Visteon Corporation — 2011 Q2 Form 10-Q Summary
Business Context and Reporting Period
Visteon is a global automotive OEM supplier of climate, electronics, interiors and lighting systems, modules and components, with approximately 26,700 employees. This report covers the three and six months ended June 30, 2011. Visteon emerged from Chapter 11 on October 1, 2010 and adopted fresh-start accounting; therefore, 2011 Successor results are not directly comparable with 2010 Predecessor results.
The company changed its operating structure in 2011 to report Climate, Electronics, Interiors and Lighting as global product-line segments. Prior-period segment information was recast.
Financial Performance and Position
| Metric | Three Months 2011 | Three Months 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Net sales | $2,178 million | $1,945 million | $4,151 million | $3,849 million |
| Product sales | $2,178 million | $1,889 million | $4,151 million | $3,735 million |
| Gross margin | $197 million | $104 million | $346 million | $522 million |
| Operating income | $67 million | $(36) million | $116 million | $210 million |
| Net income attributable to Visteon | $26 million | $(201) million | $65 million | $32 million |
| Diluted earnings per share | $0.50 | $(1.55) | $1.25 | $0.25 |
| Adjusted EBITDA | $201 million | $166 million | $360 million | $327 million |
| Cash provided by operating activities | $70 million | $133 million | $20 million | $173 million |
| Free cash flow | $(1) million | $92 million | $(106) million | $107 million |
Second-quarter consolidated gross margin was approximately 9.0% of sales, compared with approximately 5.3% in the prior-year period. Six-month gross margin was approximately 8.3%, compared with approximately 13.6% in 2010. The six-month comparison was affected by unusually significant 2010 employee benefit accounting items.
- Second-quarter sales increased $233 million, or 12%, including $192 million from higher OEM production volumes and $155 million from favorable currency, partly offset by $37 million from plant divestitures and closures and net price reductions.
- Six-month sales increased $302 million, or 8%, including $431 million from higher production volumes and $173 million from favorable currency, partly offset by $125 million from divestitures and closures and net price reductions.
- Second-quarter equity income from non-consolidated affiliates rose to $43 million from $35 million; six-month equity income rose to $87 million from $65 million, primarily due to Yanfeng and growth in China.
- Second-quarter SG&A increased to $111 million from $88 million, driven by incentive compensation, bankruptcy-related professional fees, currency and intangible amortization.
- Second-quarter interest expense fell to $13 million from $129 million, primarily because 2010 included $122 million of prior contractual interest associated with the Chapter 11 proceedings.
Cash Flow, Liquidity and Debt
At June 30, 2011, cash and equivalents were $839 million and restricted cash was $22 million, for total cash of $861 million. Total cash declined by approximately $118 million from December 31, 2010. Accounts receivable were $1,341 million, inventories were $419 million and total current assets were $2,978 million.
- Six-month operating cash flow was $20 million, down from $173 million, primarily reflecting working-capital outflows, tax-related assets, bankruptcy professional-fee payments and the absence of certain 2010 cash benefits.
- Capital expenditures were $126 million, compared with $66 million in the prior-year period, resulting in six-month free cash flow of negative $106 million.
- Total debt was $596 million, consisting of $91 million of short-term debt and $505 million of long-term debt.
- On April 6, 2011, Visteon issued $500 million of 6.75% senior notes due 2019 and repaid its approximately $498 million term loan. The refinancing generated a $24 million loss on debt extinguishment, principally from unamortized discounts and fees.
- The asset-based revolving credit facility was increased to $220 million. No borrowings or letters of credit were outstanding under the facility at June 30, 2011, and approximately $220 million was available subject to borrowing-base requirements.
- Affiliate debt totaled approximately $100 million, with approximately $260 million of remaining availability under affiliate working-capital facilities.
Material Changes, Outlook and Unusual Items
- In June 2011, Visteon announced the planned closure of its Cadiz Electronics facility in Spain, expected to be completed by June 30, 2012 and affecting approximately 400 employees. The company recorded $21 million of severance and termination costs and expects additional material costs, although the amount cannot yet be estimated.
- Restructuring reserves were $42 million at June 30, 2011, including $21 million related to the Cadiz closure. Management continues to evaluate additional restructuring actions in response to automotive industry conditions.
- The company reported $19 million of other expense in the second quarter, primarily restructuring costs, compared with $13 million in the prior-year period. The first half included $17 million of restructuring costs, compared with $42 million of restructuring, asset impairment and divestiture losses in 2010.
- Commodity costs, particularly resins and aluminum, increased cost of sales. Management stated that pricing pressure and material costs exceeded manufacturing, material and restructuring savings in the second quarter and first half.
- Management highlighted continued risks from vehicle-production volatility, seasonality, customer concentration, foreign exchange, commodity prices, supply interruptions, labor constraints, restructuring execution and access to liquidity.
- The March 2011 earthquake and tsunami in Japan could continue to cause supply, production, premium freight and customer shutdown costs, although conditions had stabilized as of the filing.
- Customer concentration remained significant: Ford and affiliates represented 25% of accounts receivable, Hyundai Motor Company 15% and Hyundai Mobis 12% at June 30, 2011.
Contingencies and Other Risks
- Visteon had approximately $17 million reserved for German pension-related claims, with potential additional exposure estimated at up to approximately $12 million.
- The company disclosed ongoing disputes and proceedings concerning retiree medical benefits, UK pension matters, product warranty and recall claims, environmental matters and other legal and regulatory claims. Certain potential exposures cannot be reasonably estimated.
- Product warranty and recall liabilities were $77 million at June 30, 2011; management cautioned that future claims could exceed recorded reserves.
- Unrecognized tax benefits were $146 million, including approximately $83 million that could affect the effective tax rate if recognized. The company expects possible reductions of $5 million to $10 million within the next twelve months from statute expirations.
- The company guaranteed approximately $45 million of subsidiary lease payments and up to $30 million of contingent pension obligations under a PBGC agreement.
Investor Verification Points
- Verify the effect of Successor versus Predecessor accounting and fresh-start adjustments before relying on year-over-year comparisons.
- Assess whether higher OEM volumes and affiliate earnings can offset pricing pressure, commodity inflation and restructuring costs.
- Monitor operating cash conversion, working-capital requirements and the negative free cash flow position.
- Review the terms, covenants and refinancing implications of the 6.75% senior notes and the $220 million revolving facility.
- Track the timing and ultimate cost of the Cadiz closure and other restructuring programs.
- Evaluate exposure to Ford, Hyundai-related customers, foreign exchange, commodities and supply-chain disruptions.
- Follow the German pension claims, retiree-benefit proceedings, warranty and recall exposure, tax uncertainties and other contingencies.