VISTEON CORP quarterly report, Q1 FY2019

Visteon Corporation — Q1 2019 Form 10-Q Summary

Business context and reporting period

Visteon is a global automotive technology supplier focused on cockpit electronics and connected-car solutions, including instrument clusters, displays, infotainment, telematics, head-up displays, cockpit domain controllers and autonomous-driving platforms. The company has approximately 10,000 employees and operates primarily outside the United States. This report covers the three months ended March 31, 2019, compared with the same period in 2018.

Key financial metrics

Metric	Q1 2019	Q1 2018
Sales	$737 million	$814 million
Gross margin	$66 million; 9.0%	$129 million; 15.8%
Net income attributable to Visteon	$14 million	$65 million
Diluted EPS	$0.49	$2.11
Adjusted EBITDA	$41 million	$104 million
Cash flow from operations	$4 million	$81 million
Capital expenditures, including intangibles	$37 million	$44 million

Cash and restricted cash totaled $435 million at March 31, 2019, down from $467 million at December 31, 2018. Unrestricted cash was $432 million.
Total debt was $404 million, consisting of $56 million of short-term debt and $348 million of long-term debt. The company had no borrowings under its $300 million revolving credit facility and remained compliant with debt covenants.
Accounts receivable were $484 million and inventories were $195 million at quarter-end.
Total assets were $2.182 billion and total equity was $605 million.
Operating cash flow was substantially reduced by lower earnings and an unfavorable change in trade working capital.
Net engineering costs rose to $85 million, or 11.5% of sales, from $68 million, or 8.4% of sales.

Material changes versus the prior comparable period

Sales declined $77 million, or approximately 9%, primarily due to unfavorable vehicle volumes and mix, currency effects and customer pricing. Consolidation of Changchun Visteon FAWAY Automotive Electronics partially offset the decline by adding $12 million of sales.
Global light-vehicle production fell 6.7% year over year, with China production down 13.5%. Management cited depressed production among key customers and continued weakness expected in the second quarter.
Gross margin declined $63 million. Contributing factors included $31 million from unfavorable volume and mix, $21 million of higher engineering costs, $7 million of unfavorable currency and $4 million of unfavorable net cost performance.
Results were adversely affected by approximately $10 million of costs associated with inefficiencies from a Mexico plant transfer and launch challenges involving a curved center information display.
SG&A increased to $57 million from $44 million, largely because the prior-year period benefited from a legal settlement and related stock-award forfeiture that did not recur.
Adjusted EBITDA decreased $63 million to $41 million, reflecting lower volumes and mix, currency, higher engineering costs and unfavorable cost performance.
Income taxes shifted from a $21 million provision in Q1 2018 to a $5 million benefit in Q1 2019. The 2019 benefit included a $12 million discrete release of a German deferred-tax valuation allowance.
Financing cash outflows fell to $2 million from $230 million because the company did not repeat the $200 million share repurchase completed in Q1 2018. No share repurchases occurred in Q1 2019.
Beginning January 1, 2019, the company adopted the new lease standard, recording approximately $172 million of right-of-use assets and $176 million of lease liabilities. The adoption materially affected the balance sheet but not reported earnings or cash flows.

Guidance, outlook, commentary and risks

Management believes existing cash, operating cash flow and available credit facilities will be adequate for current business requirements. No specific full-year revenue, earnings or margin guidance is provided in the filing text.
Visteon expects cockpit electronics to grow faster than underlying vehicle production over the next five years and is pursuing long-term growth, margin expansion and shareholder returns.
The company may incur additional restructuring charges. Approximately $19 million of restructuring reserves remained at March 31, 2019, and activities were expected to be substantially complete within one year.
The company expects approximately $7 million of pension contributions in 2019 and had paid $3 million for restructuring activities during the quarter.
The U.S. deferred-tax valuation allowance could be partially released within 9 to 21 months if operating improvement is sustained; any release could materially increase net income in the period recognized.
Visteon has an $11 million loan guarantee related to Yanfeng Visteon Investment Company. Its maximum exposure to loss in that venture was $99 million at March 31, 2019.
Key risks include cyclical and declining vehicle production, customer concentration, currency movements, pricing pressure, engineering-cost recovery, product launches, supply-chain disruptions, commodity costs, restructuring execution, labor restrictions, regulatory changes, recalls, litigation and access to foreign subsidiary cash.
OFAC continues to review previously disclosed sales involving automotive HVAC components to Iran. Potential penalties or restrictions could be material, but the company cannot estimate a loss range.
Brazilian operations had accrued approximately $14 million for claims totaling approximately $82 million. Product warranty and recall liabilities totaled $51 million.
Brexit-related trade and customs uncertainty could affect the company’s approximately $90 million of 2018 United Kingdom sales and its integrated European supply chain.
A prior material weakness involving judicial deposits in Brazil was remediated, and management concluded it was no longer a material weakness as of March 31, 2019. Disclosure controls were considered effective. Implementation of a new lease accounting system was a material change to internal control processes.

Most important facts for investors to verify

Whether vehicle production weakness, especially in China and among major customers, persists through the remainder of 2019.
Whether the Mexico plant-transfer inefficiencies and curved-display launch issues are resolved and whether gross margin recovers.
Whether higher engineering costs are offset by customer recoveries, new business and operating improvements.
Whether operating cash flow improves from the Q1 level of $4 million and supports capital spending, pensions, restructuring and debt obligations.
The company’s progress toward margin expansion and the effect of customer pricing reductions and currency movements.
The status and potential financial impact of the OFAC review, Brazilian claims, warranty and recall matters, and the YFVIC loan guarantee.
The assumptions supporting potential releases of U.S. and other deferred-tax valuation allowances.
Future share repurchases under the remaining $400 million authorization and their effect on liquidity and shareholder returns.