Thursday, April 28, 2005

Visteon fights for future

As deadlines near, parts supplier's survival may depend on talks with Ford over bailout.

By Eric Mayne / The Detroit News

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The clock is ticking for Visteon Corp. -- the nation's second-largest auto parts supplier and a leading Michigan employer.

The company is racking up huge losses as last-ditch restructuring talks with its former parent, Ford Motor Co., stretch on with no resolution.

Investors are dumping its stock. Cash is running low. And bankruptcy concerns are mounting.

On Wednesday, after reporting a larger-than-expected first-quarter loss of $188 million, Visteon said it is exploring financing alternatives to stay afloat if the bailout talks with Ford fail.

The grim news sent Visteon shares tumbling 16 percent Wednesday, or 70 cents, to an all-time low of $3.74. The shares dropped as much as 29 percent during the day.

Short of a major overhaul, analysts say Van Buren Township-based Visteon will remain overmatched in the competitive global auto parts business, where production cuts and high material costs are ravaging companies.

"If Ford doesn't step up quickly, it's going to be difficult for Visteon to survive," said Sean Egan, managing director at Egan-Jones Ratings Co., an independent debt rating firm in Haverford, Pa. "They don't have a leg to stand on."

Some analysts are even more bearish.

"I don't see any way to fix it except for a (bankruptcy) filing," said Joe Farricielli, vice president of California-based Imperial Capital LLC.

Visteon, which employs 70,000 people worldwide and 19,000 in Michigan, has lost $3 billion since 2003.

In March, Ford agreed to reduce wage reimbursements Visteon now pays for Ford hourly workers assigned to work at the supplier and to accelerate some payments.

But a larger Ford bailout expected before the end of 2004 is still being negotiated, leaving Visteon in limbo as a pair of key financing deals are about to expire.

A $565 million line of credit will expire in June, while $250 million in bonds come due in August. Visteon executives expressed confidence Wednesday that refinancing can be arranged, but it would likely come at a cost.

"Given current market conditions, the company's financial performance and its credit ratings, any alternative would likely require significantly more restrictive" lending terms and collateral, Visteon stated.

If a deal is reached after financing is arranged, Visteon said it hopes to revisit the terms.

Three ratings agencies have downgraded Visteon to well below junk status.

The entire U.S. auto parts industry is struggling to make money in a brutal business environment.

Troy-based Delphi Corp., the largest U.S. parts supplier, is expected to post a first-quarter loss and slashed its quarterly dividend last month to conserve cash.

Lear Corp. reported an 83 percent drop in first-quarter profit to $15.6 million and said it plans to close plants.

Visteon remains saddled with high labor and operating costs. It hopes to downsize and shed weak business units and factory workers as part of the talks with Ford, its former parent and biggest customer.

"Our first-quarter results highlight the need we have for structural change in North America," Visteon Chief Financial Officer Jim Palmer said Wednesday.

"Our inflexible cost structure makes it difficult" to reduce expenses when customers cut production.

Spun off in 2000, Visteon has never recorded a full-year profit. And pending the outcome of the Ford talks, it is withholding earnings guidance.

Visteon builds and sells a wide array of components from state-of-the-art projector headlamps to low-margin chassis parts. But products such as alternators and fuel pumps have become commodities today.

They require less technical expertise to manufacture, so companies with advanced capabilities -- such as Visteon -- are often outflanked by suppliers who enjoy lower wages.

Visteon is focusing its investment and research efforts on three high-margin product lines that offer more growth: climate controls, vehicle interiors and advanced electronics.

The company's remaining businesses -- glass, steering and chassis parts -- are expected to be spun off into a holding company controlled by Ford.

Visteon offered no details about the talks Wednesday, but acknowledged their importance and hinted that progress is being made.

"We want to make sure that we get it right and that all parties are in agreement," Visteon President and CEO Mike Johnston said. "Because of the complexity, it's taken more time, certainly, than what we had hoped."

Palmer said the two sides are "working down into the details of the agreement."

Merrill Lynch analyst John Casesa said Visteon's first-quarter loss could speed along the negotiations because Ford is too reliant on Visteon to allow the company to fail.

"Visteon's current poor results only add to its leverage to extract an acceptable settlement from Ford," Casesa wrote in a research note.

In addition to Ford production cuts, increased costs for raw materials and employee benefits hurt Visteon's performance in the first quarter.

Revenues were flat at $5 billion, with sales to Ford down $383 million. Sales to non-Ford automakers jumped 8 percent to $1.7 billion.

But Visteon's near-term fortunes remain linked to Ford, which plans to cut second-quarter production as well.

In 2003, Ford agreed to rescue Visteon from $1.9 billion in employee health care benefit commitments. In exchange, the automaker received preferential pricing on Visteon components.

Last year, Ford agreed to take back its hourly workers who'd been assigned to Visteon -- if they could be accommodated.

To date, Visteon has reduced its hourly payroll by 2,100 workers.

But the supplier still has 17,500 former Ford workers in its plants.

The so-called "flowback" deal, negotiated with the United Auto Workers, allows Visteon to hire replacement workers at permanently lower wages more in line with competitors.

Casesa said Visteon might be a healthy company today if Ford had better prepared it for the spin-off.

"The results underscore that Ford has to address the underlying problems that weren't addressed at the time of the IPO," Casesa said.

Detroit News wire services contributed to this report. You can reach Eric Mayne at (313) 222-2443 or emayne@detnews.com.