Business Context and Reporting Period
Visteon Corporation is a global automotive supplier focused on cockpit electronics, including instrument clusters, displays, infotainment, audio, telematics, head-up displays and autonomous-driving platforms. The company reports one operating segment, Electronics, and had approximately 10,000 employees. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the same periods in 2017.
Financial Performance and Position
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Sales | $758 million | $774 million | $1,572 million | $1,584 million |
| Gross margin | $104 million; 13.7% | $111 million; 14.3% | $233 million; 14.8% | $240 million; 15.2% |
| Net income attributable to Visteon | $35 million | $45 million | $100 million | $108 million |
| Diluted EPS | $1.17 | $1.41 | $3.29 | $3.31 |
| Adjusted EBITDA | $81 million | $84 million | $185 million | $185 million |
| Operating cash flow | Not separately provided | Not separately provided | $126 million | $85 million |
- Q2 sales declined $16 million, primarily from unfavorable volumes, customer pricing and product mix, partly offset by favorable currency and new business.
- Six-month sales declined $12 million despite a $71 million favorable currency impact; unfavorable volume, mix and pricing reduced revenue.
- Q2 net income attributable to Visteon decreased $10 million, while six-month net income decreased $8 million. The six-month comparison included higher restructuring expense and taxes, and the absence of a 2017 discontinued-operations gain.
- Adjusted EBITDA margin was 10.7% for Q2 and 11.8% for the first six months, compared with 10.9% and 11.7%, respectively, in the prior-year periods.
- Cash provided by operating activities improved by $41 million year over year, largely from favorable trade working-capital changes.
- Capital expenditures were $69 million for the first six months. Financing activities used $233 million, including $200 million for share repurchases.
- At June 30, 2018, cash and equivalents were $525 million, restricted cash was $3 million, and total cash for cash-flow purposes was $528 million, down from $709 million at December 31, 2017.
- Total debt was approximately $378 million, consisting of $30 million of short-term debt and $348 million of long-term debt. The company had no revolver borrowings and approximately $300 million of revolving capacity available, subject to facility terms.
- The company was in compliance with its debt covenants. The term facility has a $350 million principal balance and matures in March 2024; the revolving facility matures in March 2022.
Material Changes Versus the Prior Comparable Period
- Gross margin declined 60 basis points in Q2 and 40 basis points for the six months, reflecting customer pricing and adverse volume and product mix, partly offset by cost efficiencies, engineering recoveries and currency.
- Q2 restructuring expense increased to $5 million from $3 million. Six-month restructuring expense increased to $10 million from $4 million. Charges included severance at a South American facility, North American product wind-downs and the completion of an engineering and administrative restructuring program.
- Net interest expense decreased to $2 million in Q2 and $4 million for the six months, compared with $4 million and $9 million, respectively, primarily because of lower effective rates and the absence of a prior-year interest-rate-swap settlement expense.
- The company recognized a $17 million pretax benefit from resolving a legal dispute with its former chief executive officer, including a $10 million SG&A benefit, a $4 million other-income benefit and a $3 million discontinued-operations benefit.
- Share repurchases totaled $200 million during the first six months. As of June 30, $500 million remained under the repurchase authorization through 2020.
- Foreign currency translation produced a $21 million decrease in accumulated other comprehensive income during the first six months, contributing to comprehensive income of $83 million versus $146 million in the prior-year period.
Guidance, Outlook, Commentary and Risks
- Management reported a backlog of approximately $21.1 billion and expects cockpit electronics to grow faster than underlying vehicle production, supported by connected-car, advanced driver-assistance and electrification technologies.
- Management expects global vehicle production to increase during the remainder of 2018, but projected volumes for certain key customers, particularly in North America, are expected to decline. New emissions regulations could temporarily reduce European production.
- Strategic priorities include long-term margin expansion, cost efficiencies, improved free cash flow, capital-structure optimization and development of autonomous-driving technologies through the DriveCore platform.
- Management believes cash from operations, existing cash and available credit facilities will be adequate for current requirements. However, $321 million of cash was held outside the United States, and access to foreign subsidiary and joint-venture cash may be subject to regulatory, contractual and local liquidity restrictions.
- Principal risks include vehicle-production cyclicality, customer concentration, pricing pressure, commodity and supply-chain costs, foreign-exchange movements, labor constraints, restructuring execution, technology and intellectual-property risks, and the ability to recover engineering and tooling costs.
- Ford and its affiliates represented 25% of accounts receivable at June 30, 2018; Mazda represented 18% and Renault/Nissan 13%, creating customer-credit and concentration exposure.
- Material contingencies include an unresolved Van Buren Township bond-related dispute for which the possible loss cannot be estimated, an ongoing OFAC review of previously disclosed Iran-related sales, and litigation and tax matters in Brazil and Argentina.
- Product warranty and recall liabilities were $48 million at June 30, 2018. The company cautioned that future claims or recalls could exceed recorded reserves.
- The company expects the adoption of the new lease standard to have a material impact on processes, controls, information systems and financial statements, although the filing does not provide a quantified balance-sheet impact.
Investor Verification Items
- Verify whether volume, customer pricing and product-mix pressures continue to offset cost reductions, engineering recoveries and favorable currency.
- Monitor cash generation after substantial share repurchases and capital expenditures, including the sustainability of working-capital benefits.
- Assess liquidity available outside the United States and the company’s capacity to fund operations while continuing the repurchase program.
- Review debt covenant compliance, variable-rate exposure and the effect of interest-rate and foreign-currency hedges.
- Track restructuring execution, remaining reserves of $13 million and any additional charges associated with facility or product wind-downs.
- Evaluate potential outcomes of the Township litigation, OFAC review, tax proceedings and Brazil and Argentina claims, for which the filing does not provide a reliable full loss range.
- Separate recurring operating performance from the $17 million former-CEO settlement benefit and other discontinued-operations items.