The cumulative compensation for the six top executives at Ford Motor Co. — $70 million — exceeded the automaker’s annual net income of $47 million in 2019, a year that included a botched Ford Explorer launch and billions in warranty costs.
On Feb. 4, when reporting that annual profits plunged from $3.7 billion one year earlier, Chief Financial Officer Tim Stone characterized the situation as “not OK.”
Now, Ford faces a whole new set of financial and production issues since shuttering in late March because of COVID-19 safety concerns: In addition to getting plants running again, Ford must try and determine when to launch its high-profile Ford Bronco as well as the much-anticipated new F-150, both scheduled for 2020 releases.
Details could be revealed when the company releases first quarter earnings Tuesday.
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Cash is the key to survival during these uncertain times for any manufacturer, especially automakers. Ford spokesman T.R. Reid said these are the steps Ford has taken:
- On March 19, Ford notified lenders it would be borrowing a total of more than $15 billion against two existing lines of credit.
- On April 13, Ford announced its preliminary first quarter results, saying the dividend would be suspended, the company had $30 billion in cash on its balance sheet as of April 9 and the company believed it had sufficient cash to last through at least the end of September without restarting production or taking additional financing actions.
- On April 17, Ford issued $8 billion in bonds to further increase financial flexibility.
The company’s credit rating was downgraded in March, which has the same negative effect on a business as it does on an individual with bad credit: Getting capital can be hard.
Still, corporate debt investors who purchased the bonds expressed enthusiasm, Reid noted.
“We believe Ford’s going to be around a good long time,” he said. “We’re committed to responsibly restoring ourselves to investment grade.”
On April 13, Ford put out a news release saying it planned to report a $600-million loss before taxes. Then April 17, Ford disclosed in a report filed with the Securities and Exchange Commission an estimated net loss of $2 billion for the months of January through March, attributed primarily to the pandemic-related production shutdown and sales loss.
General Motors and Fiat Chrysler Automobiles also closed factories, and all Detroit Three companies have taken actions to protect themselves from a cash crunch. Executives have said they’ll defer, freeze and cut their own salaries to help navigate the cash shortfall.
Still, Ford faces a daunting reality.
By contrast, GM reported a pretax profit of $3 billion in 2019, down from $3.2 billion just one year earlier despite a brutal 40-day UAW worker strike that shut down operations nationally.
Ford points out its disappointing profits included one-time pension and global restructuring costs. It also included $47 million paid to 2,666 owners of Ford Focus and Fiesta automobiles with defective transmissions who settled a class-action lawsuit with the company. Meanwhile, an estimated 2 million consumers have been notified that they’re entitled to financial relief from Ford so those costs will bleed into 2020.
The automaker’s net income in 2019, or profit after taxes and other charges, was $47 million, down from $3.7 billion in 2018 and $7.7 billion in 2017. Ford said in January its net income would be affected by a $2.2 billion charge related to pension obligations, calling it a bookkeeping adjustment.
“We fell short of our financial expectations and yours in 2019,” Hackett said Feb. 4 on an earnings call with investors. “What is particularly disappointing is the primary reason for that shortfall was our operational execution.”
Wall Street focuses on earning before interest or taxes — EBIT — which Ford reported as $6.4 billion in 2019, down from $7 billion in 2018 and $9.6 billion in 2017.
“We didn’t perform up to our expectations last year, everybody has made that clear,” Reid said. But even though the automaker is “required to report certain things, including net income,” earnings before interest or taxes is “more meaningful.”
Citing executive salaries and the $47 million net profit can be misleading because it doesn’t reflect the amount of money that the company actually generates, Reid said.
“There’s just too much stuff in the net that doesn’t speak to underlying performance of the business — global redesign, electric vehicles, AV spending. You don’t get that benefit now,” Reid said. “You get that back in future years. In the meantime, there’s nominal return.”
Global redesign alone, which was begun in July 2018, has an $11 billion price tag.
Yet it was during this “disappointing” period that Ford compensated its top executives with salary, incentive bonuses, stock and other perks that exceeded the company’s annual net profit, including paying two chief financial officers, according to documents filed with the SEC:
- CEO Jim Hackett: $17.36 million in 2019, slightly down from $17.75 million in 2018.
- Executive Chairman Bill Ford: $16.76 million, up from $13.83 million in 2018.
- Stone, who was hired April 15 and assumed his CFO role June 1: $8.32 million.
- CFO Bob Shanks, who was replaced by Stone: $8.32 million, down from $8.42 million in 2018 when he was the only CFO.
- Jim Farley, then-president, New Business and Technology and Strategy: $8.36 million, up from $5.86 million in 2018.
- Joe Hinrichs, then-president, Automotive: $11 million, up from $5.81 million.
“These compensation packages are baked-in formulas,” said John McElroy, longtime industry observer and “Autoline After Hours” host. “They’re still very well compensated for an absolutely abysmal year.”
Linking annual net profit to executive compensation is “dumb, no offense,” Reid said.
“Global redesign, which we control, which will payoff over time, together with the pension and other post-employment benefits, which is simply paper effect that fluctuates up or down over down — those two things alone reduced net income by nearly $6 billion.”
But things are so bad this year that Ford will not be giving shareholders their dividend in order to preserve cash. That is significant and notable for Ford investors.
“When you lower the water in the river, all the rocks get exposed,” said market analyst Jon Gabrielsen, who advises auto industry clients.
“Ford’s current financial quagmire, resulting in the need to draw down their credit lines a few weeks ago, and now even additional borrowing, is not the result of the COVID-19 lockdowns and shutdowns; this has been building for years,” Gabrielsen said.
“The current external environment merely exposed Ford’s ever weakening condition 12 to 18 months sooner. Indeed, Ford had negative cash flow of $8 billion in Q1 2020, yet the lockdowns and shutdowns were only for about two weeks out of the 13 weeks of the quarter.”
Watching the CEO
At this point, shareholders are watching CEO Hackett, who turned 65 April 22. He said when he took the job in May 2017 that he viewed it as a transition. And Farley, now chief operating officer, is widely considered the heir apparent.
Hackett, who retired from Steelcase as CEO, has received more than $52 million in compensation at Ford.
“Looking at executive pay in a single year can be misleading and misplaces the debate on an executive’s earnings versus long-range value creation,” said Marcus Hudson, executive director of the Calderone Advisory Group based in Birmingham, which advises suppliers in the automotive industry.
“The broader issue with Ford’s CEO compensation isn’t a single year, but rather the whole body of work,” he said. “CEO pay is an investment on which investors should expect a return; Ford has invested over $50 million into its CEO position since 2017 and the return, pre-COVID-19 drop has been minus 26%. While pay in a single year is debatable, a minus 26% return over three years is not.”
One major blow to Ford involved the cost of repairing the new Ford Explorer after it rolled off the assembly line in Chicago. The company had to ship thousands to Flat Rock, Michigan, by truck as workers desperately attempted to identify and fix a series of complicated problems. Some even required buy back from new customers.
“Clearly at Ford there is no correlation between executive compensation and overall company financial performance,” Gabrielsen said.
In addition to releasing earnings Tuesday afternoon, the company has announced that Farley and Stone will discuss first quarter earnings in a “fireside chat’ hosted by Bank of America equity analyst John Murphy and credit analyst Doug Carson Thursday afternoon.
Meanwhile, shareholder Angelo Mascaro of Arlington, Virginia, a retired economist who attended the University of Michigan, said his faith in Hackett has evaporated. “I own a Taurus and Ford stock and he’s killed both.”
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