Visteon Corporation — 2018 Q3 Form 10-Q Summary
Business context and reporting period
Visteon is a global automotive supplier focused on cockpit electronics, including instrument clusters, displays, infotainment, audio, telematics, head-up displays, cockpit domain controllers and advanced safety platforms. The company has approximately 10,000 employees and operates primarily outside the United States. This filing covers the three and nine months ended September 30, 2018; results are unaudited.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Sales | $681 million | $765 million | $2,253 million | $2,349 million |
| Gross margin | $82 million; 12.0% | $114 million; 14.9% | $315 million; 14.0% | $354 million; 15.1% |
| Net income attributable to Visteon | $21 million | $43 million | $121 million | $151 million |
| Diluted EPS | $0.71 | $1.35 | $4.02 | $4.68 |
| Adjusted EBITDA | $71 million | $83 million | $256 million | $268 million |
| Adjusted EBITDA margin | 10.4% | 10.8% | 11.4% | 11.4% |
- Operating cash flow was $107 million for the first nine months, versus $129 million in the comparable 2017 period. Capital expenditures were $96 million.
- Total cash, cash equivalents and restricted cash were $442 million at September 30, 2018, including $3 million of restricted cash, down from $709 million at December 31, 2017.
- Total debt was $380 million, comprising $32 million of short-term debt and $348 million of long-term debt. The company had no borrowings under its $300 million revolving credit facility and was in compliance with its debt covenants.
- Financing cash outflows were $294 million, including $250 million of share repurchases, $14 million of distributions and $13 million of net short-term debt repayments.
- Cash held outside the United States totaled $276 million, including approximately $130 million considered permanently reinvested outside the United States.
Material changes versus the prior comparable period
- Third-quarter sales declined $84 million, or approximately 11%, primarily because of unfavorable volumes and product mix, customer pricing, currency effects and lower production by customers in North America, China and Japan. Nine-month sales declined $96 million, or approximately 4%.
- Third-quarter gross margin fell $32 million and declined 2.9 percentage points to 12.0%. Nine-month gross margin fell $39 million and declined 1.1 percentage points to 14.0%.
- Volume and product mix reduced nine-month gross margin by approximately $73 million. These effects were partly offset by cost efficiencies and favorable currency impacts.
- SG&A declined $15 million in the quarter and $22 million year to date, partly due to lower incentive compensation and favorable currency. However, restructuring expense increased by $12 million in the quarter and $18 million year to date.
- Net income attributable to Visteon decreased $22 million in the quarter and $30 million year to date. Lower gross margin and higher restructuring charges were only partly offset by lower SG&A and interest expense.
- On September 1, 2018, Visteon acquired an additional 1% of Changchun Visteon FAWAY Auto Electronics, increasing ownership to 51% and resulting in consolidation. The transaction contributed $3 million of third-quarter sales and a $4 million non-cash gain.
- Visteon repurchased $250 million of common stock during the first nine months. The company reported $450 million of remaining authorization through 2020.
Guidance, outlook, commentary and risks
- Management expects fourth-quarter global vehicle production to be broadly flat year over year, with declines projected for certain key customers, particularly in North America. The company also cited continued weakness in China, the shift away from diesel vehicles in Europe and possible production effects from flooding in southwestern Japan.
- Management continues to target long-term growth and margin expansion through cockpit electronics, connected-car, advanced driver assistance, electrification and advanced safety technologies. No specific full-year revenue or earnings guidance is provided in the filing text.
- A restructuring program affecting engineering and administrative functions produced an $18 million third-quarter charge. The company expects up to $25 million under the program, with approximately $16 million accrued at September 30. Total restructuring reserves were $27 million.
- Management believes operating cash flow, existing cash and available credit facilities will be adequate for current requirements, but liquidity depends on global vehicle production, customer timing, access to foreign subsidiary cash and capital-market access.
- The company faces automotive-cycle, customer concentration, pricing, commodity, foreign exchange, supply-chain, labor, regulatory, intellectual-property, warranty and product-recall risks. Ford and its affiliates represented 26% of accounts receivable, Mazda 18% and Renault/Nissan 13% at September 30, 2018.
- Visteon maintains an $11 million loan guarantee for Yanfeng Visteon Investment Company and reported a maximum exposure to loss in that joint venture of $93 million, including investments, receivables and the guarantee.
- Material unresolved matters include a Van Buren Township bond-related dispute for which the possible loss cannot be estimated, an OFAC review of historical Iran-related sales, and tax, labor and other claims in Brazil and Argentina. Accrued claims were approximately $13 million in Brazil and $3 million in Argentina against aggregate claims of approximately $99 million and $3 million, respectively.
- The company expects the adoption of the new lease standard to have a material effect on the consolidated balance sheet, although it does not expect a material income-statement impact.
- Disclosure controls and procedures were assessed as effective as of September 30, 2018, and no material changes to internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether lower customer production volumes, pricing pressure and product mix continue to reduce sales and gross margins.
- Whether restructuring actions deliver sufficient savings to offset engineering investment, customer price reductions and cyclical volume weakness.
- The sustainability of operating cash flow after $250 million of year-to-date share repurchases and $96 million of capital expenditures.
- The company’s ability to maintain liquidity while continuing share repurchases and funding technology development.
- Potential outcomes and timing of the Township litigation, OFAC review, tax audits and Brazil/Argentina claims.
- The financial and operational contribution of the newly consolidated VFAE business.
- The balance-sheet effect of adopting the lease standard and any future changes in foreign exchange, interest rates and vehicle production.