Visteon Corporation — Q3 2017 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Visteon is a global automotive supplier focused primarily on cockpit electronics, including instrument clusters, displays, infotainment, audio, telematics and head-up displays. The company had approximately 10,000 employees and reported one operating segment, Electronics, following the exit of substantially all former Climate and Other operations.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Sales | $765 million | $770 million | $2,349 million | $2,345 million |
| Gross margin | $116 million; 15.2% | $105 million; 13.6% | $359 million; 15.3% | $335 million; 14.3% |
| Net income from continuing operations | $47 million | $25 million | $154 million | $100 million |
| Net income attributable to Visteon | $43 million | $28 million | $151 million | $73 million |
| Diluted EPS | $1.35 | $0.81 | $4.68 | $2.03 |
| Adjusted EBITDA | $83 million | $75 million | $268 million | $241 million |
- Operating cash flow: $131 million for the first nine months, compared with $38 million in the prior-year period.
- Investing cash flow: $97 million used, including $69 million of capital expenditures and $47 million for repurchase of the India electronics operations.
- Financing cash flow: $197 million used, primarily reflecting $170 million of share repurchases and $29 million of dividends to non-controlling interests.
- Cash and restricted cash: $735 million at September 30, 2017, including $3 million of restricted cash, versus $882 million at December 31, 2016.
- Debt: $391 million of reported short- and long-term debt, consisting of $44 million short-term debt and $347 million long-term debt. The fair value of debt was approximately $397 million.
- Liquidity: The amended revolving credit facility had $300 million of capacity and no outstanding borrowings. Affiliate working-capital lines had approximately $18 million of availability. The company was in compliance with its debt covenants.
- Capital structure: Visteon stockholders’ equity was $615 million and total equity was $733 million at quarter-end.
Material changes versus the prior comparable period
- Q3 sales declined $5 million because the 2016 comparison included $21 million of Other climate sales. Electronics sales increased $16 million, driven by new business, favorable volumes, product mix and currency, partly offset by customer pricing and design changes.
- Nine-month sales increased $4 million. Electronics volume, mix and new business added $117 million, while customer pricing and other items reduced sales by $58 million, unfavorable currency reduced sales by $14 million, and exited climate operations reduced sales by $41 million.
- Gross margin improved by $11 million in Q3 and $24 million for the nine-month period. Benefits included cost efficiencies, higher engineering recoveries and favorable volumes or currency; customer pricing, product mix and manufacturing costs were offsets.
- Q3 Adjusted EBITDA margin for Electronics increased to 10.8% from 10.0%. Nine-month Adjusted EBITDA increased $27 million to $268 million.
- Net income attributable to Visteon increased $15 million in Q3 and $78 million for the nine-month period. The improvement benefited from higher gross margin, lower restructuring expense, non-recurrence of 2016 South Africa disposition charges, affiliate gains and favorable discontinued-operation items.
- Restructuring expense decreased to $10 million from $22 million for the first nine months. The engineering and administrative restructuring program had incurred approximately $37 million through September 30 and may incur up to $45 million in total costs.
- Cash from operations improved by $93 million, primarily due to higher earnings and lower transaction-related tax payments. Cash declined overall because of share repurchases, capital expenditures and the India operations repurchase.
- The company repurchased $170 million of common stock during 2017 through September 30, with $230 million remaining under the $400 million authorization.
Guidance, outlook, commentary and risks
- Management reported $4.6 billion of new business wins during the first nine months, $0.5 billion above the prior-year period, and an approximately $18.0 billion backlog at September 30, 2017. Approximately 37% of backlog is expected to be manufactured in China and other Asian countries.
- Strategic priorities include strengthening the cockpit electronics core, selectively expanding into adjacent products, developing autonomous-driving technologies, accelerating the China business and enhancing shareholder returns.
- Management expects to launch its autonomous-driving domain-controller technology in 2018 and is investing in a research and development facility for connected and automated vehicle activities.
- Management believes operating cash flow, existing cash and available credit facilities will be adequate for current business requirements. It expected approximately $35 million of remaining 2017 payments related to the Germany Interiors divestiture and $7 million of 2017 pension contributions.
- The company was negotiating a possible exit of a European facility that could require $15 million to $20 million of cash and working-capital contributions plus approximately $10 million to $15 million of long-term assets. The transaction was not yet finalized and the assets were not classified as held for sale.
- Key operating risks include cyclical vehicle production, customer concentration and changes in Ford and other OEM production, pricing pressure, commodity and supply-chain costs, currency movements, labor restrictions, restructuring execution, technology and intellectual-property risks, warranty and recall exposure, and access to foreign subsidiary cash.
- Ford and affiliates represented 17% of accounts receivable; Mazda and Nissan/Renault each represented 11% at September 30, 2017.
- Unresolved matters include an OFAC review of previously disclosed sales involving Iran, litigation involving the former CEO, the Van Buren Township bond-related dispute, tax and legal matters in Brazil and Argentina, and other product, regulatory and employment claims. The company could not estimate potential losses for certain matters.
- Gross unrecognized tax benefits were $17 million at September 30. Management stated that a partial release of the U.S. deferred-tax valuation allowance could occur within 12 to 24 months if U.S. operating results improve sustainably, potentially materially affecting net income.
- The company planned to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method and did not expect a material cumulative adjustment.
Facts investors should verify
- Whether Electronics revenue growth, engineering recoveries and cost efficiencies offset customer pricing and mix pressure in subsequent quarters.
- Progress and final cost of the engineering and administrative restructuring program, including the remaining restructuring reserve of $26 million.
- Cash deployment, remaining share-repurchase authorization and the effect of buybacks on liquidity and share count.
- Execution of the $18.0 billion backlog, new-business wins and the timing of autonomous-driving and SmartCore-related launches.
- Potential cash requirements from the Germany Interiors settlement, the possible European facility exit, pensions, litigation, tax matters and OFAC proceedings.
- Foreign-exchange exposure, variable-rate debt exposure and the effectiveness of the company’s hedging programs.
- Customer production trends, particularly North American vehicle production and Ford-related volumes, as well as OEM pricing and sourcing decisions.