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Automakers Go Into Cash-Preserving Mode to Fight Coronavirus

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The COVID-19 pandemic has resulted in unprecedented challenges for the auto sector, thereby creating a demand shock as consumers’ confidence has dropped significantly. Hit by virus-led factory closures, auto companies have been issuing sweeping furloughs for the majority of the workers. As furloughs and layoffs are mounting, CEOs are resorting to pay cuts as part of their strategy to mitigate the impact of the virus crisis. With coronavirus concerns dimming earnings and sales prospects, carmakers are resorting to cost-containment initiatives and are drawing down their credit lines to preserve cash. Slashing executive pay, dividends and capex, along with imposing a hiring freeze are becoming commonplace. Let’s take a look at the actions taken by various auto firms to fight the coronavirus mayhem. 

Firms on a Cost-Cutting Spree, Tap Credit Lines to Maintain Liquidity

General Motors (GM - Free Report) has furloughed 6,500 salaried employees in the United States. The U.S. auto giant is slashing the paychecks of 69,000 salaried workers by 20%. Executives will bear deeper pay cuts on top of the unilateral 20% deferment, resulting in a total reduction of 30% for senior leadership and 25% for other executives. In a bid to boost cash reserve, General Motors intends to draw down about $16 billion from the existing credit lines. The borrowed funds will be in addition to the company’s current cash reserve, which it estimates in the range of $15-$16 billion as of the end of March. General Motors currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ford F also announced that its top 300 executives will defer 20-50% of their salaries for at least five months. Executive chairman Bill Ford has deferred his full salary for a minimum of five months. The company will freeze hiring for non-critical positions and would put off merit-based salary increases for the time being. To preserve cash, Ford has also suspended quarterly dividend of 15 cents per share. To maintain ample liquidity, the firm will draw $15.4 billion from two credit lines. It will borrow $13.4 billion under its corporate credit facility and an additional $2 billion under the supplemental credit facility. 

Meritor has also suspended its share repurchase program to bolster cash reserve. It would also be slashing the base salary of each of its named executive officers by 50-60%, and all employees in the United States and Canada by 40-50%.

The recreational vehicle maker, Winnebago WGO will undertake cost-saving measures including reductions for executives and the board, and postponement of certain capital expenses. The firm’s CEO will see salary cut by 25% for the remainder of fiscal 2020. Additionally, he will forgo his entire financial based annual incentive for the rest of fiscal 2020. Hiring freezes, reduction of capex and business expenses, as well as suspension of merit increases for salaried employees will prevail in the remainder of fiscal 2020.

Tenneco TEN intends to resort to cost-containment measures through unpaid furloughs, pay cuts of executive leadership, CEO and reduction in board retainer fees. Overall salary costs will be reduced at least 25% through furloughs and net pay cuts in the second quarter of 2020. While the CEO will not draw his salary during the period, executives will take 50% pay cuts. Post the second quarter, salary costs will be trimmed at least 10% from the original levels for the rest of the year. Capital expenditures in 2020 will be reduced to less than $400 million compared with the prior forecast of $610-$650 million.

Group 1 Automotive GPI has reduced corporate compensation until further notice to combat the crisis. While the firm’s CEO’s salary has been reduced by 50%, the president of U.S. and Brazilian operations will receive a pay cut of 35%. Salary of the senior vice president and the corporate vice president will be slashed by 20% and 15%, respectively. Other corporate and field support personnel will receive a pay cut of around 10%. The company is also putting efforts to trim U.S. marketing costs by more than 75%.

Lear is resorting to temporary cost-reduction measures to shore up the company’s balance sheet, as it braces for a period of revenue slump amid the virus mayhem. The auto parts supplier has suspended quarterly dividend and stock buybacks in this regard. Further, the company is drawing $1 billion from the $1.75-billion revolving credit facility.

Superior Industries SUP has fully drawn down its $160-million U.S. revolving credit line and €48 million on its €60-million European revolver. All executives and salaried employees will take a 20% cut in base salary, effective Apr 1 through May 31. Non-employee board members will forgo all cash compensation for the aforementioned period. While all discretionary spending has been suspended, working capital costs will be clipped substantially.

Autoliv has nixed its quarterly dividend scheduled for Jun 4 and suspended future dividends until further notice.The company’s executive officers and non-employee board members have agreed to minimize their pay to combat the crisis. While the executive officers have reduced their base salaries by 20% for second-quarter 2020, the non-employee board members have decreased their annual base retainer by 20% for the same period. The company also drew the remaining $600 million from the revolving credit facility of $1 billion. Notably, it had already drawn down $500 million on Mar 19.

Goodyear Tire & Rubber is also furloughing employees and slashing salaries. The tire company, which had announced the temporary closure of its factories through early April, has pushed back the resumption of operations. Management has decided to put an unspecified number of employees in the United States on leave through the end of June. While the firm’s CEO will be taking a 50% pay cut, other senior executives’ salaries will be reduced by 30%, with portions of those cuts as deferments. Other employees will be taking smaller salary reductions.

AutoNation AN is putting 7,000 employees on unpaid leaves, while trimming the salaries of top managers. Compensation reductions include 50% salary cuts for the executive director, CEO and president, 35% pay cut for executive vice presidents of the company, 30% for senior vice presidents and regional presidents, and 20% for the remaining corporate and regional employees. The largest U.S. auto dealership chain will delay more than $50 million capex through the second quarter and curtail advertising costs by around 50%, along with reducing discretionary expenses. AutoNation currently has $1.1 billion of liquidity, including more than $400 million of cash and about $700 million of availability under the revolving credit facility, which would be used to deal with the downturn caused by shutdowns in production due to the pandemic-led crisis.

Asbury Automotive Group, one of the largest U.S. automotive retailers, is furloughing 2,300 workers and slashing executive pays amid the pandemic.

Penske Automotive has enforced a variety of measures, including a company-wide hiring freeze, substantial cost cuts, staffing-level adjustments, postponement of $150 million in capex, and negotiated rent deferrals at different locations for up to 90 days, to counter the pandemic-led crisis. Additionally, executive and management compensation has been drastically slashed, including a 100% pay cut for the CEO and president during the crisis. The board of directors has also suspended cash compensation for the next six months.

Final Thoughts

These are constructive measures to boost the firms’ cash position and preserve financial flexibility in the face of rising global market uncertainty due to the coronavirus-induced crisis. Given the rising possibility of a recession in 2020, cash is the king for businesses. Therefore, amid the coronavirus crisis, many companies are forced to take stringent measures for cash preservation.

While these moves are certainly encouraging in such trying times, will it really shield the businesses from the coronavirus wrath? Although these strategic actions might aid margins to a certain extent, it will not likely be enough to offset revenue declines from tumbling demand, given how gravely the virus outbreak is weighing on the industry. The overall sentiment surrounding the industry is extremely bleak. Market watchers are cautious about the industry’s outlook due to ambiguity associated with the spread and duration of the health hazard.

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