| VISTEON CORP ITEM 1A RISK FACTORS The risks and uncertainties described below are not the only ones facing the Company |
| Additional risks and uncertainties, including those not presently known or that the Company believes to be immaterial, also may adversely affect the Company’s results of operations and financial condition |
| Should any such risks and uncertainties develop into actual events, these developments could have material adverse effects on the Company’s business and financial results |
| A decline in automotive sales could reduce the Company’s sales and harm its operations |
| Demand for the Company’s products is directly related to automotive vehicle production |
| Automotive sales and production can be affected by general economic conditions, such as employment levels and trends, fuel prices and interest rates, labor relations issues, regulatory requirements, trade agreements and other factors |
| Automotive industry conditions in North America and Europe continue to be challenging |
| In North America, the domestic automotive industry is characterized by significant overcapacity, fierce competition, high fixed cost structures and significant employee pension and health care obligations for the domestic automakers |
| Domestic automakers continue to report market share loss to other vehicle manufacturers resulting in lower annual production volumes and the need to further address their production capacity and cost structure |
| Similarly, in Europe the market is highly fragmented and certain automakers continue to report lower annual sales volumes |
| Any decline in automotive production levels of its current and future customers could reduce the Company’s sales and harm its results of operations and financial condition |
| Further, certain automakers, particularly in North America and Europe, report significant financial challenges due to the factors described above |
| These automakers continue to implement actions to further reduce capacity and streamline their cost structure while at the same time investing in new technologies and vehicle platforms |
| In the United States, two of the largest automakers, General Motors Corporation and Ford Motor Company, have announced restructuring plans aimed at realigning their cost structure in light of current and projected market share and production volumes for the North American market |
| A significant element of these cost reduction actions include the negotiation with and participation of the respective unionized workforces in addressing legacy costs related to health care, pensions, wages and other employee benefits |
| The results and effects of these actions and related negotiations are uncertain and, accordingly, could have a material adverse affect on the Company’s results of operations and financial condition |
| The Company is highly dependent on Ford |
| Ford is currently undergoing a restructuring plan and further decreases in Ford’s vehicle production volume would adversely affect the Company’s results |
| Ford is the Company’s largest customer and accounted for approximately 62prca of total product sales in 2005, 70prca of total product sales in 2004 and 76prca of total product sales in 2003 |
| Although the Company has made progress in diversifying its customer base with other automakers, and has further reduced its sales concentration with Ford as a result of the completion of the ACH Transactions in the latter half of 2005, Ford will continue to be the Company’s largest customer for the foreseeable future |
| Further, Ford has recently announced a restructuring plan and may ultimately restructure its operations in a way that could be adverse to the Company’s interests |
| As in the past, any change in Ford’s vehicle production volume will have a significant impact on the Company’s sales volume |
| The Company currently leases approximately 4cmam200 salaried employees to ACH, a company controlled by Ford, and has an agreement with Ford to reimburse the Company for up to dlra150 million of the costs related to separating any of the leased employees should they be returned to us for any reason |
| In the event that Ford was unable or unwilling to fulfill its obligations under this agreement, the Company could be adversely affected |
| 16 _________________________________________________________________ [67]Table of Contents ITEM 1A RISK FACTORS — (Continued) The discontinuation of, the loss of business with respect to, or a lack of commercial success of a particular vehicle model for which the Company is a significant supplier could affect our estimates of product sales backlog |
| Although the Company has purchase orders from many of its customers, these purchase orders generally provide for the supply of a customer’s annual requirements for a particular model and assembly plant and are renewable on a year-to-year basis, rather than for the purchase of a specific quantity of products |
| Therefore, the discontinuation, loss of business with respect to, or a lack of commercial success, of a particular vehicle model for which the Company is a significant supplier could reduce the Company’s sales and affect its estimates of product sales backlog |
| Escalating pricing pressures from the Company’s customers may adversely affect our business |
| Downward pricing pressures by automotive manufacturers has been a characteristic of the automotive industry in recent years |
| Virtually all automakers have aggressive price reduction initiatives and objectives each year with their suppliers, and such actions are expected to continue in the future |
| Accordingly, suppliers must be able to reduce their operating costs in order to maintain profitability |
| The Company has taken steps to reduce its operating costs to offset customer price reductions, in addition to other actions designed to resist such reductions; however, price reductions have impacted our sales and profit margins and are expected to do so in the future |
| If the Company is unable to offset customer price reductions in the future through improved operating efficiencies, new manufacturing processes, sourcing alternatives and other cost reduction initiatives, our results of operations and financial condition would be adversely affected |
| The automotive supplier environment in which we operate continues to evolve and be uncertain |
| In recent years, the competitive environment among suppliers to the global automotive manufacturers has changed significantly as these manufacturers have sought to outsource more vehicular components, modules and systems |
| In addition, the number of suppliers worldwide has been declining due to continued consolidation |
| In the United States, declining sales volumes of certain domestic automakers combined with high material and labor costs has adversely impacted the financial condition of several domestic automotive suppliers, including resulting in several significant supplier bankruptcies |
| The Company expects to respond to these developments by continuing to diversify its customer base through the continued development of innovative products at competitive prices as well as through strategic alliances, joint ventures, acquisitions and divestitures |
| However, there is no assurance that the Company’s efforts will be successful or that competitors with lower cost structures and better access to liquidity sources will not significantly impact our business, results of operations and financial condition |
| Severe inflationary pressures impacting ferrous and non-ferrous metals and petroleum-based commodities may adversely affect the Company’s profitability and the profitability of the Company’s Tier 2 and Tier 3 supply base |
| The automotive supply industry has recently experienced significant inflationary pressures, primarily in ferrous and non-ferrous metals and petroleum-based commodities, such as resins |
| These inflationary pressures have placed significant operational and financial burdens on automotive suppliers at all levels, and are expected to continue for the foreseeable future |
| Generally, it has been difficult to pass on, in total, the increased costs of commodities used in the manufacture of the Company’s products to its customers |
| In addition, the Company’s need to maintain a continued supply of raw materials and/or components has made it difficult to resist price increases and surcharges imposed by its suppliers |
| 17 _________________________________________________________________ [68]Table of Contents ITEM 1A RISK FACTORS — (Continued) Further, this inflationary pressure, combined with other factors, has adversely impacted the financial condition of several domestic automotive suppliers, including resulting in several significant supplier bankruptcies |
| Because the Company purchases various types of equipment, raw materials and component parts from suppliers, we may be materially and adversely affected by the failure of those suppliers to perform as expected |
| This non-performance may consist of delivery delays, failures caused by production issues or delivery of non-conforming products, or supplier insolvency or bankruptcy |
| Consequently, the Company’s efforts to continue to mitigate the effects of these inflationary pressures may be insufficient if conditions were to worsen, resulting in a negative impact on the Company’s financial results |
| The Company could be adversely affected if we experience shortages of components from our suppliers |
| In an effort to manage and reduce the costs of purchased goods and services, the Company, like many suppliers and automakers, has been consolidating its supply base |
| As a result, the Company is dependent on single or limited sources of supply for certain of components used in the manufacture of our products |
| The Company selects its suppliers based on total value (including price, delivery and quality), taking into consideration their production capacities and financial condition, and we expect that they will be able to support our needs |
| However, there can be no assurance that strong demand, capacity limitations or other problems experienced by the Company’s suppliers will not result in occasional shortages or delays in their supply of components to us |
| If the Company was to experience a significant or prolonged shortage of critical components from any of its suppliers, particularly those who are sole sources, and could not procure the components from other sources, the Company would be unable to meet its production schedules for some of its key products and to ship such products to its customers in timely fashion, which would adversely affect its sales, margins and customer relations |
| Work stoppages or similar difficulties could significantly disrupt the Company’s operations |
| A work stoppage at one or more of the Company’s manufacturing and assembly facilities could have material adverse effects on the business |
| Also, if one or more of the Company’s customers were to experience a work stoppage, that customer would likely halt or limit purchases of our products which could result in the shut down of the related manufacturing facilities |
| Further, because the automotive industry relies heavily on just-in-time delivery of components during the assembly and manufacture of vehicles, a significant disruption in the supply of a key component due to a work stoppage at one of the Company’s suppliers or any other supplier could have the same consequences, and accordingly, have a material adverse effect on the Company’s financial results |
| 18 _________________________________________________________________ [69]Table of Contents ITEM 1A RISK FACTORS — (Continued) The Company has a history of significant losses; the Company is in the process of implementing a three-year improvement plan but may be unable to successfully improve its performance or attain profitability |
| The Company’s ability to improve its financial performance and return to profitability is dependent on its ability to implement its three-year improvement plan, and realize the benefits of such plan |
| The Company expects to fund the majority of the cash restructuring costs contemplated by its three-year plan with reimbursements from the dlra400 million escrow account established by Ford upon the completion of the ACH Transactions |
| However, it is possible that actual cash restructuring costs could vary significantly from the Company’s initial projections as the plan progresses, which could result in unexpected costs in future periods that may be in excess of amounts available from the escrow account, which could have an adverse impact on the Company’s financial results |
| Further, the Company cannot provide assurances that it will realize the expected benefits in the time periods projected, or at all, from its restructuring actions, or that such actions will improve its financial performance or return the Company to profitability in the near term or at all |
| In addition, a majority of the Company’s hourly workforce is unionized |
| Labor contracts with these unions can significantly restrict the Company’s ability to close plants and divest unprofitable, noncompetitive businesses as well as limit its ability to change local work rules and practices at a number of the Company’s facilities, constraining the implementation of cost-saving measures |
| These restrictions and limitations could have adverse effects on our results of operations and competitive position and could slow or alter the Company’s improvement plans |
| Moreover, the Company recorded asset impairment charges of dlra1cmam511 million, dlra314 million and dlra436 million in 2005, 2004 and 2003, respectively, to adjust the carrying value of the Company’s property and equipment to its estimated fair value |
| Additional asset impairment charges in the future may result in the event that the Company does not achieve its internal financial plans, and such charges could materially affect the Company’s results of operations and financial condition in the period(s) recognized |
| In addition, the Company cannot provide assurance that it will be able to recover its remaining net deferred tax assets which is dependent upon achieving future taxable income in certain foreign jurisdictions |
| Failure to achieve our taxable income targets may change the Company’s assessment of the recoverability of its remaining net deferred tax assets and would likely result in an increase in the valuation allowance in the applicable period |
| Any increase in the valuation allowance would result in additional income tax expense, would reduce stockholders’ equity and could have a significant impact on the Company’s earnings going forward |
| Sources of financing may not be available to the Company in the amount or terms required |
| The Company has secured credit facilities that mature in June 2007 |
| These facilities require the Company to attain a specified financial ratio as of the end of each quarter; specifically, a ratio of consolidated total debt to consolidated EBITDA, as such terms are defined in the facilities |
| Because the Company’s financial performance is impacted by various economic, financial and industry factors, the Company cannot say with certainty whether it will satisfy the covenants under these facilities in the future |
| Non-compliance with these covenants would constitute an event of default, allowing the lenders to accelerate the repayment of any borrowings outstanding under the facilities |
| While no assurance can be given, the Company believes that it would be able to successfully negotiate amended covenants or obtain waivers if an event of default were imminent |
| Any default under our credit facilities may result in defaults under our other debt instruments |
| The Company’s business, results of operations and financial condition could be adversely affected if it were unable to successfully negotiate amended covenants or obtain waivers on acceptable terms |
| 19 _________________________________________________________________ [70]Table of Contents ITEM 1A RISK FACTORS — (Continued) The Company’s working capital requirements and cash provided by operating activities can vary greatly from quarter to quarter and from year to year, depending in part on the level, variability and timing of our customers’ worldwide vehicle production and the payment terms with our customers and suppliers |
| Despite the Company’s expected improved performance for 2006, we cannot provide assurance that it will be able to satisfy its capital expenditure requirements during 2006 or subsequent years, or during any particular quarter, from cash provided by operating activities |
| If the Company’s working capital needs and capital expenditure requirements exceed its cash flows from operations, cash balances and borrowings, the Company may need to raise additional capital, which may not be available to us on satisfactory terms and in adequate amounts |
| For a discussion of these and other factors affecting the Company’s liquidity, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources |
| ” The Company’s business is highly dependent upon the ability to access the credit and capital markets |
| Access to, and the costs of borrowing in, these markets depend in part on the Company’s credit ratings, which are currently below-investment grade |
| There can be no assurance that the Company’s credit ratings will not decline further in the future |
| Further downgrades of our ratings would increase our costs of borrowing again and could imperil our liquidity |
| The Company’s pension and other postretirement employee benefits expense and underfunding levels of our pension plans could materially increase |
| Substantially all of the Company’s employees participate in defined benefit pension plans or retirement/termination indemnity plans |
| The Company has previously experienced declines in interest rates and pension asset values |
| Future declines in interest rates or the market values of the securities held by the plans, or certain other changes, could materially increase the underfunded status of our plans and affect the level and timing of required contributions in 2006 and beyond |
| A material increase in the underfunded status of the plans could significantly increase pension expenses and reduce the Company’s profitability |
| The Company also sponsors other postretirement employee benefit (“OPEB”) plans that cover many of our US and certain non-US employees and provide for benefits to eligible employees and dependents upon retirement |
| The Company funds its OPEB obligations on a pay-as-you-go basis; accordingly, the related plans have no assets |
| We are subject to increased OPEB cash outlays and costs due to, among other factors, rising health care costs |
| Increases in the expected cost of health care in excess of our assumptions could increase our actuarially determined liability and related OPEB expense along with future cash outlays |
| The Company’s expected annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors |
| Changes in the Company’s debt and capital structure, among other items, may impact its effective tax rate |
| Our overall effective tax rate is equal to consolidated tax expense as a percentage of consolidated earnings before tax |
| However, tax expense and benefits are not recognized on a global basis but rather on a jurisdictional basis |
| The Company is in a position whereby losses incurred in certain tax jurisdictions provide no current financial statement benefit |
| In addition, certain jurisdictions have statutory rates greater than or less than the United States statutory rate |
| As such, changes in the mix of earnings between jurisdictions could have a significant impact on the Company’s overall effective tax rate in future periods |
| Changes in tax law and rates could also have a significant impact on the Company’s overall effective rate in future periods |
| 20 _________________________________________________________________ [71]Table of Contents ITEM 1A RISK FACTORS — (Continued) The Company’s ability to effectively operate could be impaired if we fail to attract and retain key personnel |
| The Company’s ability to operate its business and implement its strategies effectively depends, in part, on the efforts of its executive officers and other key employees |
| In addition, the Company’s future success will depend on, among other factors, the ability to attract and retain qualified personnel, particularly engineers and other employees with critical expertise and skills that support our key customers and products |
| The loss of the services of any of our key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on the Company’s business |
| The Company’s international operations, including our Asian joint ventures, are subject to various risks that could adversely affect the Company’s business, results of operations and financial condition |
| The Company has operating facilities, and conducts a significant portion of its business, outside the United States |
| The Company has invested significantly in joint ventures with other parties to conduct business in South Korea, China and elsewhere in Asia |
| Our ability to repatriate funds from these joint ventures depends not only upon their uncertain cash flows and profits, but also upon the terms of our particular agreements with the Company’s joint venture partners and maintenance of the legal and political status quo |
| We risk expropriation in China and the instability that would accompany civil unrest or armed conflict within the Asian region |
| More generally, the Company’s Asian joint ventures and other foreign investments could be adversely affected by changes in the political, economic and financial environments in host countries, including fluctuations in exchange rates, political instability, changes in foreign laws and regulations (or new interpretations of existing laws and regulations) and changes in trade policies, import and export restrictions and tariffs, taxes and exchange controls |
| Any one of these factors could have an adverse effect on the Company’s business, results of operations and financial condition |
| In addition, the Company’s consolidated financial statements are denominated in US dollars and require translation adjustments, which can be significant, for purposes of reporting results from, and the financial condition of, our foreign investments |
| Warranty claims, product liability claims and product recalls could harm the Company’s business, results of operations and financial condition |
| The Company faces inherent business risk of exposure to warranty and product liability claims in the event that our products fail to perform as expected or such failure of our products results, or is alleged to result, in bodily injury or property damage (or both) |
| In addition, if any of our designed products are or are alleged to be defective, then we may be required to participate in a recall of them |
| As suppliers become more integrally involved in the vehicle design process and assume more of the vehicle assembly functions, automakers are increasingly expecting them to warrant their products and are increasingly looking to them for contributions when faced with product liability claims or recalls |
| A successful warranty or product liability claim against the Company in excess of its available insurance coverage and established reserves, or a requirement that the Company participate in a product recall, would have adverse effects, that could be material, on our business, results of operations and financial condition |
| 21 _________________________________________________________________ [72]Table of Contents ITEM 1A RISK FACTORS — (Continued) The Company is involved from time to time in legal proceedings and commercial or contractual disputes, which could have an adverse effect on its business, results of operations and financial position |
| The Company is involved in legal proceedings and commercial or contractual disputes that, from time to time, are significant |
| These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with our suppliers, intellectual property matters, personal injury claims and employment matters |
| In addition, the Company, certain directors, officers and employees have been named in lawsuits alleging violations of the federal securities laws, ERISA and fiduciary obligations |
| No assurances can be given that such proceedings and claims will not have a material adverse impact on the Company’s profitability and financial position |
| The Company could be adversely impacted by environmental laws and regulations |
| The Company’s operations are subject to US and non-US environmental laws and regulations governing emissions to air; discharges to water; the generation, handling, storage, transportation, treatment and disposal of waste materials; and the cleanup of contaminated properties |
| Currently, environmental costs with respect to former, existing or subsequently acquired operations are not material, but there is no assurance that the Company will not be adversely impacted by such costs, liabilities or claims in the future either under present laws and regulations or those that may be adopted or imposed in the future |
| Developments or assertions by or against the Company relating to intellectual property rights could materially impact its business |
| The Company owns significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets, and is involved in numerous licensing arrangements |
| The Company’s intellectual property plays an important role in maintaining our competitive position in a number of the markets served |
| Developments or assertions by or against the Company relating to intellectual property rights could materially impact the business |
| Significant technological developments by others also could materially and adversely affect our business and results of operations |
| The Company’s business and results of operations could be affected adversely by terrorism |
| Terrorist-sponsored attacks, both foreign and domestic, could have adverse effects on the Company’s business and results of operations |
| These attacks could accelerate or exacerbate other automotive industry risks such as those described above and also have the potential to interfere with our business by disrupting our supply chains and the delivery of our products to customers |
| 22 _________________________________________________________________ [73]Table of Contents ITEM 1A RISK FACTORS — (Continued) Management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2005 because of the existence of a material weakness in the Company’s internal control over financial reporting |
| The failure to remediate this material weakness, or any control deficiencies that the Company may discover in the future, could adversely affect the Company’s ability to report its financial condition and results of operations accurately and on a timely basis |
| As disclosed in the Company’s Annual Report on Form 10-K/ A for 2004 and in its Quarterly Reports on Form 10-Q for each of the first three quarters of 2005, management’s assessment of the Company’s internal controls over financial reporting identified several material weaknesses |
| These material weaknesses led to the restatement of the Company’s previously issued consolidated financial statements for fiscal years 2002 through 2004 and resulted in an adverse opinion by our independent registered public accounting firm on the effectiveness of the Company’s internal control over financial reporting |
| Although the Company made progress in executing its remediation plans during 2005, including the remediation of two material weaknesses, as of December 31, 2005, management has concluded that the Company did not maintain effective internal control over financial reporting due to a remaining material weakness in internal controls |
| If the Company is unable to remediate the remaining material weakness, and other control deficiencies currently identified or identified in the future, and otherwise continue to improve its internal control, the Company’s ability to report its financial results on a timely and accurate basis could be adversely affected, which could result in a loss of investor confidence in its financial reports or have a material adverse affect on the Company’s ability to operate our business or access sources of liquidity |
| Furthermore, because of the inherent limitations of any system of internal control over financial reporting, including the possibility of human error, the circumvention or overriding of controls or fraud, even effective internal control over financial reporting may not prevent or detect all misstatements |