VISTEON CORP quarterly report, Q3 FY2019

Visteon Corporation — Q3 2019 Form 10-Q Summary

Business context and reporting period

Visteon is a global automotive electronics supplier focused on instrument clusters, information displays, infotainment, audio, telematics, cockpit domain controllers and related connected-car technologies. The company operates as one reportable segment, Electronics, with approximately 10,000 employees and manufacturing and engineering operations concentrated outside the United States.

This filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Global light-vehicle production declined 3.2% in the third quarter and 5.9% year to date, with particularly weak production in China.

Financial performance and key metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Sales	$731 million	$681 million	$2,201 million	$2,253 million
Gross margin	$84 million; 11.5%	$82 million; 12.0%	$220 million; 10.0%	$315 million; 14.0%
Net income attributable to Visteon	$14 million	$21 million	$35 million	$121 million
Diluted EPS attributable to Visteon	$0.50	$0.71	$1.24	$4.02
Adjusted EBITDA	$62 million	$71 million	$149 million	$256 million
Cash flow from operations	Not separately provided	Not separately provided	$118 million	$107 million

Third-quarter sales increased $50 million, driven primarily by net new business, partially offset by lower volumes, unfavorable currency and customer pricing.
Nine-month sales declined $52 million, principally due to $52 million of unfavorable currency effects and $42 million of customer pricing and other reductions. VFAE consolidation increased nine-month sales by $38 million.
Nine-month gross margin fell $95 million, or 400 basis points, as unfavorable volumes and mix, higher engineering costs, customer pricing, currency and launch and plant-transfer inefficiencies more than offset cost improvements.
Net engineering costs increased to $245 million for the first nine months from $224 million, reflecting spending to support new business wins.
SG&A increased to $167 million for the first nine months from $139 million, including higher stock-based compensation, bad debt expense, the non-recurrence of a 2018 benefit and VFAE consolidation.
Restructuring expense declined to $2 million for the first nine months from $28 million in 2018.

Liquidity, debt and cash flow

Total cash and restricted cash was $446 million at September 30, 2019, down $21 million from December 31, 2018; $332 million was held outside the United States.
Operating cash flow improved to $118 million from $107 million year over year. Capital expenditures, including intangibles, were $109 million, resulting in $96 million of investing cash outflow.
Financing activities used $35 million, including $20 million for share repurchases, compared with $294 million used in the prior-year period.
Debt comprised $47 million of short-term borrowings and $348 million of long-term debt. The $300 million revolving credit facility had no borrowings, and approximately $68 million remained available under affiliate credit facilities.
The term facility has $350 million of principal outstanding and matures in March 2024. The revolving facility matures in March 2022 and requires a total net leverage ratio no greater than 3.00 to 1.00.
Visteon reported compliance with all debt covenants at September 30, 2019. Debt fair value was approximately $393 million.
Operating lease adoption added approximately $172 million of right-of-use assets and $176 million of lease liabilities at January 1, 2019. Lease liabilities totaled $160 million at September 30, 2019.

Material changes versus the prior comparable period

Q3 net income attributable to Visteon decreased $7 million and adjusted EBITDA decreased $9 million despite higher sales, primarily because of higher SG&A, higher taxes, lower other income and the absence of a 2018 affiliate transaction gain.
Year-to-date net income attributable to Visteon declined $86 million and adjusted EBITDA declined $107 million. The principal pressures were a $95 million gross-margin reduction, $28 million higher SG&A and $10 million lower other income.
The 2018 comparison benefited from a $4 million non-cash gain on the VFAE transaction and approximately $17 million of pre-tax benefits related to the resolution of a former CEO matter. These benefits did not recur in 2019.
Visteon acquired control of VFAE in September 2018 by increasing its ownership to 51%; VFAE has been consolidated since that date.
The company repurchased 322,120 shares for $20 million during the first nine months of 2019. Up to $380 million remained available under the repurchase authorization through December 2020; no shares were purchased during Q3.
The company adopted the new lease accounting standard on January 1, 2019 without restating comparative periods. The adoption materially increased reported assets and liabilities but did not affect earnings or cash flows.

Guidance, outlook, commentary and risks

Management stated that current funds from operations, cash balances and available credit facilities are expected to be adequate for current business requirements. The filing does not provide a specific full-year revenue, earnings or EBITDA guidance figure.

Management expects adverse vehicle-production trends and macroeconomic uncertainty, particularly in China and Asia-Pacific, to persist into the fourth quarter of 2019.
Strategic priorities include growth in digital cockpit electronics, margin expansion, operational restructuring and shareholder returns.
The company estimates 2019 pension contributions of $7 million and expects restructuring activities associated with the $11 million reserve at September 30, 2019 to be substantially complete within one year.
A full valuation allowance remains against U.S. deferred tax assets. Management indicated that a partial release could occur within three to 18 months if U.S. operating improvement is sustained; such a release could materially increase income in the applicable period.
Key risks include vehicle-production volatility, customer pricing pressure, engineering and product-launch costs, foreign exchange, commodity costs, supply-chain disruptions, labor and restructuring constraints, customer concentration, regulatory changes, product warranty and recall exposure, and access to foreign subsidiary cash.
OFAC continues to review voluntary disclosures concerning historical sales involving Iran. Potential penalties or restrictions could be material, but the company cannot estimate a loss range.
Brazilian litigation and claims totaled approximately $73 million, against which the company had accrued approximately $11 million. The company also maintained $51 million of product warranty and recall reserves.
Credit exposure is concentrated among major customers: Ford and affiliates represented 15% of accounts receivable and Renault/Nissan represented 13% at September 30, 2019.
Brexit-related trade, customs and supply-chain uncertainty could affect approximately $90 million of 2018 United Kingdom sales and the company's integrated European supply chain.

Most important facts for investors to verify

Whether weak global vehicle production and customer pricing pressure continue to reduce gross margin and adjusted EBITDA.
Progress in reversing the year-to-date decline in gross margin, including engineering-cost control, plant-transfer remediation and curved-display launch execution.
Cash conversion relative to capital expenditures and the sustainability of the $118 million year-to-date operating cash flow.
Debt covenant compliance, revolving-facility availability and the effect of foreign-held cash on liquidity flexibility.
Timing and probability of any U.S. deferred-tax-asset valuation allowance release.
Potential outcomes of the OFAC review, Brazilian claims, product warranty and recall matters, and other unresolved contingencies.
Whether continued share repurchases remain appropriate given earnings deterioration, vehicle-market conditions and capital needs.