Business Context and Reporting Period
Visteon Corporation is a global automotive electronics supplier with one reportable segment, Electronics. Products include instrument clusters, information displays, infotainment, audio, telematics, head-up displays, body and security systems, climate controls, and battery monitoring systems. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net sales | $610 million | $371 million | $1,356 million | $1,014 million |
| Gross margin | $35 million | $4 million | $108 million | $57 million |
| Gross margin percentage | 5.7% | 1.1% | 8.0% | 5.6% |
| Net income attributable to Visteon | $(11) million | $(45) million | $5 million | $(80) million |
| Diluted EPS | $(0.39) | $(1.62) | $0.18 | $(2.87) |
| Adjusted EBITDA | $30 million | $(3) million | $94 million | $30 million |
| Cash flow from operations | Not separately provided | Not separately provided | $1 million | $(13) million |
As of June 30, 2021, cash and equivalents were $466 million, restricted cash was $4 million, and total cash including restricted cash was $470 million. Gross debt was $355 million, consisting of $6 million of short-term debt and $349 million of long-term debt. The company had no revolver borrowings, $400 million of available revolving credit capacity, and $179 million of affiliate credit-facility capacity. It was in compliance with its debt covenants.
Total assets were $2.122 billion and total equity was $487 million at June 30, 2021, compared with $2.271 billion and $510 million, respectively, at December 31, 2020. Capital expenditures, including intangibles, were $33 million during the first six months of 2021. The company expects 2021 pension contributions of approximately $25 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased $239 million, or approximately 64%, primarily from higher volume, mix, and net new business, with additional benefit from currency. Six-month sales increased $342 million, or approximately 34%.
- Second-quarter gross margin rose to $35 million from $4 million, although semiconductor-related logistics, material, and freight costs and the absence of temporary 2020 cost controls reduced profitability. Six-month gross margin increased $51 million.
- Second-quarter net loss attributable to Visteon improved by $34 million, while six-month results improved by $85 million and returned to profitability.
- Adjusted EBITDA improved by $33 million in the quarter and $64 million year to date, supported by higher volumes, favorable currency, and lower net engineering costs.
- Selling, general and administrative expense declined to 6.6% of sales for the first six months from 9.4% in the prior-year period. The company recorded no net restructuring expense for the six-month 2021 period, compared with $37 million in 2020, although it recorded $2 million of restructuring expense in the second quarter.
- Operating cash flow improved to $1 million from an $13 million use of cash, but working capital absorbed cash because of the semiconductor supply shortage. Cash, equivalents, and restricted cash declined $30 million during the first six months.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide clear numerical full-year revenue, earnings, or cash-flow guidance. Management expects cash generated from operations, existing cash, and available credit facilities to support ongoing operations and investment, while continuing to monitor liquidity and the effects of the COVID-19 pandemic and semiconductor shortage.
- The global semiconductor shortage, supplier disruptions, the Japan fabrication-facility fire, severe weather in Texas, the Suez Canal blockage, and other supply-chain constraints reduced customer production and increased logistics and material costs. Customers may seek damages or require Visteon to absorb some production-related impacts; Visteon has stated that it intends to defend such claims and seek compensation from suppliers.
- Restructuring reserves totaled $23 million at June 30, 2021, with related activities expected to be substantially complete by the end of 2022.
- Warranty and recall liabilities were $61 million at June 30, 2021. Brazil litigation claims totaled $60 million, against which the company had accrued $10 million.
- A Michigan township litigation matter seeks $28 million related to bond shortfalls; the company disputes the claims and cannot estimate a possible loss range.
- OFAC is reviewing voluntary disclosures concerning historical sales of automotive HVAC components into Iran. Potential penalties could be material, but the company cannot estimate the possible loss or range of loss.
- The company identifies vehicle production levels, customer financial health, component and commodity availability, foreign exchange, access to foreign subsidiary cash, liquidity and covenant compliance, restructuring execution, legal proceedings, product warranty and recall exposure, and pension obligations as significant risks.
- The company maintains full valuation allowances against certain deferred tax assets, including in the United States. It stated that sustained improvement could provide sufficient evidence to release some or all of the U.S. valuation allowance within the next six to 18 months, but no release was recorded in this filing.
Important Facts for Investors to Verify
- Whether the semiconductor shortage and related customer production reductions continue to pressure margins, working capital, and cash flow.
- Whether the improvement in Adjusted EBITDA converts into sustained positive operating cash flow after restructuring, pension, capital expenditure, and working-capital requirements.
- The maturity and refinancing prospects for the $349 million term facility due in March 2024, as well as compliance with applicable covenants.
- The status and potential financial impact of the Michigan bond litigation, OFAC review, Brazil claims, customer damage claims, and supplier recovery efforts.
- Whether deferred tax valuation allowances can be released and how that would affect future effective tax rates and earnings.
- The company’s ability to complete restructuring programs and achieve planned cost savings while funding technology development and customer programs.