Financing Questions Still Dog Ford

When a Goldman Sachs analyst questioned the true cost of aggressive financing plans at Ford (F Quote) and General Motors (GM Quote) last week, it was a man-bites-dog story: Rarely does Wall Street snap so deeply into the hind quarters of corporate America. But now one of those dogs, Ford, has bitten back.

In a filing with the Securities and Exchange Commission, Ford says that the Goldman report overestimated the impact on cash numbers of finance incentives, like 0% loans, that have substantially boosted consumer auto demand over the past year.

Even if that's so, however, Ford's case in its defense is lacking in details on some important questions, which could feed further distress on transparency-crazed Wall Street. Ford, already in investors' bad books because of lackluster sales and market share performance, rose a dime on Wednesday, to $11.

Keen

With the Big Three carmakers offering lots of sweet deals to goose sales, investors have been keen to understand the loans' costs and how they are reflected in financial statements. Last week's report by Goldman Sachs auto analyst Gary Lapidus brought the issue into sharp focus.

The report contended that if Ford did its books the same way as GM, its auto division would be showing much lower cash in hand and cash flows. Because they implied Ford's accounting was more aggressive than its peers', Lapidus' cash-related arguments weighed on Ford's stock and became a chattering point in the market.

Lapidus surmised that Ford's automotive cash at the end of 2001 would have been as much as $10 billion lower than the $22.5 billion stated on the balance sheet; operating cash flows would have been $1.5 billion lower.

Ford Credit, the finance division, offers the cheap loans, but it's actually Ford's auto division that bears the cost of them in its income statement. The auto unit also pays the cash equivalent of the incentives to Ford Credit. But unlike GM, which makes all the cash payments upfront, Ford makes them over the life of the loan.

Point of Debate

Here's where the parties part ways. Lapidus estimated the cash obligation that hasn't been paid at around $10 billion. But Ford, in its Tuesday SEC filing, says the obligation is "less than half" that amount.

What to think? Well, first off, Ford has effectively confirmed that the automotive cash is overstated -- to the tune of $5 billion, which is hardly small change. And given the limited information available, it's hard to see how the overstatement can be only $5 billion.

Lapidus put out another note Tuesday responding to Ford's filing. In it, the analyst says that because Ford auto made a $4 billion cash payment to Ford Credit last year, and loans have an estimated duration of two-and-a-half years, the liability could be in the range of $10 billion (2.5 times 4). But if the cash liability is only $5 billion, it could mean that there are other items in the $4 billion payment that aren't related to the financing subsidy.

One other possible explanation is that the cash payments are front-ended. If so, multiplying the $4 billion by 2.5 could overstate the liability, because the $4 billion could represent more than 40% of the total subsidy, which is what it would be if it were paid evenly over 2.5 years. In fact, in its filing, Ford said "the payments are front-loaded," but it did not link this fact to the size of the cash liability.

While Ford has expressly disputed Lapidus' numbers, it clearly needs to now explain in detail how it arrives at its $5 billion cash liability number.

Ford also said in its filing that its cash deferral method affects cash flows by an amount, that is "even smaller" than half. Lapidus' first report didn't state by what proportion they were impacted by the deferral method; it just stated that auto cash flows would have been $1.5 billion less in 2001, if Ford used the GM method.

Of course, on a consolidated, companywide basis, all these cash calculations are netted out. But, as Lapidus points out in his Tuesday report, the exercise is important because it means the auto division effectively has less spare cash from which it can pay a dividend over to Ford Credit to support its prodigious lending program.

Let the dogfight continue.