will overtake Toyota and become the second-largest automaker in the U.S. this year.

"It really is a phenomenal turnaround," Toprak said. "It's going to be one of the worst years on record for auto sales and Ford is still making advances in profitability and in its lineup.

"Just imagine how well Ford might do when we are selling 14 million cars again" in the U.S., Toprak said.



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