Ford Motor Co. said on Monday it will assume more of the retirement costs of its former auto parts unit Visteon Corp., taking a $1.6 billion fourth-quarter charge in a move to cut Visteon's costs and make it a viable independent company.
The move follows three years of frequent restructuring by Visteon after its spinoff from Ford in 2000, as it struggled to cut costs and win new business from other automakers.
Ford also raised its earnings estimates for 2003, released new data on its pension underfunding, and said it would take up to $300 million in charges by the end of 2004 to sell non-core businesses.
The new deal forces Visteon to guarantee annual price cuts to Ford through 2007 and competitive prices on subsequent new contracts. The $1.6 billion noncash charge to Ford covers retiree health-care costs that were threatening to consume most of Visteon's cash.
"A stronger Visteon is good for Ford," said Ford Chief Financial Officer Don Leclair in a conference call with reporters and analysts. The Ford agreement and Visteon's new contract with the United Auto Workers union "will provide the basis for Visteon to transition to a fully competitive cost structure."
The deals sent Ford's shares up 5 percent, or 78 cents, to $16.02 in midday trading on the New York Stock Exchange, while Visteon's shares fell 13 cents to $9.86.
Merrill Lynch analyst John Casesa said while it was hard to determine how the deal affected Ford's earnings, a strong Visteon was better for Ford in the long run.
"In our view, Ford today took action to account for the disappointing outcome of several decisions made in the 1990s, the biggest of which was the Visteon spinoff," Casesa said in a research note. "With this agreement, Ford is doing what it probably should have done before the spinoff."
New tier for old
Visteon accounts for about one-fifth of Ford's North American parts purchases. But, despite Visteon's efforts win more customers, Ford still accounts for about 80 percent of its revenues.
One of Visteon's largest cost burdens has been some 20,000 UAW workers who are considered Ford employees under the 2000 spinoff agreement. Ford will transfer as many of those workers as possible back to Ford plants, allowing Visteon to replace them with new workers under the lower wage structure of its new UAW contract and making its wages similar to those of other parts makers.
Ford will assume $1.65 billion in retiree health-care liability for those workers and give Visteon $100 million to help build a computer system. In return, Visteon will pay Ford $150 million in lieu of a cost cut on parts sold to Ford this year, offer Ford competitive prices on new contracts, and lower prices on parts it already builds for Ford.
Visteon reimburses Ford for the wages and benefits of its UAW workers, and faced some $3 billion in retiree health-care costs due to Ford, with annual payments of $545 million from 2006 through 2020. Visteon Chief Operating Officer Mike Johnston said in addition to Ford's health-care charge, Visteon's payment schedule was extended to 2049 -- cutting its annual retiree health-care payments to roughly $150 million a year from 2006 on.
Visteon said it would record fourth-quarter write-downs of $400 million to $500 million to cover the drop in value of some poor-performing product lines and an additional tax expense of $400 million to $450 million to reduce some deferred tax assets.
Ford said its earnings for all of 2003, excluding the Visteon charges and other items, should range from $1.05 to $1.10 per share, up from a prior estimate of 95 cents to $1.05 per share. Analysts on average were already predicting $1.05 per share, according to Reuters Research, a division of Reuters Group PLC.
Leclair said Ford's pension underfunding would decrease to $3.4 billion by the end of the year, thanks to a 20.9 percent return on its pension fund investments and $2 billion in contributions.
He also said Ford would contribute $6 billion to its fund for employee health care, $2 billon of which will be set aside for long-term investments. To control some of its costs, Leclair said starting in 2004, new salaried employees at Ford will have "defined contribution" pension and retirement health-care plans, rather than traditional pensions.