Ford has announced new agreements with Visteon Corporation - its largest supplier and former automotive components subsidiary -- that it claims will improve the competitiveness of both companies, mostly by hacking down the prices Visteon charges.

The deal imposes a pre-tax charge of $US1.6 billion on Ford in the fourth quarter of 2003 yet, despite the hit, Ford has raised its 2003 earnings guidance based on cost cutting, strong sales of the new F-150 truck in the US and healthy profits at its credit arm.

The new agreements primarily address pricing and sourcing arrangements between Ford and Visteon, as well as costs related to approximately 20,000 UAW-represented Ford employees working at Visteon. These employees were assigned to Visteon as part of Visteon's June 2000 spin off from Ford.

Visteon will pay Ford $US150 million on the carmaker's 2003 purchases in lieu of further price reductions for 2003. Visteon has also committed to a schedule of annual price reductions over the next four years and what Ford calls "other actions that should enable Visteon to achieve fully competitive prices over time".

All new Ford business sourced to Visteon will be at competitive prices and terms and Ford will provide what it calls "labour differential relief for UAW workers at efficient manning levels".

Ford has agreed to look to Visteon first for new business at UAW-represented Visteon plants but can seek alternative sourcing solutions if Visteon is not competitive.

Ford will assume about $1.65 billion of Visteon's total estimated $3 billion post-retirement health care and life insurance benefit liabilities (OPEB) related to UAW-represented Ford employees at Visteon.

Visteon and Ford will share equally up to $200 million in costs to upgrade Visteon's information and technology systems as it completes its separation from Ford's IT systems.

As job openings occur, Ford employees assigned to Visteon will return to Ford over time. As agreed to in concept by the UAW, Visteon will fill future job openings with UAW-represented workers earning Tier I UAW supplier-level wages.

The timeframe for Visteon to fund its remaining post-retirement OPEB liability - which begins in 2006 -- will be extended to 2049 from 2020.

Visteon's contributions to potential profit-sharing payments for UAW-represented Ford employees will be capped at $2,040 per employee.

Ford and Visteon will share equally future Visteon capital investments for select products. Payments from Ford to Visteon will be made over a seven-year period for each investment.

Ford will accelerate payment terms to Visteon over the next three years, after which terms will return to normal.

A Ford-Visteon governance council will be established to monitor the relationship between the two companies, as well as manage implementation of the agreements.

Ford will incur a net pre-tax charge in the 2003 fourth quarter of $1.6 billion, or $0.52 per share.  The charge includes approximately $1.65 billion of transferred OPEB liability and $100 million of IT separation costs, offset partly by the $150 million payment on 2003 Visteon purchases by Ford.

The OPEB liability transfer will have minimal impact on Ford's near-term cash flow, because the additional liability will not be fully due for about 50 years. Ford's health care expense will increase by about $100 million annually, beginning in 2004.

Ford will take a non-cash, pre-tax charge of approximately $150 million for disposition of several non-core businesses. These operations are being "held for sale." Additional charges of about $100-to-$150 million for disposition of non-core businesses are anticipated during 2004.

Ford noted that the fourth-quarter charge for its previously announced restructuring of Ford Europe will be about $450 million and that the remaining expected charges (about $100 to $150 million) associated with these restructuring actions will occur in the first half of 2004.

The effect of all fourth-quarter special items on earnings per share is expected to be $0.72.

Ford will contribute $1 billion to its US pension funds and $6 billion to its Voluntary Employees' Beneficiary Association (VEBA) trust. Of the contribution to the VEBA trust, $2 billion will be set aside for long-term investments.

Nonetheless, excluding special items, Ford has increased its full-year 2003 earnings guidance from continuing operations from the $0.95-to-$1.05 per share range to a new range of $1.05-to-$1.10 per share.

"The increase in our 2003 earnings outlook primarily reflects continued strong cost savings, strong unit revenue from the new F-150 and other vehicles, and the ongoing strength of Ford Motor Credit's operating results," Ford chief financial officer Don Leclair said.

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