Shares of automotive systems supplier Visteon
Visteon also talked about costs continuing to rise. Specifically, Visteon mentioned its inability to recoup rising steel and fuel costs. Sorry. That's the breaks of being a supplier because Ford certainly doesn't want to pay for those costly items. Ford has enough steel and fuel cost concerns of its own.
Also on the cost front, Visteon was expecting its previous "labor strategies" to have shown some results. Instead, cost reductions have not materialized. But never fear. Visteon remains committed to "on-time delivery of quality parts" to its customers. Never mind that they cannot profit from doing so.
All of these things add up to a huge matzah ball hanging over the table. Visteon announced plans to write down between $825 million and $900 million of its deferred tax assets (currently around $870 million). While it's a noncash charge today, it is very significant tomorrow.
As a Foolish reader, it's likely you are familiar with deferred tax liabilities. These are taxes you owe but have not paid. The most famous example is the unrealized capital gains on the securities owned by Berkshire Hathaway
Deferred tax assets are a different animal. They are a result of some very complicated calculations that are full of assumptions. I'll take the easy route and refer you to pages 34 and 35 of Visteon's 2003 10-K report. Keep in mind the nature of assets on the balance sheet. Inventories are assets that convert to cash when turned into products and sold. Visteon was generating cash from the deferred tax assets by turning them into tax credits that reduced the amount of taxes paid. Less cash out means more cash in. Unfortunately, it looks like that gravy train is going away too.
To make matters worse, Visteon mentioned that further writedowns based on asset impairments are likely in the coming quarters. There is really no end in sight to the problems, and the true magnitude is not completely known yet. Analysts do not like uncertainty. So Fitch downgraded its debt rating to junk status, and CFSB threw in the towel with an underperform rating.
What is Visteon going to do, go back and renegotiate prices with Ford when Ford is having troubles as well? Any idea when steel and fuel prices will come down? Could Ford squeeze its suppliers further in order to help its own cause? Like I said, being an automotive industry supplier is a tough business.
Of course, Visteon is looking for other meal tickets to diversify its revenue streams. But that is not a short-term fix. Personally, others can worry about whether the shares are cheap or not. I am turned off enough to stay away from this stock forever.
Fool contributor David Meier has owned five cars during his life. However, he will never own a stock associated with the car industry. He does not own shares in any of the companies mentioned.