Visteon Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020. Visteon is a global automotive supplier focused on cockpit electronics and connected-car solutions. The results were significantly affected by COVID-19-related vehicle production shutdowns and demand declines.
Financial Results and Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net sales | $371 million | $733 million | $1,014 million | $1,470 million |
| Gross margin | $4 million; 1.1% | $70 million; 9.5% | $57 million; 5.6% | $136 million; 9.3% |
| Net income attributable to Visteon | $(45) million | $7 million | $(80) million | $21 million |
| Adjusted EBITDA | $(3) million | $46 million | $30 million | $87 million |
| Operating cash flow | Not separately provided | Not separately provided | $(13) million | $61 million |
| Capital expenditures | Not separately provided | Not separately provided | $65 million | $71 million |
Basic and diluted loss per share attributable to Visteon was $1.62 in the quarter and $2.87 for the six-month period, compared with prior-year earnings per share of $0.25 and $0.75, respectively.
Liquidity and capital structure: Cash and equivalents were $755 million at June 30, 2020, or $759 million including restricted cash, compared with $466 million and $469 million, respectively, at December 31, 2019. Total debt was approximately $770 million, including $22 million of short-term debt and $748 million of long-term debt, versus $385 million at year-end 2019. The increase primarily reflects the $400 million draw on the revolving credit facility in March 2020. The term and revolving facilities mature in 2024, and the company was in compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 49% year over year; six-month sales declined 31%. Management attributed approximately $350 million of the quarterly decline and $421 million of the six-month decline to lower volume, mix and net new business, primarily from COVID-19.
- Global light-vehicle production declined approximately 45% in the second quarter and 33% for the first six months. Production outside China largely halted during April and gradually resumed during May and June.
- Gross margin fell to 1.1% in the quarter and 5.6% year to date, despite lower engineering costs and favorable cost performance, because of volume and mix pressure.
- SG&A declined $17 million in the quarter and $20 million year to date, reflecting temporary compensation reductions, lower incentive compensation and other cost-reduction actions. SG&A nevertheless increased as a percentage of sales.
- Restructuring expense increased to $4 million in the quarter and $37 million year to date, compared with none and $1 million, respectively, in the prior-year periods.
- Adjusted EBITDA declined $49 million in the quarter and $57 million year to date. Six-month operating cash flow shifted from $61 million provided to $13 million used.
- Financing activities generated $363 million year to date, primarily from the $400 million revolving-credit draw, partially offset by share repurchases, dividends to non-controlling interests and debt repayments.
Outlook, Commentary, Risks and Unusual Items
- Management expects COVID-19 may continue to have a materially adverse effect on operations, sales, liquidity and financial results. The filing does not provide quantitative full-year revenue or earnings guidance.
- Actions taken to preserve liquidity and reduce costs include the revolving-credit draw, global compensation reductions, restructuring programs, reduced spending and enhanced employee-safety protocols.
- January and March 2020 restructuring programs had recorded costs of $21 million and $15 million, respectively. The January program is expected to incur up to $24 million in total; $32 million of restructuring reserves remained at June 30, 2020, with activities expected to be substantially complete by mid-2021.
- Management believes available cash, operating cash flow and credit facilities will be sufficient to support ongoing operations and technology investment, but notes heightened uncertainty, seasonal working-capital needs and potential additional COVID-19 effects.
- Required 2020 pension contributions were estimated at approximately $20 million; approximately $2 million had been contributed to non-U.S. plans, and the company was evaluating permitted deferrals.
- A full valuation allowance remains against U.S. deferred tax assets. Management stated that a partial release could be possible within 12 to 24 months if U.S. operating results improve, which could materially benefit net income in the release quarter.
- Material contingencies include a Michigan township lawsuit seeking $28 million related to bond shortfalls, an unresolved OFAC review of historical Iran-related sales, and Brazilian claims totaling $57 million supported by $8 million of accruals. The company cannot estimate the possible loss range for the first two matters.
- Customer concentration remains significant: Ford and affiliates represented 19% of accounts receivable at June 30, 2020, while Renault/Nissan represented 14%.
- The company had $364 million remaining under its share-repurchase authorization but stated that it did not currently intend to repurchase additional shares.
Key Facts for Investors to Verify
- Whether vehicle production and customer demand recover sufficiently to restore sales volumes and gross margins.
- The pace and total cost of restructuring programs and whether expected cost savings are realized.
- Cash burn, working-capital requirements and the company’s ability to reduce the $400 million revolving-credit balance while maintaining covenant compliance.
- The timing and outcome of pension contributions, deferred tax asset valuation allowance assessments and potential tax audit resolutions.
- Developments in the Michigan litigation, OFAC review, Brazilian claims and product warranty or recall exposures.
- Foreign-currency, interest-rate and supply-chain risks, including the effect of hedging and customer pricing arrangements.