VISTEON CORP quarterly report, Q3 FY2015

Visteon Corporation — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2015; filed November 5, 2015. Visteon is a global automotive supplier focused primarily on cockpit electronics, including infotainment, driver information, connectivity, telematics and electronic control modules. The Electronics segment is now the core business; residual South American and European operations are reported in Other.

Financial performance

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Sales	$808 million	$793 million	$2,436 million	$1,798 million
Gross margin	$105 million; 13.0%	$93 million; 11.7%	$316 million; 13.0%	$223 million; 12.4%
Net income from continuing operations	$21 million	$(21) million	$110 million	$(57) million
Net income attributable to Visteon	$5 million	$(21) million	$2,263 million	$(157) million
Adjusted EBITDA	$65 million	$30 million	$203 million	$102 million
Operating cash flow	Not separately provided	Not separately provided	$274 million	$180 million

Q3 Electronics sales were $771 million, up from $760 million; Other sales declined to $37 million from $46 million.
Q3 gross-margin improvement reflected favorable volume and mix, material and manufacturing efficiencies, and lower SG&A. Currency effects reduced sales, primarily through the euro and Japanese yen.
Nine-month sales growth was driven principally by the 2014 Electronics Acquisition, which contributed approximately $691 million, higher production volumes and new business.
Adjusted EBITDA increased to $203 million for nine months, primarily from volume and mix and cost efficiencies, partially offset by unfavorable currency, customer pricing, higher engineering costs and warranty expense.

Cash, debt and liquidity

September 30 cash and equivalents were $2,860 million; short-term investments were $52 million and restricted cash was $8 million. Total cash, short-term investments and restricted cash were $2,920 million.
Total debt was $382 million, comprising $33 million of short-term debt and $349 million of long-term debt, compared with $616 million at December 31, 2014.
Following the Climate transaction, Visteon prepaid $246 million of term-loan principal, reducing the Term Facility to approximately $350 million. The Term Facility matures in 2021; the $200 million Revolving Facility matures in 2019 and had no borrowings at quarter-end.
Management stated that the company was in compliance with debt covenants. Approximately $18 million remained available under affiliate credit facilities.
Capital expenditures were $151 million for the first nine months, compared with $209 million in the prior-year period.
Financing cash outflows were $759 million, including $250 million for debt principal payments and $500 million for share repurchases.

Material changes and unusual items

On June 9, 2015, Visteon completed the sale of its HVCC Climate business for approximately $3.4 billion of gross proceeds, received approximately $2.7 billion of net cash proceeds and recorded a $2.332 billion pretax gain. The transaction is reported in discontinued operations.
The Climate transaction drove most of the $2.263 billion nine-month net income attributable to Visteon. It should not be viewed as recurring operating earnings.
Visteon recorded a $62 million pretax gain on the sale of its 12.5% interest in Yanfeng Visteon Jinqiao.
The company intends to return approximately $2.5 billion to $2.75 billion of Climate proceeds to stockholders through repurchases and/or a special dividend. A $500 million accelerated share repurchase was initiated in June 2015.
Remaining Argentina and Brazil Interiors divestitures were expected to close during 2015 and could generate approximately $20 million of additional losses, subject to closing conditions and purchase-price adjustments.
On October 30, 2015, after quarter-end, Visteon agreed to sell its Berlin, Germany interiors operation. The company expects to contribute approximately $190 million of cash and other assets and record an estimated $100 million loss, with closing expected around December 1, 2015.
The company expects approximately $15 million of fourth-quarter 2015 restructuring charges for a European Electronics facility. Total Electronics restructuring charges could reach approximately $60 million; $51 million had been recorded through September 30.
Warranty and recall accruals were $30 million at September 30. The company recorded $13 million of changes in estimates related to defective supplier parts and expects to pursue supplier reimbursement.

Outlook, risks and contingencies

Management expects continued growth in cockpit electronics, which it stated is expected to grow at approximately twice the rate of the overall automotive industry, but results remain dependent on global vehicle production and customer platform mix.
Key operating risks include automotive cyclicality, China and South America weakness, foreign-exchange exposure, commodity costs, customer pricing pressure, supply disruptions, labor constraints and the ability to realize restructuring savings.
Visteon is pursuing recovery of approximately $359 million of Korean tax receivables at September 30, including $377 million of withholding tax paid in connection with the Climate transaction before currency and interest effects. Management expects recovery over one to five years, but recovery is not assured.
The Township of Van Buren, Michigan, is seeking responsibility for an estimated $25 million to $36 million shortfall in bond debt-service payments. The company disputes the claim and cannot estimate a possible loss.
OFAC is reviewing voluntary disclosures concerning approximately $12 million of sales by former HVCC-related Chinese joint ventures into Iran. Potential penalties or restrictions could be material, but no loss estimate was available.
Other contingencies include Brazilian tax and labor matters, German pension claims, product warranty and recall claims, environmental matters and guarantees. The filing states that ultimate outcomes may exceed recorded reserves.

Investor verification checklist

Separate recurring Electronics operating performance from the $2.332 billion Climate divestiture gain and other divestiture-related items.
Confirm the timing, amount and form of the planned $2.5 billion to $2.75 billion shareholder return.
Assess recovery risk and timing for the approximately $359 million Korean tax receivable.
Evaluate the effect of the post-quarter-end Berlin sale, including the estimated $100 million loss and approximately $190 million cash or asset contribution.
Track remaining Interiors divestitures, restructuring charges, Electronics integration costs and warranty-related recoveries.
Review exposure to automotive production volumes, currency movements, customer concentration and legal or regulatory contingencies, including the Township and OFAC matters.