VISTEON CORP quarterly report, Q1 FY2012

Visteon Corporation — Form 10-Q Summary

Business context and reporting period

Visteon is a global automotive supplier of climate, electronics and interiors systems, modules and components to original equipment manufacturers. The company had approximately 25,000 employees and operations, technical centers and joint ventures worldwide. This unaudited filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Results reflect the post-bankruptcy successor entity, which emerged from Chapter 11 on October 1, 2010.

Key financial metrics

Metric	Q1 2012	Q1 2011	Change
Sales	$1,717 million	$1,850 million	$(133) million
Gross margin	$134 million	$143 million	$(9) million
Gross margin percentage	7.8%	7.7%	Improved modestly
Operating income (loss)	$(20) million	$45 million	$(65) million
Income from continuing operations	$(14) million	$52 million	$(66) million
Net income (loss) attributable to Visteon	$(29) million	$39 million	$(68) million
Diluted EPS attributable to Visteon	$(0.56)	$0.75	$(1.31)
Adjusted EBITDA	$150 million	$160 million	$(10) million
Cash flow from operating activities	$19 million	$(50) million	Improved by $69 million
Capital expenditures	$53 million	$55 million	$(2) million
Free cash flow	$(34) million	$(105) million	Improved by $71 million

Sales declined primarily because of the deconsolidation of Duckyang, which reduced reported sales by approximately $114 million, unfavorable currency effects of $33 million and price productivity. Higher production volumes and favorable mix contributed approximately $35 million. Climate sales increased to $1,023 million, while Electronics declined to $322 million and Interiors declined to $400 million.

Gross margin was affected by unfavorable product mix, currency and the Duckyang deconsolidation, partially offset by lower depreciation and amortization and favorable material and manufacturing performance. Operating results included $63 million of restructuring and other expenses, compared with $2 million in the prior-year quarter.

Financial position, debt and liquidity

Cash and equivalents were $696 million at March 31, 2012, compared with $723 million at December 31, 2011. Including restricted cash, total cash was $721 million.
Total debt was $596 million, consisting of $93 million of short-term debt and $503 million of long-term debt. The principal long-term obligation was $494 million of 6.75% senior notes due April 15, 2019.
The $220 million revolving credit facility had no borrowings and was fully available at quarter-end, subject to borrowing-base requirements. Affiliate credit facilities had approximately $180 million of remaining availability.
Cash balances outside the United States totaled $559 million; approximately $150 million was considered permanently reinvested outside the United States.
Total assets were $5.16 billion and total shareholders’ equity was $2.09 billion at March 31, 2012.
Accounts receivable increased to $1.19 billion from $1.06 billion at year-end, while accounts payable increased to $1.16 billion from $1.01 billion.

Material changes and unusual items

The company agreed to sell its Lighting operations for approximately $92 million, including $20 million for its 50% interest in Visteon TYC Corporation. Lighting was classified as discontinued operations and the transaction was expected to close in the third quarter of 2012. Lighting generated $139 million of sales and $3 million of net income in Q1 2012.
Restructuring and other expenses included $41 million of restructuring costs, $14 million related to an asset contribution, and $8 million of business transformation costs. The largest item was the Cadiz, Spain, Electronics closure, which generated approximately $50 million of restructuring and other expenses and approximately $49 million of cash payments during the quarter.
Restructuring reserves declined to $14 million from $26 million at December 31, 2011. The company expected substantially completing related activities by the end of 2012.
In April 2012, Visteon completed the sale of its corporate headquarters for approximately $81 million and entered into a 15-year leaseback. The approximately $20 million gain was to be deferred and recognized over the lease term.
Visteon contributed approximately 1.5 million shares valued at $73 million to two U.S. defined benefit pension plans, reducing expected future cash pension funding requirements.
The company continued evaluating a potential transaction combining most of its Interiors business with Yanfeng Visteon Automotive Trim Systems. The Interiors assets had a carrying value of approximately $189 million; management concluded that no impairment existed at quarter-end, but a material impairment could be required if the transaction became more likely.

Outlook, risks and contingencies

Management described global vehicle production as modestly stronger overall, with growth in North America, Japan/Korea and India offsetting declines in Europe and China. The company did not provide specific full-year revenue or earnings guidance in the filing. Management expected seasonal liquidity usage during the first and third quarters and planned to fund requirements through operating cash flow, cash on hand, financing availability, asset sales and potential capital-market access.

Key operating risks include European economic weakness, vehicle production and customer platform changes, pricing pressure, commodity costs, foreign exchange, labor restrictions and the ability to realize restructuring savings.
The company monitored potential supply-chain effects from a PA-12 resin shortage following a supplier plant explosion in Germany. It reported no significant direct exposure but noted possible production disruption, premium freight and customer shutdown costs.
Visteon was subject to a European Commission investigation concerning alleged anticompetitive behavior in automotive electronic components. No loss reserve was recorded because a reasonably possible loss range could not be estimated.
Brazilian labor, tax and customs claims totaled approximately $155 million, against which the company had accrued approximately $14 million.
German pension-related claims involved more than 650 current and former employees, with approximately 700 additional employees similarly situated. The remaining reserve was approximately $6 million, with potential additional exposure of up to approximately $8 million.
Product warranty and recall liabilities were $66 million at March 31, 2012, compared with $78 million at March 31, 2011. Environmental reserves were approximately $1 million.
Foreign currency forward contracts had notional amounts of approximately $767 million. Approximately 87% of borrowings were effectively fixed-rate, and the company had no outstanding interest-rate derivatives.

Most important facts for investors to verify

Whether the Lighting transaction closes on schedule and at the stated approximately $92 million proceeds, and how the divestiture changes future revenue and cash flow.
Whether the Interiors transaction with Yanfeng advances and whether future developments trigger an impairment of the approximately $189 million asset base.
Actual cash costs and recoveries associated with the Cadiz closure and other restructuring programs.
Liquidity after seasonal working-capital needs, pension contributions, capital expenditures and potential changes to revolving-credit borrowing capacity following asset sales.
Progress and potential financial exposure from the European Commission investigation, German pension claims, Brazilian claims and warranty or recall matters.
Trends in European and Chinese vehicle production, customer concentration and foreign-exchange effects. Ford and affiliates represented 24% of accounts receivable at quarter-end.
The comparability of reported results, given discontinued Lighting operations, the Duckyang deconsolidation and ongoing portfolio transformation.