Visteon Corporation — Form 10-Q Summary
Business context and reporting period
Visteon is a global automotive supplier focused primarily on cockpit electronics, including displays, instrument clusters, infotainment, telematics, audio systems and head-up displays. The company reported approximately 11,000 employees and two reportable segments: Electronics and Other. The filing covers the three and six months ended June 30, 2016, compared with the same periods in 2015.
Visteon continued its transformation into a pure-play automotive electronics supplier following the 2015 sale of its Climate business and the divestiture of most Interiors operations. Remaining Other operations include residual businesses in South America and South Africa.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Sales | $773 million | $812 million | $1,575 million | $1,628 million |
| Gross margin | $109 million; 14.1% | $99 million; 12.2% | $230 million; 14.6% | $211 million; 13.0% |
| Net income from continuing operations | $39 million | $65 million | $75 million | $89 million |
| Net income attributable to Visteon | $26 million | $2,208 million | $45 million | $2,258 million |
| Adjusted EBITDA | $77 million | $60 million | $166 million | $138 million |
| Adjusted EBITDA margin | 10.0% | 7.4% | 10.5% | 8.5% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $14 million | $204 million |
Sales declined 4.8% in the second quarter and 3.3% year to date. The decline primarily reflected the Germany Interiors divestiture, the wind-down of South American operations, customer pricing net of design savings, and unfavorable currency effects. These factors were partly offset by vehicle production volumes, product mix and new business.
Gross margin improved by $10 million in the quarter and $19 million year to date. Management attributed the improvement primarily to material and manufacturing efficiencies, improved cost performance and lower warranty expense, partly offset by customer pricing and currency effects. Electronics Adjusted EBITDA increased to $79 million in the quarter from $60 million and to $173 million year to date from $144 million.
Second-quarter and year-to-date reported earnings were heavily affected by the comparison with the 2015 Climate Transaction. The 2015 results included a pretax gain of approximately $2.3 billion and substantial discontinued-operation income. Discontinued operations produced a $9 million loss in the second quarter of 2016 and a $22 million loss for the first six months, compared with income of $2.159 billion and $2.205 billion, respectively, in 2015.
Balance sheet, cash flow, debt and liquidity
- Cash and equivalents were $846 million at June 30, 2016, compared with $2.728 billion at December 31, 2015. Including restricted cash and cash held for sale, total cash was approximately $853 million.
- Cash declined primarily because of the $1.736 billion special distribution paid in January 2016 and $500 million of share repurchases, partly offset by a $356 million refund of Korean withholding tax related to the Climate Transaction.
- Cash provided by operating activities was $14 million for the first six months, down from $204 million in 2015. The decrease reflected the absence of Climate-business operating cash flow, higher tax, restructuring and transition-service payments, partly offset by working-capital improvements.
- Investing activities provided $358 million, including the $356 million withholding-tax refund, while capital expenditures were $37 million.
- Financing activities used $2.258 billion, including the special distribution, share repurchases and stock-based compensation tax withholding payments.
- Total debt was approximately $372 million, consisting of $25 million of short-term debt and $347 million of long-term debt. The $350 million Term Facility matures April 9, 2021; $200 million was available under the undrawn Revolving Facility maturing April 9, 2019.
- Visteon stated that it was in compliance with its debt covenants at June 30, 2016. Affiliate credit facilities had approximately $30 million of availability.
- Cash balances outside the United States totaled $608 million, including approximately $265 million considered permanently reinvested outside the United States.
Material changes versus the prior comparable period
- Reported net income attributable to Visteon fell by $2.182 billion in the second quarter and $2.213 billion year to date, almost entirely because 2015 included the Climate Transaction gain and related discontinued-operation income.
- Continuing-operations profitability declined, with net income down $26 million in the quarter and $14 million year to date, despite higher gross margin and lower SG&A, interest expense and taxes. The decrease reflected the absence of the 2015 gain on sale of a non-consolidated affiliate and lower equity earnings.
- Adjusted EBITDA increased 28% in the quarter and 20% year to date, reflecting cost efficiencies, lower warranty expense, favorable volumes and new business.
- SG&A decreased to $54 million from $65 million in the quarter and to $110 million from $123 million year to date.
- Restructuring expense was $7 million in the quarter and $17 million year to date, compared with $12 million and $15 million, respectively, in 2015. The June 30 restructuring reserve was $37 million.
- Shares outstanding declined materially following the distribution-related repurchases. Average basic shares were 34.0 million in the quarter and 36.3 million year to date, compared with 43.4 million and 43.8 million in the respective 2015 periods.
Guidance, outlook, commentary, risks and unusual items
- Management identified a backlog of approximately $15.9 billion at June 30, 2016, equal to approximately 5.1 times trailing twelve-month sales.
- Strategic priorities are to strengthen the Electronics core, selectively pursue adjacent products such as cockpit domain controllers and cybersecurity, and deliver SG&A, engineering and operational efficiencies.
- On July 8, 2016, Visteon acquired AllGo Systems for $15 million, with up to $7 million of contingent consideration over two years based on technology and employee milestones.
- On July 18, 2016, Visteon agreed to sell its South Africa climate operations. Closing was expected in the third quarter of 2016 for approximately $2 million, with an estimated loss of approximately $12 million, primarily from accumulated foreign-currency translation amounts.
- The Argentina and Brazil Interiors transactions were expected to close during 2016, subject to regulatory and other approvals. Management estimated future losses of approximately $20 million upon closing.
- On July 22, 2016, Visteon sold a cost-method investment for approximately $11 million and expected to record an approximately $5 million gain in the third quarter.
- Management expects additional restructuring costs as engineering and South American wind-down plans are finalized. Restructuring activities were expected to be substantially completed by 2017, although the filing contains inconsistent references to mid-2017 and year-end 2016.
- An April 2016 earthquake in Kyushu, Japan, could disrupt suppliers and vehicle production; the filing states that the potential financial impact could not yet be quantified.
- Material contingencies include an unresolved Van Buren Township bond-related lawsuit, an OFAC review of voluntarily disclosed sales involving Iran, Brazilian tax and labor claims, product warranty and recall exposure, and environmental matters. The company could not estimate potential losses for the Township and OFAC matters.
- Visteon had a $26 million loan guarantee related to YFVIC and a maximum estimated exposure to loss in YFVIC of $90 million. It also maintained lease guarantees for divested businesses and a $35 million undrawn seller-backed revolving facility for the Interiors buyer.
- Customer concentration is significant: Ford and affiliates represented 24% of accounts receivable at June 30, 2016; Nissan/Renault represented 11%; and Mazda represented 10%.
- Foreign exchange, interest-rate, automotive production, commodity, labor, supply-chain, regulatory, litigation and customer financial risks could materially affect results. The company uses derivatives primarily to hedge currency and interest-rate exposures.
Most important facts for investors to verify
- Whether Electronics cost efficiencies and the approximately $15.9 billion backlog convert into sustained sales and Adjusted EBITDA growth despite customer pricing pressure.
- The company’s ability to generate positive operating cash flow after the large shareholder distributions and repurchases.
- The timing and cash impact of the Argentina and Brazil Interiors closings, South Africa sale, India electronics repurchase commitment and related estimated losses.
- The potential financial and reputational impact of the OFAC review, Township litigation, Brazilian tax matters, product warranty or recall claims and other contingencies.
- Future restructuring charges, pension contributions, transition-service obligations and the $33 million final contribution payment related to the Germany Interiors divestiture.
- Liquidity availability, covenant compliance and exposure to foreign-currency movements, vehicle production volatility and customer concentration.