Visteon Corporation: FY 2018 Form 10-K Summary
Business context and reporting period
Visteon is a global automotive supplier focused on cockpit electronics and connected-car technologies, including instrument clusters, displays, infotainment, telematics, head-up displays, SmartCore cockpit controllers and DriveCore autonomous-driving platforms. The company operates primarily through its Electronics segment and had approximately 10,000 employees at December 31, 2018.
This filing covers the fiscal year ended December 31, 2018, including fourth-quarter results. Major customers included Ford, Mazda and Renault/Nissan, representing approximately 26%, 18% and 12% of 2018 sales, respectively. Electronics backlog, defined as forecasted revenue from awarded programs, was $21.5 billion at year-end, although customer volumes are not firm commitments.
Key financial metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Sales | $2,984 million | $3,146 million | Down $162 million |
| Gross margin | $411 million; 13.8% | $491 million; 15.6% | Down $80 million; margin down 180 bps |
| Net income attributable to Visteon | $164 million | $176 million | Down $12 million |
| Diluted EPS | $5.52 | $5.47 | Up $0.05 |
| Adjusted EBITDA | $330 million; 11.1% of sales | $370 million; 11.8% of sales | Down $40 million; margin down 70 bps |
| Cash from operating activities | $204 million | $215 million | Down $11 million |
| Capital expenditures | $127 million | $99 million | Up $28 million |
| Cash used in financing activities | $335 million | $234 million | Higher primarily due to repurchases |
| Cash and restricted cash | $467 million | $709 million | Down $242 million |
Fourth-quarter 2018 sales were $731 million, gross margin was $96 million, net income attributable to Visteon was $43 million and diluted EPS was $1.49. Fourth-quarter results included approximately $11 million of expense attributable to corrections of judicial deposits related to former-employee litigation at a closed Brazil plant.
At December 31, 2018, total debt was approximately $405 million, consisting of $57 million of short-term debt and $348 million of long-term debt. The company had no borrowings under its $300 million revolving credit facility, approximately $29 million of availability under affiliate working-capital lines, and was in compliance with debt covenants. The term facility matures in March 2024.
Total assets were $2.0 billion and Visteon stockholders’ equity was $465 million at year-end. The company had approximately $243 million of unfunded net pension liabilities and contractual obligations of $805 million, including debt, purchase obligations, interest and operating leases.
Material changes versus the prior comparable period
- Sales declined 5.1%, primarily because unfavorable volume and product mix reduced sales by $151 million and customer pricing and other factors reduced sales by $72 million. Favorable currency increased sales by $48 million, and consolidation of VFAE increased sales by $13 million.
- Gross margin declined due principally to lower volumes and mix, customer pricing, and $21 million of higher net engineering costs. Cost performance, lower warranty costs and a favorable antitrust settlement provided partial offsets.
- SG&A expense declined $33 million to $193 million, or 6.5% of sales, from $226 million, or 7.2% of sales.
- Restructuring expense increased to $29 million from $14 million. A 2018 engineering and administrative restructuring program generated approximately $19 million of expense and may result in up to $25 million of total costs.
- The 2017 $33 million France divestiture loss did not recur. Interest expense, net declined to $7 million from $16 million, while equity income from non-consolidated affiliates increased to $13 million from $7 million.
- VFAE became consolidated after Visteon increased its ownership from 50% to 51% in September 2018. The transaction generated a $4 million non-cash gain and contributed $13 million of sales.
- Operating cash flow remained strong but declined modestly. Financing cash usage increased because share repurchases rose to $300 million from $200 million.
- Visteon returned $300 million through 2018 share repurchases and had $400 million remaining under its repurchase authorization through 2020. No common-stock dividends were paid.
Guidance, outlook, management commentary and risks
Management did not provide a clear numerical 2019 revenue or earnings forecast in the filing. Management expects cockpit electronics to grow faster than underlying vehicle production and is prioritizing digital cockpit transformation, long-term growth, margin expansion, free-cash-flow improvement and shareholder returns.
Industry production declined 1.1% globally in 2018. Management expects vehicle production to decline year over year in the first half of 2019, particularly in China and Europe, due to lower consumer confidence, U.S.-China trade uncertainty, Brexit uncertainty and increased emissions regulations. North American production was expected to be broadly flat, although certain customers could decline as demand shifts from sedans to sport utility vehicles.
- Automotive production is cyclical and Visteon has significant customer concentration, particularly with Ford.
- Trade policy, tariffs, currency movements, commodity inflation and supply-chain disruptions may affect sales, margins and cash flow.
- Customer price reductions may not be fully offset by productivity and cost-reduction actions.
- Product launches, software defects, warranty claims, recalls, cybersecurity incidents and intellectual-property disputes could produce material costs.
- Visteon disclosed approximately $99 million of aggregate Brazil litigation claims with $13 million accrued. A separate Michigan township dispute could involve a potential shortfall of $25 million to $36 million, but the company cannot estimate a possible loss.
- OFAC continues reviewing voluntary disclosures concerning approximately $12 million of historical sales involving Iran. Potential penalties or restrictions cannot be estimated and could be material.
- Visteon has a maximum exposure to loss of approximately $105 million related to its Yanfeng Visteon Investment Company joint venture, including investment, receivables, a subordinated loan and an $11 million loan guarantee.
- The company recorded $1 million of discontinued-operation income in 2018, reflecting residual legal and tax matters from previously divested businesses.
Important facts for investors to verify
- Internal controls: Management and Ernst & Young issued adverse opinions on internal control over financial reporting because of a material weakness involving accounting for judicial deposits related to former-employee litigation in Brazil. Management expected remediation in the first quarter of 2019.
- Liquidity: Verify cash availability, geographic restrictions on subsidiary cash, revolving-facility capacity, covenant compliance and the timing of debt maturities.
- Margin recovery: Assess whether engineering investments, cost reductions and new business wins can offset customer pricing, unfavorable mix and lower vehicle production.
- Customer concentration: Monitor Ford, Mazda and Renault/Nissan production volumes and program awards, as customer agreements generally do not guarantee purchase volumes.
- Pension and contingencies: Review the $243 million unfunded pension liability, Brazil litigation reserves, the Michigan township matter, OFAC review and joint-venture guarantee exposure.
- Tax assets: Visteon maintained approximately $1.1 billion of valuation allowances against deferred tax assets. A partial release could materially increase future net income, but depends on sustained improvement in U.S. operating results.
- Non-GAAP measures: Adjusted EBITDA is management-defined and should be reconciled to GAAP net income and operating cash flow before use in valuation or leverage analysis.