Visteon Corporation 10-Q Summary: Second Quarter 2017
Business context and reporting period
Visteon is a global automotive supplier focused on cockpit electronics, including instrument clusters, displays, infotainment, audio, telematics and head-up displays. The company had approximately 10,000 employees and operated primarily outside the United States. The filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Electronics was the sole reportable operating segment; legacy Climate and Interiors activities were largely exited or reported as discontinued operations.
Financial performance and financial position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $774 million | $773 million | $1,584 million | $1,575 million |
| Gross margin | $112 million; 14.5% | $109 million; 14.1% | $243 million; 15.3% | $230 million; 14.6% |
| Net income from continuing operations | $48 million | $39 million | $107 million | $75 million |
| Net income attributable to Visteon | $45 million | $26 million | $108 million | $45 million |
| Diluted EPS | $1.41 | $0.76 | $3.31 | $1.23 |
| Adjusted EBITDA | $84 million | $77 million | $185 million | $166 million |
| Operating cash flow | Not separately provided | Not separately provided | $86 million | $14 million |
Q2 Electronics Adjusted EBITDA margin was 10.9%, compared with 10.4% in the prior-year quarter. Sales growth was limited by unfavorable currency, customer pricing and the exit of legacy Climate operations, while volume, mix and new business were favorable. Q2 gross margin benefited from cost efficiencies, product mix and volume, partly offset by currency and pricing effects.
At June 30, 2017, cash and equivalents were $730 million, or $734 million including restricted cash, compared with total cash of $882 million at December 31, 2016. Total debt was $389 million, consisting primarily of $347 million of long-term debt and $42 million of short-term debt. The company had no revolver borrowings and approximately $300 million of revolving capacity, subject to facility terms; affiliate credit facilities had approximately $24 million of additional availability. Visteon reported compliance with all debt covenants.
Total assets were $2.246 billion and total equity was $705 million at June 30, 2017. Accounts receivable were $519 million and inventories were $165 million. Ford and affiliates represented 18% of accounts receivable, creating customer concentration exposure.
Material changes versus the prior comparable period
- Q2 sales increased $1 million and six-month sales increased $9 million, despite currency headwinds and customer pricing pressure.
- Gross margin increased $3 million in Q2 and $13 million year to date; margin improved by 40 basis points in Q2 and 70 basis points year to date.
- Q2 net income attributable to Visteon rose $19 million, primarily due to the absence of the prior-year discontinued-operations loss, lower restructuring expense, a $3 million gain on affiliate transactions and improved gross margin.
- Six-month net income attributable to Visteon rose $63 million, reflecting a $30 million improvement from discontinued operations, $13 million lower restructuring expense, $6 million lower SG&A and higher gross margin, partly offset by $4 million higher taxes.
- Operating cash flow improved by $72 million year to date, although working capital consumed approximately $35 million, largely due to increased China domestic sales.
- Cash used for share repurchases was $160 million year to date. The company had $240 million remaining under its $400 million authorization at June 30, 2017.
- In March 2017, Visteon amended its credit facilities, extended maturities to 2024 for the term facility and 2022 for the revolver, increased revolver capacity to $300 million and reduced applicable interest spreads.
Guidance, outlook, commentary and risks
- Management reported $3.1 billion of new business wins in the first half of 2017 and approximately $17.3 billion of backlog at June 30, 2017, equal to 5.5 times trailing twelve-month sales. Approximately 37% of backlog is expected to be manufactured in Asia.
- Strategic priorities include strengthening cockpit electronics, selectively expanding into adjacent products, developing autonomous-driving domain controllers, accelerating China operations and returning capital to shareholders.
- Management expects up to $45 million of cumulative restructuring costs under the engineering and administrative footprint program; approximately $31 million had been recorded through June 30, 2017, with $18 million accrued and approximately $13 million paid.
- The company expected approximately $34 million of remaining payments in the second half of 2017 related to the Germany Interiors divestiture and $7 million of 2017 pension contributions.
- Management believes operating cash flow, existing cash and available credit facilities are adequate for current requirements, but liquidity depends on vehicle production, customer timing, foreign-subsidiary cash access and credit-market conditions.
- Principal risks include automotive cyclicality, customer and Ford production levels, foreign exchange, commodity costs, pricing pressure, supply disruptions, labor restrictions, restructuring execution, product warranty and recall costs, tax audits, litigation, regulatory matters and access to foreign cash.
- Material contingencies include potential exposure related to a Michigan township bond-tax dispute, OFAC review of historical Iran-related sales, Brazil and Argentina legal claims, an $18 million YFVIC loan guarantee and a possible European facility exit requiring approximately $15 million to $20 million of cash and working capital plus $10 million to $15 million of long-term assets.
- The company adopted new share-based compensation guidance without a material impact and planned to adopt the revenue-recognition standard on January 1, 2018 using the modified retrospective method; management did not expect a material financial statement impact.
Facts investors should verify
- Whether backlog conversion and new business wins produce sustained revenue growth despite currency and customer pricing pressures.
- The cash impact and completion timing of the restructuring program, Germany divestiture obligations and potential European facility exit.
- Remaining share-repurchase activity and its effect on cash balances, share count and per-share results.
- The sustainability of improved operating cash flow after the unusually favorable comparison with 2016 tax and transaction-related cash payments.
- Exposure to customer concentration, especially Ford, and to Asia-related working-capital requirements.
- Potential outcomes of OFAC, tax, litigation, warranty and other contingent matters for which the filing does not provide a reliable loss range.