Business Context and Reporting Period
Visteon Corporation filed this unaudited Form 10-Q for the three months ended March 31, 2017. Visteon is a global automotive supplier focused on cockpit electronics, including instrument clusters, displays, infotainment, audio, telematics and head-up displays. The Electronics segment is now the principal reportable business following the exit or divestiture of most Interiors and Climate operations. The company had approximately 10,000 employees.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $810 million | $802 million |
| Gross margin | $131 million; 16.2% | $121 million; 15.1% |
| Net income from continuing operations | $59 million | $36 million |
| Net income attributable to Visteon | $63 million | $19 million |
| Diluted EPS | $1.91 | $0.49 |
| Adjusted EBITDA | $101 million | $89 million |
| Electronics Adjusted EBITDA margin | 12.5% | 11.9% |
| Cash used in operating activities | $10 million | $58 million |
| Capital expenditures | $32 million | $25 million |
At March 31, 2017, cash and equivalents were $688 million, or $692 million including restricted cash. Total debt was $396 million, consisting of $49 million of short-term debt and $347 million of long-term debt. The reported fair value of debt was approximately $401 million. The company had no borrowings under its revolving credit facility and was in compliance with its debt covenants.
Total assets were $2.238 billion and total equity was $680 million at March 31, 2017. Accounts receivable were $552 million and inventories were $162 million. Cash declined by $190 million from December 31, 2016, primarily due to $125 million of share repurchases and the $47 million repurchase of the India electronics operations.
Material Changes Versus the Prior Comparable Period
- Sales increased $8 million, or approximately 1%, primarily from favorable production volumes, product mix and new business, partly offset by currency effects, customer pricing and the exit of other Climate operations.
- Gross margin increased $10 million, with the margin rate improving from 15.1% to 16.2% due to volume, mix, new business, cost efficiencies and the exit of loss-generating operations.
- Net income attributable to Visteon increased $44 million. The improvement included a $21 million favorable change in discontinued operations, including a $7 million gain related to the India operations repurchase and the absence of prior-year Interiors operating losses.
- Selling, general and administrative expense decreased $5 million, while restructuring expense decreased $9 million to $1 million.
- Adjusted EBITDA increased $12 million to $101 million, driven by volume, mix, new business, favorable currency and the exit of other Climate operations.
- Operating cash outflow improved by $48 million, although working capital and timing of engineering recoveries and affiliate payments remained uses of cash.
- Financing cash outflow was $117 million versus $2.248 billion in the prior-year quarter, when the company made a $1.736 billion special distribution and $500 million of share repurchases.
Guidance, Outlook, Risks and Unusual Items
- Management reported $1.5 billion of first-quarter 2017 new business wins, a 25% increase from the prior-year period, and a backlog of approximately $16.7 billion, or 5.4 times trailing twelve-month sales. Approximately 39% of backlog is expected to be manufactured in Asia.
- Management expects continued cost efficiencies from streamlining selling, general and administrative and engineering functions, improving free cash flow, optimizing capital structure and leveraging revenue growth. The filing does not provide specific full-year revenue or earnings guidance.
- The company expects to incur up to $45 million of restructuring costs under its engineering and administrative restructuring program; approximately $28 million had been recorded through March 31, 2017, with $17 million accrued at quarter-end.
- On March 24, 2017, Visteon amended its credit agreement, increasing revolving capacity from $200 million to $300 million, extending the revolver maturity to March 2022 and the term facility maturity to March 2024, and reducing applicable interest spreads. The term facility bears interest at LIBOR plus 2.25%.
- The company expects approximately $32 million of remaining payments related to the Germany Interiors Divestiture during the first half of 2017 and expects $7 million of pension contributions during 2017.
- The board authorized up to $400 million of share repurchases through March 2018. Following the $125 million accelerated share repurchase, approximately $275 million remained authorized at March 31, 2017.
- Key risks include cyclical and seasonal vehicle production, customer concentration, foreign exchange, commodity and supply-chain costs, pricing pressure, restructuring execution, access to foreign cash, pension and debt obligations, regulatory matters, product warranty and recalls, and legal proceedings.
- Ford and its affiliates represented 16% of accounts receivable at quarter-end. The company had a maximum exposure to loss of $76 million related to its Yanfeng Visteon Electronic China joint venture, including a $18 million loan guarantee.
- Material contingencies include an unresolved Michigan township bond-related dispute, an OFAC review of previously disclosed Iran-related sales, and litigation and tax matters in Brazil and Argentina. The company cannot estimate potential losses for certain matters.
- Product warranty and recall liabilities were $52 million at March 31, 2017, compared with $38 million at March 31, 2016. The company maintains full valuation allowances against U.S. net deferred tax assets, although a partial release could occur within 12 to 24 months if U.S. results improve sufficiently.
Important Facts for Investors to Verify
- Confirm the sustainability of the Electronics segment’s 12.5% Adjusted EBITDA margin and the conversion of reported earnings into positive operating cash flow.
- Assess whether the $16.7 billion backlog and $1.5 billion of new awards translate into profitable future revenue after customer pricing, engineering costs and currency effects.
- Monitor restructuring spending, workforce reductions and expected savings, including the remaining potential charge of up to approximately $17 million under the disclosed program.
- Evaluate liquidity after share repurchases, the India operations repurchase, Germany divestiture payments and pension contributions.
- Review exposure to automotive production declines, Ford and other major customers, China and other foreign markets, currency movements, and supplier or commodity disruptions.
- Track the OFAC review, legal proceedings, tax audits, product warranty and recall claims, and the company’s $76 million maximum exposure to the YFVIC joint venture.
- Verify the impact of discontinued operations and the $7 million India-related gain when comparing recurring operating performance.