Visteon Corporation — 2011 Form 10-K Summary
Business context and reporting period
Visteon is a global automotive supplier of climate, electronics, interiors and lighting systems, modules and components. It operated with approximately 26,000 employees and generated 2011 sales of $8.05 billion. The fiscal year ended December 31, 2011; the filing also reports fourth-quarter 2011 results.
Visteon emerged from Chapter 11 on October 1, 2010 and adopted fresh-start accounting. Consequently, 2011 Successor results are not directly comparable with Predecessor results before October 1, 2010. The closest reported comparable periods are the fourth quarter of 2011 versus the fourth quarter of 2010, and the full-year 2011 versus the combined Successor and Predecessor 2010 periods.
Financial performance and position
| Metric | 2011 | 2010 comparable information |
|---|---|---|
| Net sales | $8,047 million | $1,887 million for Q4 Successor; full-year combined figures are not fully comparable |
| Gross margin | $643 million; approximately 8.0% of sales | $244 million in Q4 2010 Successor |
| Operating income | $166 million | $93 million in Q4 2010 Successor |
| Income before taxes | $281 million | $124 million in Q4 2010 Successor |
| Net income attributable to Visteon | $80 million; diluted EPS $1.54 | $86 million; diluted EPS $1.66 in Q4 2010 Successor |
| Adjusted EBITDA | $685 million | $109 million in Q4 2010 Successor |
| Operating cash flow | $175 million | $154 million in Q4 2010 Successor; $141 million for 2009 |
| Free cash flow | $(83) million | $62 million in Q4 2010 Successor |
| Cash and restricted cash | $746 million, including $23 million restricted | $979 million at December 31, 2010, including $74 million restricted |
| Total debt | $599 million | $561 million at December 31, 2010 |
| Total assets | $4,973 million | $5,208 million at December 31, 2010 |
| Total shareholders’ equity | $1,997 million | $1,950 million at December 31, 2010 |
Product sales rose $724 million versus the combined 2010 comparison presented by management, driven primarily by $672 million of higher volume and mix and $383 million of favorable currency effects. These benefits were partly offset by $166 million from divestitures and closures, $83 million from the Duckyang deconsolidation and $82 million from pricing and other reductions.
Product gross margin was $643 million, compared with $807 million for the combined 2010 periods cited by management. The 2010 amount included $192 million of gains from termination of certain other postretirement employee benefits. In 2011, higher volume and favorable currency benefits were offset by higher depreciation and amortization, cost-performance issues, divestitures, closures and commercial agreements.
Segment product sales were Climate $4,053 million, Interiors $2,285 million, Electronics $1,367 million and Lighting $531 million, before eliminations. Equity income from non-consolidated affiliates was $168 million, including approximately $150 million attributable to Yanfeng Visteon Automotive Trim Systems and related affiliates.
Material changes and unusual items
- Visteon refinanced its $500 million term loan in April 2011 with 6.75% senior notes due 2019 and recorded a $24 million loss on debt extinguishment.
- The company recorded a $66 million fourth-quarter impairment charge principally against Lighting property and equipment. Lighting assets had an approximate post-impairment carrying value of $47 million.
- Restructuring expense was $24 million net in 2011, with a year-end restructuring reserve of $26 million. The company began a Climate systems-commonization program that could ultimately separate approximately 500 employees at an additional estimated cash cost of approximately $20 million.
- Cadiz Electronics in Spain is being closed. Agreements reached in January 2012 and ratified in February 2012 are expected to result in approximately $47 million of additional first-quarter 2012 charges, partly offset by an anticipated $19 million Ford recovery in 2012.
- Visteon sold a 1% interest in Duckyang on October 31, 2011, lost control, deconsolidated the business and recognized an $8 million gain. The transaction removed $217 million of assets and $159 million of liabilities from the consolidated balance sheet.
- Visteon acquired, through Halla Climate Control, a 37.5% interest in Wuhu Bonaire for $26 million and completed a $29 million acquisition of joint-venture interests in 2011.
- A non-binding memorandum of understanding was signed to potentially combine most of Visteon’s Interiors business with Yanfeng. No definitive transaction had been completed, and the filing states that a future transaction could create a material impairment charge.
- Natural disasters in Japan and Thailand disrupted suppliers and vehicle production, but the company stated that the 2011 impact was not material to its financial position, results or cash flows.
Liquidity, debt and outlook
Visteon had $723 million of unrestricted cash, $23 million of restricted cash and $599 million of debt at December 31, 2011. Its $220 million asset-based revolving credit facility was undrawn and available, subject to borrowing-base requirements. Affiliate working-capital facilities had approximately $200 million of remaining availability. Credit ratings were B1 from Moody’s and B+ from S&P, both with stable outlooks.
The 2011 cash decrease was $182 million, reflecting $175 million of operating cash flow, $331 million used in investing activities and $3 million used in financing activities, plus foreign-exchange effects. Capital expenditures were $258 million, producing negative free cash flow of $83 million.
Contractual obligations totaled $1.147 billion, including $599 million of debt, $212 million of purchase obligations, $211 million of scheduled long-term-debt interest and $125 million of operating leases. Debt maturities include $87 million in 2012 and $495 million thereafter, primarily related to the 2019 senior notes.
The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued focus on cost reductions, restructuring, global Climate systems commonization, portfolio transformation and potential business transactions. Expected net product sales from new programs, net of phased-out, lost and canceled programs, were estimated at approximately $1.0 billion for 2012 through 2014; these estimates are not firm orders and depend on production volumes, pricing, currency and launch timing.
Risks, contingencies and management commentary
- Customer concentration is significant: Hyundai Motor Group represented 31% and Ford 27% of 2011 product sales. Changes in their vehicle production or platform mix could materially affect results.
- The automotive industry is cyclical, highly competitive and subject to customer price reductions, commodity inflation, labor disruptions, supplier insolvencies and production interruptions.
- Approximately $447 million of unfunded pension liabilities existed at year-end 2011, including $329 million in the U.S. and $118 million outside the U.S. Estimated cash contributions for 2012 through 2015 were approximately $210 million.
- On January 9, 2012, Visteon contributed approximately $70 million of common stock to its two largest U.S. pension plans, in addition to a $15 million cash contribution, substantially reducing expected 2012 and 2013 cash funding needs.
- Credit agreements contain leverage, interest-coverage, capital-expenditure, excess-availability and other restrictive covenants. Noncompliance could require waivers or accelerate debt.
- Visteon remains exposed to the UAW postretirement-benefit litigation, German pension claims, the European Commission investigation into alleged anticompetitive conduct involving automotive electronic components, product warranty and recall claims, environmental liabilities and other legal proceedings.
- The company reported approximately $8 million reserved for German pension litigation, $1 million for environmental matters and $65 million of product warranty and recall liabilities at December 31, 2011.
- Deferred tax assets of approximately $1.7 billion were subject to valuation allowances. U.S. tax attributes are limited by the Chapter 11-related ownership change, and a subsequent ownership change could further restrict utilization.
- Management and PricewaterhouseCoopers concluded that internal control over financial reporting was effective as of December 31, 2011.
Most important facts for investors to verify
- Reconcile the company’s non-GAAP Adjusted EBITDA of $685 million and negative free cash flow of $83 million to GAAP results and cash flows.
- Assess whether the $66 million Lighting impairment and the planned Cadiz closure indicate broader portfolio or asset impairment risk.
- Review customer concentration, particularly the combined 58% of 2011 product sales attributable to Hyundai Motor Group and Ford.
- Evaluate liquidity after capital expenditures, pension funding, restructuring payments and the $87 million of 2012 debt maturities.
- Confirm the effect of the January 2012 $70 million stock contribution and $15 million cash contribution on future pension funding requirements and shareholder dilution.
- Review the terms and covenant requirements of the 6.75% senior notes, revolving facility and affiliate debt.
- Consider the comparability limitations caused by fresh-start accounting and the Successor/Predecessor presentation before relying on year-over-year trends.
- Monitor the potential Interiors transaction, UAW litigation, European Commission investigation, German pension claims and unresolved warranty, environmental and other contingencies.