Visteon Corporation 2019 Form 10-K Summary
Business context and reporting period
Visteon is a global automotive electronics supplier focused on digital instrument clusters, information displays, infotainment, telematics, head-up displays, SmartCore cockpit controllers and DriveCore advanced-safety platforms. The filing covers the fiscal year ended December 31, 2019, with quarterly information for the fourth quarter ended December 31, 2019. The company reported one segment, Electronics, and had approximately 11,000 employees.
Ford, Mazda and Renault/Nissan represented approximately 22%, 14% and 13% of 2019 sales, respectively. Anticipated Revenue from Awarded Programs was $22.6 billion at year-end, but customer volume commitments are generally not firm and programs may be modified or canceled.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $2,945 million | $2,984 million | Down $39 million |
| Gross margin | $324 million; 11.0% | $411 million; 13.8% | Down $87 million; margin down 280 basis points |
| Net income attributable to Visteon | $70 million | $164 million | Down $94 million |
| Diluted EPS | $2.48 | $5.52 | Down $3.04 |
| Adjusted EBITDA | $234 million | $330 million | Down $96 million |
| Cash provided by operating activities | $183 million | $204 million | Down $21 million |
| Capital expenditures | $142 million | $127 million | Up $15 million |
Fourth-quarter 2019 sales were $744 million, gross margin was $104 million, net income attributable to Visteon was $35 million and diluted EPS was $1.24. Fourth-quarter sales growth excluding currency and acquisitions outperformed the market by 7%.
Year-end cash totaled $469 million, including $3 million of restricted cash. Total debt was approximately $385 million, consisting of $37 million of short-term debt and $348 million of long-term debt. The company had no borrowings under its revolving credit facility and approximately $73 million of availability under affiliate working-capital lines. Total assets were $2.271 billion and Visteon stockholders’ equity was $480 million.
The company adopted the new lease standard on January 1, 2019, recognizing approximately $172 million of right-of-use assets and $176 million of lease liabilities. Year-end operating and finance lease liabilities totaled $169 million.
Material changes versus the prior comparable period
- Sales declined 1.3%, primarily due to $59 million of unfavorable currency effects and $71 million of customer pricing reductions. Net new business and mix contributed $22 million, while the 2018 consolidation of VFAE contributed $38 million to the comparison.
- Gross margin declined to 11.0% from 13.8%. Unfavorable volume and mix reduced gross margin by $69 million, higher net engineering costs reduced it by $21 million, and currency reduced it by $12 million. Favorable cost performance of $80 million only partially offset customer pricing reductions.
- Net engineering costs increased to $300 million from $286 million, reflecting investment to support new business wins.
- SG&A increased to $221 million from $193 million, or 7.5% versus 6.5% of sales, due partly to higher stock compensation, incentive compensation, bad-debt expense and personnel costs.
- Restructuring expense declined to $4 million from $29 million. The company paid $15 million related to restructuring activities during 2019.
- Share repurchases fell substantially to $20 million in 2019 from $300 million in 2018. The company retained $380 million of repurchase authorization through December 31, 2020, and paid no common-stock dividends in either year.
- China domestic sales increased to $527 million from $405 million, but China export sales declined to $262 million from $309 million. Other Asia-Pacific sales fell to $560 million from $678 million, principally reflecting lower Japan-related sales.
Guidance, outlook, management commentary, risks and unusual items
Management expects global light-vehicle production to decline year over year in the first half of 2020, particularly in China, Europe and other Asia-Pacific markets. The filing cites low consumer confidence, trade uncertainty, emissions regulations and the potential impact of the coronavirus outbreak. North American production was expected to increase slightly, although certain key customers were forecast to decline.
In the first quarter of 2020, the company approved a restructuring program affecting engineering and administrative functions and expects to incur $18 million to $24 million of related costs. Management continues to target technology innovation, long-term growth and margin expansion, and shareholder returns.
- Automotive production is cyclical; 2019 global light-vehicle production declined 5.6%, with China down 8.1%.
- Customer concentration is significant, particularly Ford, which represented 22% of 2019 sales. OEMs generally do not guarantee production volumes and may terminate or change programs.
- Customer pricing pressure, material inflation, supply shortages, production interruptions, tariffs, foreign-exchange movements and labor issues may reduce sales or margins.
- The company has approximately $276 million of unfunded net pension liabilities and expects $26 million of pension contributions in 2020.
- Deferred tax assets totaled $198 million after valuation allowances of $1.132 billion. Management indicated that a partial release of the U.S. valuation allowance could occur within 12 to 24 months if U.S. profitability improves sustainably, potentially creating a significant one-time earnings benefit.
- Brazilian litigation and claims totaled approximately $78 million, against which the company had accrued approximately $11 million.
- A Michigan township lawsuit seeks $28 million relating to alleged current and future shortfalls on development bonds. The company disputes the claims and cannot estimate a possible loss.
- OFAC continues reviewing voluntary disclosures concerning historical sales of automotive HVAC components into Iran. Potential penalties or restrictions cannot be estimated and could be material.
- Product warranty and recall liabilities were $49 million at year-end, compared with $48 million in 2018.
- The company adopted lease accounting in 2019 without an impact on reported earnings or cash flows. Goodwill impairment testing identified no impairment.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019.
Most important facts for an investor to verify
- Whether the 2019 margin decline is temporary or reflects sustained customer pricing, volume, mix and engineering-cost pressure.
- The pace of global vehicle production, especially in China, Europe and other Asia-Pacific markets, and the continuing effects of coronavirus-related disruptions.
- Ford, Mazda and Renault/Nissan production plans, program awards, pricing negotiations and actual realization of the $22.6 billion awarded-program estimate.
- Liquidity after capital expenditures, restructuring payments, pension contributions and any future share repurchases.
- Compliance with the revolving-credit-facility net leverage covenant of 3.50:1.00 and the maturity profile of the $348 million term facility due March 2024.
- The cost and benefits of the 2020 restructuring program and whether additional restructuring actions will be required.
- Potential cash or earnings effects from pension funding, tax audits, deferred-tax valuation allowance changes, Brazilian claims, the Michigan bond litigation and the OFAC review.