Business Context and Reporting Period
Visteon Corporation, a global automotive supplier of climate, electronics and interiors systems, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company had approximately 29,000 employees and reported Climate, Electronics and Other segments. Results include the July 1, 2014 acquisition of substantially all of Johnson Controls’ global automotive electronics business and the 2013 consolidation of YFVE.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Sales | $1,970 million, up 32.8% | $5,470 million, up 16.9% |
| Gross margin | $192 million; 9.8% of sales | $565 million; 10.3% of sales |
| Income from continuing operations | $30 million | $108 million |
| Net income attributable to Visteon | $(21) million versus $43 million | $(157) million versus $177 million |
| Adjusted EBITDA | $136 million versus $128 million | $499 million versus $432 million |
| Cash flow from operating activities | Not separately provided | $180 million versus $179 million |
Quarterly diluted loss per share attributable to Visteon was $0.46, compared with diluted earnings per share of $0.85 in the prior-year quarter. Nine-month diluted loss per share was $3.31, compared with diluted earnings per share of $3.44.
At September 30, cash and equivalents were $936 million, restricted cash was $12 million, and total cash including cash held for sale and restricted cash held for sale was approximately $1,060 million. Total debt was approximately $994 million, including $13 million classified as held for sale, leaving approximately $66 million of cash in excess of total debt according to management. Debt included $598.5 million outstanding under the new term facility and $134 million of international affiliate short-term borrowings. No revolving facility borrowings were outstanding.
Inventory increased to $562 million from $472 million at December 31, 2013. Total assets were $5.693 billion and total equity was $2.177 billion at September 30, 2014.
Material Changes Versus the Prior Comparable Period
- Sales increased primarily from the Electronics Acquisition, the YFVE controlling interest, higher vehicle production volumes and favorable product mix. Electronics sales rose to $760 million from $340 million in the quarter, while Climate sales rose to $1.211 billion from $1.131 billion.
- Quarterly gross margin increased $57 million, supported by volume, mix, acquisitions and a $25 million pension settlement gain. Gross margin was partially offset by unfavorable currency effects, higher engineering costs and cost performance.
- Adjusted EBITDA increased $8 million in the quarter and $67 million year to date. Electronics Adjusted EBITDA increased $23 million in the quarter and $74 million year to date; Climate Adjusted EBITDA was broadly flat.
- Net earnings declined despite higher operating metrics because equity income from affiliates fell by $46 million in the quarter and $119 million year to date following the sale of Visteon’s Yanfeng interest, while discontinued Interiors operations generated losses.
- The Interiors business subject to divestiture was reported as discontinued operations. The nine-month loss from discontinued operations was $200 million, including a $188 million long-lived asset impairment; the quarter included a $29 million loss.
- Cash used in investing activities increased to $461 million from $125 million, primarily due to $308 million of acquisitions and $209 million of capital expenditures. Financing cash use was $344 million, including $500 million of share repurchases and $84 million of dividends to non-controlling interests, partly offset by term-loan proceeds.
- Visteon redeemed all remaining 6.75% senior notes due 2019 during 2014 and recorded a $23 million loss on extinguishment. The new $600 million term facility matures in 2021, and the $200 million revolving facility matures in 2019.
Guidance, Outlook, Commentary and Risks
- Management expects the combined Electronics business to generate approximately $3 billion of annual revenue and expects $40 million to $70 million of annual cost synergies by the end of 2017.
- Management expects to incur approximately $40 million to $60 million of restructuring costs for the Electronics integration program and approximately $30 million of total Electronics integration costs, including costs through the second quarter of 2015.
- Visteon expected additional Interiors divestiture losses of $150 million to $200 million, with the majority expected in the fourth quarter of 2014. The November 1, 2014 Master Closing required approximately $120 million of cash funding and a $56 million seller-backed revolving facility bearing interest at LIBOR plus 5%. Remaining India, Thailand, Argentina and Brazil transactions were expected to close later, subject to conditions and potential purchase-price adjustments.
- The company remained in compliance with its 3.00-to-1.00 total net leverage covenant and HVCC’s debt and interest coverage covenants at September 30, 2014.
- Key risks include cyclicality and vehicle production volumes, customer concentration, foreign currency and commodity exposure, pricing pressure, restructuring execution, integration of acquired businesses, labor restrictions, access to liquidity, pension funding, and the ability to complete the Interiors divestiture.
- Material contingencies include an approximately $42 million South Korean wage-related claim, potential OFAC penalties related to disclosed sales into Iran, a Korean patent infringement claim, tax proceedings, Brazilian and German employment matters, warranty and recall claims, and other litigation. The company could not estimate potential losses for several of these matters.
- Ford and its affiliates represented 25% of accounts receivable, while Hyundai Mobis represented 16%, creating customer concentration risk. A 10% change in quoted currency rates was estimated to affect derivative fair value by approximately $66 million before considering offsets from underlying exposures.
- Disclosure controls were considered effective as of September 30, 2014, but acquired entities, including YFVE and the businesses acquired in 2014, were excluded from management’s assessment of internal controls over financial reporting.
Investor Verification Items
- Verify the final accounting, purchase-price allocation and realized synergies from the Electronics Acquisition, including future restructuring and integration costs.
- Track the remaining Interiors divestiture closings, additional losses, cash contributions, working-capital adjustments and utilization of the $56 million seller-backed facility.
- Reconcile reported cash and debt, including cash and liabilities held for sale, restricted cash, affiliate borrowings and the new term facility.
- Assess whether operating cash flow and Adjusted EBITDA improvements translate into sustainable free cash flow after capital expenditures, taxes, pension contributions, debt service and restructuring payments.
- Monitor leverage covenant compliance, credit ratings and the availability of affiliate and revolving credit facilities.
- Evaluate unresolved tax, sanctions, labor, patent, warranty, recall and other legal contingencies for potential cash or earnings impacts.
- Review the effect of the $500 million accelerated share repurchase on liquidity, share count and future capital allocation.