The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs.
The Company is exposed to various market risks including, but not limited to, changes in currency exchange rates arising from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt, dividends and market interest rates.investments in subsidiaries. The Company manages these risks, in part, through the use of derivative financial instruments. The maximum length of time over which the Company hedges the variability in the future cash flows related to transactions, excluding those transactions as related to the payment of variable interest on existing debt, is eighteen months. The maximum length of time over which the Company hedges forecasted transactions related to variable interest payments is the term of the underlying debt. The use of financial derivative instruments may pose risk of loss in the event of nonperformance by the transaction counter-party.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Recorded (Loss) Income into AOCI, net of tax | | Reclassified from AOCI into (Income) Loss | | Recorded in (Income) Loss |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in Millions) |
Three Months Ended September 30 | | | | | | | | | | | | |
Foreign currency risk - Cost of sales: | | | | | | | | | | | | |
Cash flow hedges | | $ | (1 | ) | | $ | (3 | ) | | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net investment hedges | | (7 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Non-designated cash flow hedges | | — |
| | — |
| | — |
| | — |
| | 1 |
| | (2 | ) |
Interest rate risk - Interest expense, net: | | | | | | | | | | | | |
Interest rate swap | | — |
| | 2 |
| | — |
| | 1 |
| | — |
| | — |
|
| | $ | (8 | ) | | $ | (2 | ) | | $ | 2 |
| | $ | 1 |
| | $ | 1 |
| | $ | (2 | ) |
Nine Months Ended September 30 | | | | | | | | | | | | |
Foreign currency risk - Cost of sales: | | | | | | | | | | | | |
Cash flow hedges | | $ | (1 | ) | | $ | — |
| | $ | 5 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
|
Net investment hedges | | (20 | ) | | (3 | ) | | — |
| | — |
| | — |
| | — |
|
Non-designated cash flow hedges | | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (3 | ) |
Interest rate risk - Interest expense, net: | | | | | | | | | | | | |
Interest rate swap | | — |
| | (2 | ) | | 1 |
| | 1 |
| | — |
| | — |
|
| | $ | (21 | ) | | $ | (5 | ) | | $ | 6 |
| | $ | (2 | ) | | $ | (2 | ) | | $ | (3 | ) |
Concentrations of Credit Risk
Financial instruments including cash equivalents, derivative contracts, and accounts receivable, expose the Company to counter-party credit risk for non-performance. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s credit rating requirements. The Company’s counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk throughpursuant to written policies requiringthat specify minimum counterparty credit standingprofile and by limiting the concentration of credit exposure to any one counter-party and through monitoring counter-party credit risks.
amongst its multiple counterparties.
The Company's credit risk with any individualsingle customer does not exceed ten percent of total accounts receivable except for Ford and its affiliates which represent 14% and 13%, and Renault/Nissan which represents 17%10% and 16%11%, of the Company's balance as of September 30, 2017March 31, 2021 and December 31, 2016, respectively, Mazda which represents 11% and 10% of the balance as of September 30, 2017 and December 31, 2016, and Nissan/Renault which represents 11% and 10% of the balance as of September 30, 2017 and December 31, 2016,2020, respectively.
NOTE 17.14. Commitments and Contingencies
Litigation and Claims
In 2003, the Local Development Finance Authority of the Charter Township of Van Buren, Michigan (the “Township”) issued approximately $28 million in bonds finally maturing in 2032, the proceeds of which were used at least in part to assist in the development of the Company’s U.S. headquarters located in the Township. During January 2010, the Company and the Township entered into a settlement agreement (the “Settlement Agreement”) that, among other things, reduced the taxable value of the headquarters property to current market value and facilitated certain claims of the Township in the Company’s chapter 11 proceedings.value. The Settlement Agreement also provided that the Company would continue to negotiate in good faith with the Township, pursuant to the terms of the Settlement Agreement, in the event that property tax payments waswere inadequate to permit the Township to meet its payment obligations with respect to the bonds. In September 2013,October 2019, the Township notified the Company in writing that it is estimatingthe Township had incurred a shortfall in tax revenuesunder the bonds of between $25less than $1 million and $36 million, which could render it unablerequested that the Company meet to satisfy its payment obligations under the bonds.discuss payment. The parties met in November 2019 but no agreement was reached. On May 12, 2015,December 9, 2019, the Township commenced a proceedinglitigation against the Company in the U. S. Bankruptcy Court for the District of Delaware in connection with the foregoing. Upon the Company’s motion to dismiss, the Township dismissed the proceeding before the Delaware Bankruptcy Court and re-commenced the proceeding against the Company in the MichiganMichigan’s Wayne County Circuit Court forclaiming damages of $28 million related to what the State of Michigan on July 2, 2015. The Township sought damages or, alternatively, declaratory judgment that, among other things,alleges to be the Company is responsiblecurrent shortfall and projected future shortfalls under the Settlement Agreement for payment of any shortfall in the bond debt service payments. On February 2, 2016, the Wayne County Circuit Court dismissed the Township’s lawsuit without prejudice on the basis that the Township’s claims were not ripe for adjudication. The Township appealed the decision to the Michigan Court of Appeals, which affirmed the dismissal of the Township’s lawsuit. The Township has sought leave to appeal from the Michigan Supreme Court.bonds. The Company disputes the factual and legal assertions made by the Township and intends to vigorously defend the matter.matter vigorously. The Company is not able to estimate the possible loss or range of loss in connection with this matter.
The Company is currently involved in disputes with its former President and Chief Executive Officer, Timothy D. Leuliette. Mr. Leuliette filed an arbitration demand against the Company with the American Arbitration Association, alleging claims relating to the cessation of his employment. The Company subsequently filed a complaint against Mr. Leuliette in the U.S. District Court for the Eastern District of Michigan, seeking to enjoin the arbitration and asserting additional claims. The federal litigation is currently stayed pending a ruling in the arbitration. The Company disputes the factual and legal assertions made by Mr. Leuliette, has asserted counterclaims against him in the arbitration, and, although there can be no assurances, the Company does not currently believe that the resolution of these disputes will have a material adverse impact on its results of operations or financial condition.
In November 2013, the Company and Halla Visteon Climate Control Corporation a Korean corporation (“HVCC”), jointly filed an Initial Notice of Voluntary Self-Disclosure statement with the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) regarding certain sales of automotive HVAC components by a minority-owned, Chinese joint venture of HVCC into Iran. The Company updated that notice in December 2013, and subsequently filed a voluntary self-disclosure regarding these sales with OFAC in March 2014. In May 2014, the Company voluntarily filed a supplementary self-disclosure identifying additional sales of automotive HVAC components by the Chinese joint venture, as well as similar sales involving an HVCC subsidiary in China, totaling approximately $12 million, and filed a final voluntary-self disclosure with OFAC on October 17, 2014. OFAC is currently reviewing the results of the Company’s investigation. Following that review, OFAC may conclude that the disclosed sales resulted in violations of U.S. economic sanctions laws and warrant the imposition of civil penalties, such as fines, limitations on the Company's ability to export products from the United States, and/or referral for further investigation by the U.S. Department of Justice. Any such fines or restrictions may be material to the Company’s financial results in the period in which they are imposed, but at this timethe Company is not able to estimate the possible loss or range of loss in connection with this matter. Additionally, disclosure of this conduct and any fines or other action relating to this conduct could harm the Company’s reputation and have a material adverse effect on ourits business, operating results and financial condition. The Company cannot predict when OFAC will conclude its own review of our voluntary self-disclosures or whether it may impose any of the potential penalties described above.
The Company's operations in Brazil and Argentina are subject to highly complex labor, tax, customs and other laws. While the Company believes that it is in compliance with such laws, it is periodically engaged in litigation regarding the application of these laws. As of September 30, 2017, theThe Company maintained accruals of approximately $12 million and $4$9 million for claims aggregating approximately $57 million and $5$56 million in Brazil and Argentina, respectively.as of March 31, 2021. The amounts accrued represent claims that are deemed probable of loss and are reasonably estimable based on the Company's assessment of the claims and prior experience with similar matters.
The adverse impacts of the COVID-19 pandemic led to a significant vehicle production reduction in the first half of 2020, which was followed by increased consumer demand and vehicle production schedules in the second half of 2020, particularly in the fourth quarter. Because semiconductor suppliers have been unable to rapidly reallocate production to serve the automotive industry, the surge in demand led to a worldwide semiconductor supply shortage. The shortage was further exacerbated in the first quarter of 2021 by storms in late February that impacted certain semiconductor supplier facilities in the southern United
States and a fire at another semiconductor fabrication facility in Japan in March 2021. The Company is working closely with suppliers and customers to attempt to minimize potential adverse impacts of these events which are outside of the Company’s control. Notwithstanding these efforts, the Company’s semiconductor suppliers have in some instances been unable to deliver sufficient semiconductors to meet the Company’s customer requirements. This has led certain customers to allege that the Company has contributed to production reductions. As a result, these customers have communicated that they expect the Company to absorb some of the financial impact of those reductions and are reserving their rights to claim damages arising from the supply shortages. The Company believes it has a number of legal defenses to such claims and intends to defend any such claims vigorously. The Company has also notified semiconductor suppliers that it will seek compensation from them for failure to deliver sufficient quantities. The Company is not able to estimate the possible loss or range of loss in connection with this matter at this time.
While the Company believes its accruals for litigation and claims are adequate, the final amounts required to resolve such matters could differ materially from recorded estimates and the Company's results of operations and cash flows could be materially affected.
Guarantees and Commitments
The Company provided a $15 million loan guarantee to YFVIC. The guarantee contains standard non-payment provisions to cover the borrowers in event of non-payment of principal, accrued interest, and other fees, and the loan is expected to be fully paid by September 2019.
As part of the agreements involving the divestiture of the Climate Transactionbusiness (the "Climate Transaction") and Interiors Divestiture, the Company continues to provide lease guarantees to divested Climate and Interiors entities. At September 30, 2017As of March 31, 2021, the Company has approximately $7$5 million and $1 million of outstanding guarantees, related to each of the divested Climate and Interiors entities, respectively, totaling $14 million. Theserespectively. The guarantees represent the maximum potential amount that the Company could be required to pay under the guarantees in the event of default by the guaranteed parties. The guarantees will generally cease upon expiration of current lease agreements.
agreement which expire in 2026 and 2024 for the Climate and Interiors entities, respectively.
Product Warranty and Recall
Amounts accrued for product warranty and recall claims are based on management’s best estimates of the amounts that will ultimately be required to settle such items. The Company’s estimates for product warranty and recall obligations are developed with support from its sales, engineering, quality and legal functions and include due consideration of contractual arrangements, past experience, current claims and related information, production changes, industry and regulatory developments and various other considerations. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued or beyond what the Company may recover from its suppliers. Specific cause actions represent customer actions related to defective supplier parts and related software.
The following table provides a reconciliationrollforward of changes in the product warranty and recall claims liability:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2021 | | 2020 |
Beginning balance | $ | 64 | | | $ | 49 | |
Provisions | 5 | | | 5 | |
Changes in estimates | 1 | | | — | |
| | | |
| | | |
| | | |
Currency/other | (3) | | | 0 | |
Settlements | (7) | | | (5) | |
Ending balance | $ | 60 | | | $ | 49 | |
|
| | | | | | | |
| Nine Months Ended September 30 |
| 2017 | | 2016 |
| (Dollars in Millions) |
Beginning balance | $ | 55 |
| | $ | 38 |
|
Accruals for products shipped | 15 |
| | 12 |
|
Changes in estimates | 5 |
| | 4 |
|
Specific cause actions | 3 |
| | 7 |
|
Recoverable warranty/recalls | — |
| | 6 |
|
Foreign currency | 2 |
| | 1 |
|
Settlements | (29 | ) | | (13 | ) |
Ending balance | $ | 51 |
| | $ | 55 |
|
Other Contingent Matters
The Company is actively negotiating the possible exit of a European facility that would involve contributing cash, inventory, and fixed assets to a third party. The potential transaction is subject to governmental and legal approvals. While the terms have yet to be finalized, the potential contribution includes cash and working capital ranging from $15 million to $20 million and long term assets of approximately $10 million to $15 million. As of September 30, 2017, the Company did not meet the specific criteria necessary for the assets to be considered held for sale.
Various legal actions, governmental investigations and proceedings and claims are pending or may be instituted or asserted in the future against the Company, including those arising out of alleged defects in the Company’s products; governmental regulations relating to safety; employment-related matters; customer, supplier and other contractual relationships; intellectual property rights; product warranties; product recalls; and environmental matters. Some of the foregoing matters may involve compensatory, punitive or antitrust or other treble damage claims in very large amounts, or demands for recall campaigns, environmental remediation programs, sanctions, or other relief which, if granted, would require very large expenditures. The Company enters into agreements that contain indemnification provisions in the normal course of business for which the risks are considered nominal and impracticable to estimate.
Contingencies are subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Reserves have been established by the Company for matters discussed in the immediately foregoing paragraphparagraphs where losses are deemed probable and reasonably estimable. It is possible, however, that some of the matters discussed in the foregoing paragraphparagraphs could be decided unfavorably to the Company and could require the Company to pay damages or make other expenditures in amounts, or a range of amounts, that cannot be estimated as of September 30, 2017March 31, 2021 and that are in excess of established reserves. The Company does not reasonably expect, except as otherwise described herein, based on its analysis, that any adverse outcome
from such matters would have a material effect on the Company’s financial condition, results of operations or cash flows, although such an outcome is possible.
NOTE 18.15. Segment Information and Revenue Recognition
The Company’s current reportable segment is Electronics. The Company's Electronics segment provides vehicle cockpit electronics products to customers, including instrument clusters, information displays, infotainment systems, audio systems, telematics solutions, battery monitoring systems, and head-up displays. As the Company has 1 reportable segment, total assets, depreciation, amortization and capital expenditures are equal to consolidated results.
Financial results for the Company's reportable segment have been prepared using a management approach, which is consistent with the basis and manner in which financial information is evaluated by the Company's chief operating decision maker in allocating resources and in assessing performance. The Company’s chief operating decision maker, the Chief Executive Officer, evaluates the performance of the Company’s segment primarily based on net sales, before elimination of inter-company shipments, Adjusted EBITDA (a non-GAAPnon-U.S. GAAP financial measure, as defined below), and operating assets.
The Company’s current reportable segment is Electronics. The Company's Electronics segment provides vehicle cockpit electronics products to customers, including audio systems, information displays, instrument clusters, head up displays, infotainment systems, and telematics solutions. Prior to 2017, the Company also had Other operations consisting primarily of South Africa and South America climate operations substantially exited during the fourth quarter of 2016. As the Company ceased Other operations in 2016, future legacy impacts will be associated with the Company's continuing Electronics operations.
Segment Sales
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in Millions) |
Electronics | $ | 765 |
| | $ | 749 |
| | $ | 2,349 |
| | $ | 2,304 |
|
Other | — |
| | 21 |
| | — |
| | 41 |
|
Total consolidated sales | $ | 765 |
| | $ | 770 |
| | $ | 2,349 |
| | $ | 2,345 |
|
Segment Adjusted EBITDA
The Company defines Adjusted EBITDA as net income attributable to the Company adjusted to eliminate the impact of depreciation and amortization, restructuring expense, net interest expense, loss on debt extinguishment, equity in net income of non-consolidated affiliates, gain and loss on divestiture, gain on non-consolidated affiliate transactions, other net expense, provision for income taxes, discontinued operations, net income attributable to non-controlling interests, non-cash stock-based compensation expense, pension settlement gains, and other gains and losses not reflective of the Company's ongoing operations.
Adjusted EBITDA is presented as a supplemental measure of the Company's financial performance that management believes is useful to investors because the excluded items may vary significantly in timing or amounts and/or may obscure trends useful in evaluating and comparing the Company's operating activities across reporting periods. Not all companies use identical calculations and, accordingly, the Company's presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA is not a recognized term under U.S. GAAP and does not purport to be a substitute for net income as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. Adjusted EBITDA has limitations as an analytical tool and is not intended to be a measure of cash flow available for management's discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments, and debt service requirements. In addition, theThe Company uses Adjusted EBITDA (i) as a factor in incentive compensation decisions (ii)and to evaluate the effectiveness of the Company's business strategies and (iii)strategies. In addition, the Company's credit agreements use measures similar to Adjusted EBITDA to measure compliance with certain covenants.
Segment Adjusted EBITDA is summarized below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in Millions) |
Electronics | $ | 83 |
| | $ | 75 |
| | $ | 268 |
| | $ | 248 |
|
Other | — |
| | — |
| | — |
| | (7 | ) |
Adjusted EBITDA | $ | 83 |
| | $ | 75 |
| | $ | 268 |
| | $ | 241 |
|
Theand reconciliation of Adjusted EBITDA to net income (loss) attributable to Visteon is as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2021 | | 2020 |
Net income (loss) attributable to Visteon Corporation | $ | 16 | | | $ | (35) | |
Depreciation and amortization | 27 | | | 25 | |
Non-cash, stock-based compensation expense | 4 | | | 5 | |
Provision for income taxes | 12 | | | 5 | |
Interest expense, net | 2 | | | 2 | |
Net income (loss) attributable to non-controlling interests | 3 | | | (1) | |
Restructuring, net | (1) | | | 33 | |
Equity in net income of non-consolidated affiliates | 0 | | | (1) | |
Other | 1 | | | 0 | |
Adjusted EBITDA | $ | 64 | | | $ | 33 | |
Revenue Recognition
Disaggregated revenue by geographical market and product lines is as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2021 | | 2020 |
Geographical Markets | | | |
Europe | $ | 276 | | | $ | 254 | |
Americas | 202 | | | 192 | |
China Domestic | 124 | | | 57 | |
China Export | 54 | | | 64 | |
Other Asia-Pacific | 119 | | | 116 | |
Eliminations | (29) | | | (40) | |
| $ | 746 | | | $ | 643 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2021 | | 2020 |
Product Lines | | | |
Instrument clusters | $ | 387 | | | $ | 312 | |
Audio and infotainment | 145 | | | 145 | |
Information displays | 118 | | | 109 | |
Body and security | 35 | | | 25 | |
Climate controls | 14 | | | 10 | |
Telematics | 18 | | | 12 | |
Other | 29 | | | 30 | |
| $ | 746 | | | $ | 643 | |
During the three months ended March 31, 2021, revenue recognized related performance obligations satisfied in previous periods represented less than 1% of consolidated net sales. The Company has no material contract assets, contract liabilities, or capitalized contract acquisition costs as of March 31, 2021.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in Millions) |
Adjusted EBITDA | $ | 83 |
| | $ | 75 |
| | $ | 268 |
| | $ | 241 |
|
Depreciation and amortization | 21 |
| | 21 |
| | 62 |
| | 62 |
|
Restructuring expense | 6 |
| | 5 |
| | 10 |
| | 22 |
|
Interest expense, net | 3 |
| | 5 |
| | 12 |
| | 10 |
|
Equity in net income of non-consolidated affiliates | (1 | ) | | — |
| | (6 | ) | | (3 | ) |
Other (income) expense, net | (1 | ) | | 12 |
| | (3 | ) | | 16 |
|
Provision for income taxes | 8 |
| | 5 |
| | 34 |
| | 27 |
|
(Income) loss from discontinued operations, net of tax | — |
| | (7 | ) | | (8 | ) | | 15 |
|
Net income attributable to non-controlling interests | 4 |
| | 4 |
| | 11 |
| | 12 |
|
Non-cash, stock-based compensation expense | 3 |
| | 2 |
| | 9 |
| | 6 |
|
Other | (3 | ) | | — |
| | (4 | ) | | 1 |
|
Net income attributable to Visteon Corporation | $ | 43 |
| | $ | 28 |
| | $ | 151 |
| | $ | 73 |
|
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations, financial condition, and cash flows of Visteon Corporation (“Visteon” or the “Company”). MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20162020 filed with the Securities and Exchange Commission on February 23, 2017,18, 2021 and the financial statements and accompanying notes to the financial statements included elsewhere herein.
Description of BusinessExecutive Summary
Strategic Priorities
Visteon Corporation (the "Company" or "Visteon") is a global automotive supplier that designs, engineers, and manufactures innovative electronics products for nearly every original equipment vehicle manufacturer ("OEM") worldwide including Ford, Mazda, Renault/Nissan, General Motors, Honda, BMW and Daimler. Visteon is headquartered in Van Buren Township, Michigan and has an international network of manufacturing operations, technical centers and joint venture operations, supported by approximately 10,000 employees, dedicated to the design, development, manufacture and support of its product offerings and its global customers. The Company's manufacturing and engineering footprint is principally located outside of the United States.
Visteon provides value for its customers and stockholders through its technology-focused vehicle cockpit electronics business, by delivering a rich, connected cockpit experience for every car from luxury to entry. The Company's cockpit electronics business is one of the broadest portfolios in the industry and includes instrument clusters, information displays, infotainment systems, audio systems, telematics solutions, and head up displays. The Company's vehicle cockpit electronics business comprises and is reported under the Electronics segment. In addition to the Electronics segment, the Company had residual operations in South America and South Africa previously associated with the Climate business, sold or exited by December 31, 2016, but not subject to discontinued operations classification that comprised Other.
Strategic Initiatives
Visteon is a technology-focused, pure-play supplier of automotive cockpit electronics and connected car solutions. solutions for the world’s major vehicle manufacturers. The automotive electronics market is expected to grow faster than underlying vehicle production volumes as the vehicle shifts from analog to digital and towards device and cloud connectivity, electric vehicles, and more advanced safety features.
The Company has laid out the following strategic initiatives for 2017 and beyond:priorities:
Strengthen the Core•Technology Innovation - Visteon offers technology and related manufacturing operations for audio, head-up displays, information displays, infotainment, instrument clusters and telematics products. During the first nine months of 2017, the Company won $4.6 billion in new business, $0.5 billion higher than the first nine months of 2016. The third quarter 2017 new business wins includes the first award of Phoenix™ infotainment technology, designed to unlock innovation by enabling third-party developers to create apps easily, while delivering built-in cybersecurity and over-the-air ("OTA") updates. Earlier in the year, awards included the third and fourth awards of SmartCore™ cockpit technology which represents the industry-first automotive grade cockpit domain controller, consolidating separate cockpit electronics products on a single, multi-core chip, accessible through integrated human machine interface ("HMI") technology. The Company's backlog, defined as cumulative remaining life of program booked sales, is approximately $18.0 billion as of September 30, 2017, or 5.7 times the last twelve months of sales, reflecting a strong booked sales base on which to launch future growth.
Core business financial results continue to improve with Adjusted EBITDA margin for electronics of 10.8% in third quarter 2017 compared with 10.0% in the same period of 2016. The Company expects to deliver cost efficiencies by streamlining selling, general and administration costs and engineering costs, improving free cash flow, optimizing the capital structure and driving savings benefits as revenue grows.
During 2016, the Company initiated a restructuring of its engineering and administration organization to focus on technology and execution and also to align the engineering and administrative footprint with its core technologies and customers. The organization will be comprised of customer regional engineering, product management and advanced technologies, and global centers of competence.
Move Selectively to Adjacent Products - As consumer demand continues to evolve with an increase in electronics content per vehicle, the Company is advancing its expertise in the areas of cockpit domain controllers, next generation safety applications, and vehicle cybersecurity. Each of these areas require careful assessments of shifting consumer needs and how these new products complement Visteon's core products.
Expand into Autonomous Driving - The Company's approach to autonomous driving is to feature fail-safe centralized domain hardware, designed for algorithmic developers, and applying artificial intelligence for object detection and other functions.
The Company is developing a secure autonomous driving domain controller platform with an open framework based on neural networks.established global leader in automotive electronics and is positioned to provide solutions as the industry transitions to the next generation automotive experience. The Company projects a launchcockpit is becoming fully digital, connected, automated, learning, and voice enabled while vehicles are also becoming electric and featuring more advanced safety capabilities. Visteon's broad portfolio of cockpit electronics technology, the industry's first wireless battery management system, and the development of the technologyDriveCore™ advanced safety platform positions Visteon to support these macro trends in 2018.the automotive industry.
During the third quarter of 2017, the Company entered into a contribution agreement with a non-profit corporation who is building a state of the art research•Long-Term Growth and development facility for testing and validating connected and automated vehicles, the acceleration of standards, and the education of the workforce and public. The Company will use the future facility for the Company's autonomous driving research and development activities.
Accelerate China BusinessMargin Expansion - The Company planshas continued to accelerate its Chinawin business at a rate that exceeds current sales levels by demonstrating product quality, technical and development capability, new product innovation, reliability, timeliness, product design, manufacturing capability, and flexibility, as China’s economic environment offers significant growth opportunities in sales and new technology launches. Visteon will continue to leverage joint venture relationships to drive adoption of new offerings. Approximately 37% of the Company's $18 billion of backlog is expected to be manufactured in China and other countries in Asia.
well as overall customer service.
•Enhance Shareholder Returns- On January 10, 2017, the Company's board of directors authorized management to purchase $400 million of Visteon common stock. On February 27, 2017, the Company entered into an accelerated share buyback ("ASB") program with a third-party financial institution to purchase shares of Visteon common stock for an aggregate purchase price of $125 million. Through conclusion of the program on May 8, 2017, the Company acquired 1,300,366 shares at an average price of $96.13 per share. In addition to the ASB program, theThe Company has purchasedreturned approximately $3.3 billion to shareholders since 2015 through a combination of 441,613 shares in the open market. Through the end of the third quarter, the Company has purchased 1,741,979 shares at an average price of $97.59 per share for a total of $170 million inongoing share repurchases during 2017.and a onetime $1.75 billion special distribution in 2016.
Financial Results
The Company anticipates that additional share repurchases, if any, would occur from time to time in open market transactions or in privately negotiated transactions depending on market and economic conditions, share price, trading volume, alternative uses of capital and other factors.
Executive Summary
The Company's Electronicspie charts below highlight the net sales breakdown for Visteon for the three months ended September 30, 2017 totaled $765 million,March 31, 2021.
*Regional net sales are based on the pie charts below highlight thegeographic region where sales breakdown for the threeoriginate and nine months ended September 30, 2017.not where customer is located (excludes inter-regional eliminations).
Three Months Ended September 30, 2017
Nine Months Ended September 30, 2017
Third quarter 2017 global light vehicle production increased 2.1% over the same period last year.Global Automotive Market Conditions and Production increased year over year in all regions during the third quarter except for North America which was down (9.7%) as manufacturers cut production to reduce higher than optimal levels of unsold inventory.
Levels
Light vehicle production levels for the three and nine months ended September 30, 2017March 31, 2021 and 2016,2020 by geographic region are provided below:
| | | | | | | | | | | | | | | | | |
(Units in millions) | Three Months Ended March 31, |
| 2021 | | 2020 | | Change |
China | 5.6 | | | 3.2 | | | 75.0 | % |
Other Asia Pacific | 5.1 | | | 4.9 | | | 4.1 | % |
Europe | 4.6 | | | 4.6 | | | — | % |
Americas | 4.2 | | | 4.5 | | | (6.7) | % |
Other | 0.5 | | | 0.4 | | | 25.0 | % |
Global | 20.0 | | | 17.6 | | | 13.6 | % |
Source: LMC, March 2021 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| (Units in Millions) |
Global | 22.4 |
| | 22.0 |
| | 2.1 | % | | 69.8 |
| | 68.0 |
| | 2.6 | % |
Asia Pacific | 11.9 |
| | 11.5 |
| | 3.5 | % | | 36.0 |
| | 34.7 |
| | 3.6 | % |
Europe | 5.0 |
| | 4.8 |
| | 5.2 | % | | 16.5 |
| | 16.1 |
| | 2.4 | % |
North America | 4.0 |
| | 4.4 |
| | (9.7 | )% | | 13.0 |
| | 13.5 |
| | (3.7 | )% |
South America | 0.9 |
| | 0.7 |
| | 26.1 | % | | 2.4 |
| | 2.0 |
| | 20.9 | % |
Other | 0.6 |
| | 0.6 |
| | 11.6 | % | | 1.9 |
| | 1.7 |
| | 12.9 | % |
Source: IHS Automotive
|
Significant aspectsThe automotive industry was negatively impacted in 2020 by the COVID-19 pandemic, with industry production coming to a stop at most locations at varying times throughout the first half of the Company's financial resultsyear, followed by a faster than anticipated recovery in the second half of 2020. This trend continued in the first quarter of 2021 with strong retail demand in the United States and China while dealer inventories have continued to decrease.
The surge in demand in the second half of 2020 has led to a worldwide semiconductor supply shortage, both in automotive and in other industries, during the threefirst quarter of 2021. In addition, recent events including unusually cold weather in Austin, Texas in February and nine months periods ended September 30, 2017 includea supplier fire in Japan have led to reduced semiconductor availability. These factors have been further exacerbated by the following:
continued COVID-19 pandemic and other supply chain related disruptions such as the Suez Canal blockage. The Company recorded sales of $765 million for the three months ended September 30, 2017, representing a decrease of $5 million when compared with the same period of 2016. The decrease is attributable to the exit of other climate operations in 2016, representing a decrease of $21 million. Electronics sales increased by $16 million, primarily due to new business, favorable volumes, product mix, and currency, partially offset by customer pricing net of design changes.
The Company recorded sales of $2,349 million for the nine months ended September 30, 2017, representing an increase of $4 million when compared with the same period of 2016. The increase was primarily due to new business, favorable volumes, and product mix, partially offset by customer pricing net of design changes, unfavorable currency, and the exit of other climate operations in 2016.
Gross margin was $116 million or 15.2% of sales for the three months ended September 30, 2017, compared to $105 million or 13.6% of sales for the same period of 2016. The increase was primarily attributable to improved cost performance including higher engineering recoveries and favorable volumes and currency, partially offset by customer pricing and product mix.
Gross margin was $359 million or 15.3% of sales for the nine months ended September 30, 2017, compared to $335 million or 14.3% of sales for the same period of 2016. The increase was primarily attributable to the exitmagnitude of the impact on the Company's other climate2021 financial statements and results of operations in 2016, favorable volumes, net new business and improved cost performance including higher engineering recoveries, partially offset by customer pricing, currency impacts,cash flows will depend on the evolution of the semiconductor supply shortage, related plant production schedules and product mix.
Net income attributable to Visteon was $43 million for the three months ended September 30, 2017, compared to net incomesupply chain impacts. Impacts of $28 million for the same period of 2016. The increase of $15 million includes improved gross margin of $11 million and the non-recurrence of charges associated with the 2016 South Africa climate disposition of $11 million. These increases were partially offset by an increasethese supply chain challenges in the provision for income taxesfirst quarter of $3 million and the non-recurrence of 2016 discontinued operations net income of $7 million.
Net income attributable to Visteon was $151 million for the nine months ended September 30, 2017, compared to net income of $73 million for the same period of 2016. The increase of $78 million includes higher net income due to the non-recurrence of 2016 losses from discontinued operations of $15 million, 2017 income from discontinued operations of $8 million, lower restructuring charges of $12 million, the non-recurrence of charges associated with the 2016 South Africa climate disposition of $11 million, lower selling, general and administrative expenses of $5 million, higher equity in net income of non-consolidated affiliates of $3 million and gains on the sale of non-consolidated affiliates of $3 million. Gross margin improved $24 million including $17 million for electronics operations and $7 million related to the 2016 exit2021 may not be indicative of the climate operations. These improvements were partially offset by higher income taxes of $7 million.
Including discontinued operations, the Company generated $131 million of cashimpacts to be expected in operating activities during the nine months ended September 30, 2017, compared to cash provided by operations of $38 million during the same period of 2016 representing a $93 million improvement. The increase in operating cash flows is attributable to higher net income of $77 million and lower cash tax payments, net of expense of $67 million primarily due to the non-recurrence of
future quarters.
Results of Contents
transaction related taxes incurred in 2016, partially offset by higher warranty payments net of expense of $21 million, higher working capital use of approximately $10 millionOperations - Three Months Ended March 31, 2021 and an increase in China bank notes of $11 million.
Total cash was $735 million, including $3 million of restricted cash as of September 30, 2017, $147 million lower than $882 million as of December 31, 2016, primarily attributable to share repurchases of $170 million, $69 million of capital expenditures, and the repurchase of the India electronics operations sold in connection with the Climate Transaction of $47 million, partially offset by the change in cash provided by operating activities of $93 million and $15 million proceeds from business divestiture.
2020
The Company's consolidated results of operations for the three months ended September 30, 2017March 31, 2021 and 20162020 were as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2021 | | 2020 | | Change |
Net sales | $ | 746 | | | $ | 643 | | | $ | 103 | |
Cost of sales | (673) | | | (590) | | | (83) | |
Gross margin | 73 | | | 53 | | | 20 | |
Selling, general and administrative expenses | (45) | | | (54) | | | 9 | |
Restructuring, net | 1 | | | (33) | | | 34 | |
Interest expense, net | (2) | | | (2) | | | — | |
Equity in net income of non-consolidated affiliates | — | | | 1 | | | (1) | |
Other income, net | 4 | | | 4 | | | — | |
Provision for income taxes | (12) | | | (5) | | | (7) | |
| | | | | |
| | | | | |
Net income (loss) | 19 | | | (36) | | | 55 | |
Less: Net (income) loss attributable to non-controlling interests | (3) | | | 1 | | | (4) | |
Net income (loss) attributable to Visteon Corporation | $ | 16 | | | $ | (35) | | | $ | 51 | |
Adjusted EBITDA* | $ | 64 | | | $ | 33 | | | $ | 31 | |
* Adjusted EBITDA is a Non-GAAP financial measure, as further discussed below. |
|
| | | | | | | | | | | |
| Three Months Ended September 30 |
| 2017 | | 2016 | | Change |
| (Dollars in Millions) |
Sales | $ | 765 |
| | $ | 770 |
| | $ | (5 | ) |
Cost of sales | 649 |
| | 665 |
| | (16 | ) |
Gross margin | 116 |
| | 105 |
| | 11 |
|
Selling, general and administrative expenses | 54 |
| | 53 |
| | 1 |
|
Restructuring expense | 6 |
| | 5 |
| | 1 |
|
Interest expense, net | 3 |
| | 5 |
| | (2 | ) |
Equity in net income of non-consolidated affiliates | 1 |
| | — |
| | 1 |
|
Other (income) expense, net | (1 | ) | | 12 |
| | (13 | ) |
Provision for income taxes | 8 |
| | 5 |
| | 3 |
|
Net income from continuing operations | 47 |
| | 25 |
| | 22 |
|
Income from discontinued operations | — |
| | 7 |
| | (7 | ) |
Net income | 47 |
| | 32 |
| | 15 |
|
Net income attributable to non-controlling interests | 4 |
| | 4 |
| | — |
|
Net income attributable to Visteon Corporation | $ | 43 |
| | $ | 28 |
| | $ | 15 |
|
Adjusted EBITDA* | $ | 83 |
| | $ | 75 |
| | $ | 8 |
|
| | | | | |
* Adjusted EBITDA is a Non-GAAP financial measure, as further discussed below. |
Net Sales, Cost of Sales and Gross Margin | | | | | | | | | | | | | | | | | | |
(In millions) | Net Sales | | Cost of Sales | | Gross Margin | |
Three months ended March 31, 2020 | $ | 643 | | | $ | (590) | | | $ | 53 | | |
Volume, mix, and net new business | 102 | | | (89) | | | 13 | | |
Currency | 16 | | | (10) | | | 6 | | |
Customer pricing | (19) | | | — | | | (19) | | |
Engineering costs, net * | — | | | 16 | | | 16 | | |
Cost performance, design changes and other | 4 | | | — | | | 4 | | |
Three months ended March 31, 2021 | $ | 746 | | | $ | (673) | | | $ | 73 | | |
*Excludes the impact of currency. | | | | | | |
Results of Operations - Three Months Ended September 30, 2017 and 2016
Prior to 2017, the Company also had Other operations consisting primarily of the South Africa and the South America climate operations exited during the fourth quarter of 2016.
Sales
|
| | | | | | | | | | | |
| Electronics | | Other | | Total |
| (Dollars in Millions) |
Three months ended September 30, 2016 | $ | 749 |
| | $ | 21 |
| | $ | 770 |
|
Volume, mix, and net new business | 26 |
| | — |
| | 26 |
|
Currency | 9 |
| | — |
| | 9 |
|
Customer pricing and other | (19 | ) | | — |
| | (19 | ) |
Exit and wind-down | — |
| | (21 | ) | | (21 | ) |
Three months ended September 30, 2017 | $ | 765 |
| | $ | — |
| | $ | 765 |
|
SalesNet sales for the three months ended September 30, 2017March 31, 2021 totaled $765$746 million, which representsrepresenting an decreaseincrease of $5$103 million compared with the same period of 2016. Favorable volumes, product mix,2020. Volumes and net new business increased net sales by $26$102 million. Product mix reflects the Company specific content across product lines. Favorable currency increased net sales by $9$16 million, primarily attributable to the Euroeuro, Japanese yen and Indian Rupee. The exit of other climate operations in 2016Chinese renminbi. Customer pricing decreased net sales by $21$19 million. Other reductions were associated with customer pricing,Cost performance and design changes increased net of design savings.
Cost of Sales
|
| | | | | | | | | | | |
| Electronics | | Other | | Total |
| (Dollars in Millions) |
Three months ended September 30, 2016 | $ | 644 |
| | $ | 21 |
| | $ | 665 |
|
Currency | 7 |
| | — |
| | 7 |
|
Volume, mix, and net new business | 30 |
| | — |
| | 30 |
|
Exit and wind-down | — |
| | (21 | ) | | (21 | ) |
Net cost performance | (32 | ) | | — |
| | (32 | ) |
Three months ended September 30, 2017 | $ | 649 |
| | $ | — |
| | $ | 649 |
|
sales by $4 million.
Cost of sales decreased $16increased by $83 million for the three months ended September 30, 2017 whenMarch 31, 2021 compared with the same period in 2016. Increased2020. Favorable volumes product mix, and net new business increased cost of sales by $30$89 million. Foreign currency increased cost of sales by $7$10 million, primarily attributable to the Euroeuro, Mexican peso and Brazilian Real. The exit and wind down of other climate operations decreasedChinese renminbi. Net engineering costs, by $21 million. Net efficiencies, including material, design and usage economics and higher engineering recoveries, partially offset by increased manufacturing expense,excluding currency, decreased cost of sales by $29$16 million. Cost performance, design changes and other includes favorable material cost offset by decreases in other cost performance, primarily due to increased one-time logistics and associated material costs with shortage of sales also included a $3 million benefit related to legacy South America climate operations for freight recoveriessemiconductor microchips and a favorable ruling on a litigation matter.other component parts and raw materials.
A summary of sales includes net engineering costs comprised of grossis shown below:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2021 | | 2020 |
Gross engineering costs | $ | (80) | | | $ | (100) | |
Engineering recoveries | 21 | | | 27 | |
Engineering costs, net | $ | (59) | | | $ | (73) | |
Gross engineering expenses relatedcosts relate to forward model program development and advanced engineering activities partially offset byand exclude contractually reimbursable engineering cost recoveries from customers. Electronics grosscosts. Net engineering expenses were $99costs of $59 million for the three months ended September 30, 2017, consistent withMarch 31, 2021, including the same periodimpacts of 2016. Engineering recoveriescurrency, were $33$14 million for the three months ended September 30, 2017, $9 million higherlower than the same period of 2016. Engineering2020. The decrease is primarily related to the benefits of previously announced restructuring actions and ongoing cost recoveries can fluctuate periodreduction efforts partially offset by the reclassification of certain program expenses from selling, general and administrative expenses to period depending on underlying contractual terms and conditions and achievement of related development milestones.align with the Company's optimized structure.
Gross Margin
GrossThe Company's gross margin was $116$73 million or 15.2%9.8% of net sales for the three months ended September 30, 2017March 31, 2021 compared to $105$53 million or 13.6%8.2% of net sales for the same period of 2016. The increase in gross margin2020. Favorable volumes of $10$13 million included $9 million of favorable net cost performance reflecting material cost efficiencies and higher engineering recoveries which more thanpartially offset annual customer pricing and higher manufacturing costs. Favorableof $19 million. Lower net engineering costs excluding currency, of $2 million reflected the impact of the Indian Rupee and Brazilian Real. Favorable volumes and net new business were offset by product mix reducingincreased gross margin by $16 million. Favorable cost performance of $4 million. The year-over-year changemillion includes favorable material cost partially offset by decreases in gross margin also included a $3 million benefit relatedother cost performance due to legacy South America climate operations for freight recoveriesincreased one-time logistics and a favorable ruling on a litigation matter.
additional material costs associated with shortage of semiconductor microchips and other component parts and raw materials.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses were $45 million or 6.0% of net sales and $54 million or 7.1% and $53 million or 6.9%8.4% of net sales, during the three months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. The increasedecrease is primarily related to higher incentive compensationpreviously announced restructuring actions and the reclassification of certain program expenses to gross engineering costs and economics partially offset by cost efficiencies.
to align with the Company's optimized structure.
Restructuring, ExpenseNet
During the fourth quarter of 2016,2020 the Company announced aapproved various restructuring programprograms impacting the engineering, administrative and administrativemanufacturing functions to further alignimprove efficiency and rationalize the Company's engineering and related administrative footprint with its core product technologies and customers.Company’s footprint. During the three months ended September 30, 2017,March 31, 2021, the Company recorded $6released $1 million of restructuring expenses, net of reversals, under this program. Through September 30, 2017, the Company recorded approximately $37 million of restructuring expenses under this program, and expectsexpense related to incur up to $45 million of restructuring costs associated with approximately 250 employees.
these programs based on a change in estimate. During the three months ended September 30, 2016, theMarch 31, 2020, the Company recorded $4$33 million of restructuring expenses primarily related to severance and termination benefits, in connection with the wind-down of certain operations in South America.these actions.
Interest Expense, Net
Interest expense, net, was $3 million and $5of $2 million for the three months ended September 30, 2017March 31, 2021 and 2016, respectively. Interest expense for the three months ended September 30, 2017 includes termination impacts of2020 is primarily related to the Company's interest rate swap as further described in Note 16, "Fair Value Measurements and Financial Instruments."
Term Loan Facility.
Equity in Net Income of Non-Consolidated Affiliates
Equity in net income of non-consolidated affiliates was less than $1 million and $1 million for the three month periodperiods ending September 30, 2017.March 31, 2021 and 2020. The decrease in income is primarily attributable due to increased engineering expenses at the Company's equity investment in Yanfeng Visteon Investment Company.
Other (Income) Expense,Income, Net
Other (income) expense,income, net consists of $4 million for the following:three-month periods ending March 31, 2021 and 2020 is primarily due to net pension financing benefits.
|
| | | | | | | |
| Three Months Ended September 30 |
| 2017 | | 2016 |
| (Dollars in Millions) |
Transformation initiatives | $ | 1 |
| | $ | — |
|
Gain on non-consolidated affiliate transactions, net | (2 | ) | | (1 | ) |
Foreign currency translation charge | — |
| | 11 |
|
Loss on asset contribution | — |
| | 2 |
|
| $ | (1 | ) | | $ | 12 |
|
Transformation initiative costs include information technology separation costs, integration of acquired business, and financial and advisory services incurred in connection with the Company's transformation into a pure play cockpit electronics business. The gain on non-consolidated affiliate transactions, net are described in Note 5, "Non-Consolidated Affiliates."
The Company recorded an impairment charge of $11 million during the three months ended September 30, 2016, related to foreign currency translation amounts recorded in accumulated other comprehensive loss associated with the agreement to sell the Company's South Africa climate operations. In connection with the closure of the Climate facility in Argentina, the Company entered an agreement to contribute land and building with a net book value of $2 million to the local municipality.
Income Taxes
The Company's provision for income taxes of $8$12 million for the three months ended September 30, 2017,March 31, 2021, represents an increase of $3$7 million, when compared with $5 million in the same period of 2016.2020. The increase in tax expense is primarily attributable to the year-over-year changes in the mix of earnings and differing tax rates between jurisdictions. In this regard, during the three months ended September 30, 2016, the Company reflected favorable adjustments due to incorporating certain transfer pricing adjustments between the U.S. and Japan consistent with the anticipated transfer pricing methodology expected to be agreed upon in connection with the pursuit of a bilateral advance pricing agreement (“APA”) with the U.S. and Japan tax authorities.
Discontinued Operations
The operations subject to the Interiors Divestiture and Climate Transaction met conditions required to qualify for discontinued operations reporting. Accordingly, the results of operations for the Interiors business have been reclassified to income (loss) from discontinued operations, net of tax in the consolidated statements of comprehensive income for the three month periods ended September 30, 2017 and 2016. See Note 4 “Discontinued Operations" for additional disclosures.
Net Income
Net income attributable to Visteon was $43 million for the three months ended September 30, 2017, compared to net income of $28 million for the same period of 2016. The increase of $15 million includes improved gross margin of $11 million and the non-recurrence of charges associated with the 2016 South Africa climate disposition of $11 million. These increases were partially offset by an increase in the provision for income taxes ofapproximately $3 million and the non-recurrence of 2016 discontinued operations net income of $7 million.
Adjusted EBITDA
Adjusted EBITDA (a non-GAAP financial measure, as defined in Note 18) was $83 million for the three months ended September 30, 2017, representing an increase of $8 million when compared with Adjusted EBITDA of $75 million for the same period of 2016. The increase includes favorable net cost performance of $10 million reflecting material cost efficiencies and higher engineering recoveries which more than offset customer pricing and higher manufacturing costs. Foreign currency increased Adjusted EBITDA by $2 million attributable to the Brazilian Real and Indian Rupee. Favorable volumes and net new business were offset by product mix, reducing adjusted EBITDA by $4 million.
The reconciliation of Adjusted EBITDA to net income attributable to Visteon for the three months ended September 30, 2017 and 2016, is as follows:
|
| | | | | | | | | | | |
| Three Months Ended September 30 |
| 2017 | | 2016 | | Change |
| (Dollars in Millions) |
Adjusted EBITDA | $ | 83 |
| | $ | 75 |
| | $ | 8 |
|
Depreciation and amortization | 21 |
| | 21 |
| | — |
|
Restructuring expense | 6 |
| | 5 |
| | 1 |
|
Interest expense, net | 3 |
| | 5 |
| | (2 | ) |
Equity income of non-consolidated affiliates | (1 | ) | | — |
| | (1 | ) |
Other (income) expense, net | (1 | ) | | 12 |
| | (13 | ) |
Provision for income taxes | 8 |
| | 5 |
| | 3 |
|
Income from discontinued operations, net of tax | — |
| | (7 | ) | | 7 |
|
Net income attributable to non-controlling interests | 4 |
| | 4 |
| | — |
|
Non-cash, stock-based compensation | 3 |
| | 2 |
| | 1 |
|
Other | (3 | ) | | — |
| | (3 | ) |
Net income attributable to Visteon Corporation | $ | 43 |
| | $ | 28 |
| | $ | 15 |
|
The Company's consolidated results of operations for the nine months ended September 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2017 | | 2016 | | Change |
| (Dollars in Millions) |
Sales | $ | 2,349 |
| | $ | 2,345 |
| | $ | 4 |
|
Cost of sales | 1,990 |
| | 2,010 |
| | (20 | ) |
Gross margin | 359 |
| | 335 |
| | 24 |
|
Selling, general and administrative expenses | 158 |
| | 163 |
| | (5 | ) |
Restructuring expense | 10 |
| | 22 |
| | (12 | ) |
Interest expense, net | 12 |
| | 10 |
| | 2 |
|
Equity in net income of non-consolidated affiliates | 6 |
| | 3 |
| | 3 |
|
Other (income) expense, net | (3 | ) | | 16 |
| | (19 | ) |
Provision for income taxes | 34 |
| | 27 |
| | 7 |
|
Net income from continuing operations | 154 |
| | 100 |
| | 54 |
|
Income (loss) from discontinued operations | 8 |
| | (15 | ) | | 23 |
|
Net income | 162 |
| | 85 |
| | 77 |
|
Net income attributable to non-controlling interests | 11 |
| | 12 |
| | (1 | ) |
Net income attributable to Visteon Corporation | $ | 151 |
| | $ | 73 |
| | $ | 78 |
|
Adjusted EBITDA* | $ | 268 |
| | $ | 241 |
| | $ | 27 |
|
| | | | | |
* Adjusted EBITDA is a Non-GAAP financial measure, as further discussed below. |
Results of Operations - Nine Months Ended September 30, 2017 and 2016
Prior to 2017, the Company also had Other operations consisting of the South Africa and the South America climate operations exited during the fourth quarter of 2016.
Sales
|
| | | | | | | | | | | |
| Electronics | | Other | | Total |
| (Dollars in Millions) |
Nine months ended September 30, 2016 | $ | 2,304 |
| | $ | 41 |
| | $ | 2,345 |
|
Volume, mix, and net new business | 117 |
| | — |
| | 117 |
|
Currency | (14 | ) | | — |
| | (14 | ) |
Customer pricing and other | (58 | ) | | — |
| | (58 | ) |
Exit and wind-down | — |
| | (41 | ) | | (41 | ) |
Nine months ended September 30, 2017 | $ | 2,349 |
| | $ | — |
| | $ | 2,349 |
|
Sales for the nine months ended September 30, 2017 totaled $2,349 million, which represents an increase of $4 million compared with the same period of 2016. Favorable volumes, product mix, and net new business increased sales by $117 million. Product mix reflects the Company specific content across product lines. Unfavorable currency decreased sales by $14 million, primarily attributable to the Chinese Renminbi and Euro partially offset by the Brazilian Real and Indian Rupee. The exit of other climate operations in 2016 decreased sales by $41 million. Other reductions were associated with customer pricing, net of design savings.
Cost of Sales
|
| | | | | | | | | | | |
| Electronics | | Other | | Total |
| (Dollars in Millions) |
Nine months ended September 30, 2016 | $ | 1,962 |
| | $ | 48 |
| | $ | 2,010 |
|
Currency | (12 | ) | | — |
| | (12 | ) |
Volume, mix, and net new business | 112 |
| | — |
| | 112 |
|
Exit and wind-down | — |
| | (48 | ) | | (48 | ) |
Net cost performance | (72 | ) | | — |
| | (72 | ) |
Nine months ended September 30, 2017 | $ | 1,990 |
| | $ | — |
| | $ | 1,990 |
|
Cost of sales decreased $20 million for the nine months ended September 30, 2017 when compared with the same period in 2016. Increased volumes, product mix, and net new business increased cost of sales by $112 million. Foreign currency decreased cost of sales by $12 million primarily attributable to the Chinese Renminbi, Japanese Yen, and Mexican Peso, partially offset by the Euro, Brazilian Real, and Thai Bhat. The exit and wind down of other climate operations decreased cost of sales by $48 million. Net efficiencies, including material, design and usage economics, and higher engineering recoveries, partially offset by higher manufacturing and warranty costs, decreased cost of sales by $68 million. Cost of sales during the nine months ended September 30, 2017 also includes a $4 million benefit related to legacy South America climate operations for freight recoveries and a favorable litigation matter ruling.
Cost of sales includes net engineering costs, comprised of gross engineering expenses related to forward model program development and advanced engineering activities, partially offset by engineering cost recoveries from customers. Electronics gross engineering expenses were $288 million for the nine months ended September 30, 2017, a decrease of $3 million compared to the same period of 2016. Engineering recoveries were $79 million for the nine months ended September 30, 2017, $19 million higher than the recoveries recorded in the same period of 2016. Engineering cost recoveries can fluctuate period to period depending on underlying contractual terms and conditions and achievement of related development milestones.
Gross Margin
Gross margin was $359 million or 15.3% of sales for the nine months ended September 30, 2017 compared to $335 million or 14.3% of sales for the same period of 2016. The $24 million increase in gross margin included $5 million from favorable volumes and net new business, partially offset by product mix and $7 million related to the exit of climate operations. Currency decreased gross margin by $2 million as the impact of the Chinese Renminbi and Euro more than offset the impact of the Japanese Yen, Mexican Peso, and Brazilian Real. Gross margin also included net cost efficiencies of $10 million, including favorable material
cost efficiencies and higher engineering recoveries partially offset by customer pricing reductions, and higher manufacturing costs. The year-over-year change in gross margin also included a $4 million benefit related to legacy South America climate operations.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses were $158 million or 6.7% of sales and $163 million or 7.0% of sales during the nine months ended September 30, 2017 and 2016, respectively. The decrease is primarily related to net efficiencies including lower bad debt expense and impacts of restructuring actions.
Restructuring Expense
During the fourth quarter of 2016, the Company announced a restructuring program impacting engineering and administrative functions to further align the Company's engineering and related administrative footprint with its core product technologies and customers. Through September 30, 2017, the Company has recorded approximately $37 million of restructuring expenses, net of reversals, under this program, associated with approximately 250 employees, and expects to incur up to $45 million of restructuring costs for this program. During the nine months ended September 30, 2017, the Company has recorded approximately $10 million of restructuring expenses, net of reversals, under this program.
During the first quarter of 2016, the Company announced a restructuring program to transform the Company's engineering organization and supporting functional areas to focus on execution and technology. The organization will be comprised of regional engineering, product management and advanced technologies, and global centers of competence. Through the first nine months of 2016, the Company recorded approximately $13 million of restructuring expenses, net of reversals, under this program, associated with approximately 100 employees.
During the nine months ended September 30, 2016, the Company recorded $11 million of restructuring expenses, related to severance and termination benefits, in connection with the wind-down of certain operations in South America.
Interest Expense, Net
Interest expense, net was $12 million and $10 million for the nine months ended September 30, 2017 and 2016, respectively. Theoverall increase in net interest expense results from lower interest income, due to lower cash balances, financing fees for the Amended Credit Facilities as further described in Note 11, "Debt" and termination impacts of the Company's interest rate swap as further described in Note 16, "Fair Value Measurements and Financial Instruments."
Equity in Net Income of Non-Consolidated Affiliates
Equity in net income of non-consolidated affiliates was $6 million and $3 million for the nine month periods ended September 30, 2017 and 2016 respectively. The income is primarily attributable to the Company's equity interest in Yanfeng Visteon Investment Company and increased primarily related to the timing of engineering recoveries.
Other (Income) Expense, Net
Other (income) expense, net consists of the following:
|
| | | | | | | |
| Nine Months Ended September 30 |
| 2017 | | 2016 |
| (Dollars in Millions) |
Transformation initiatives | $ | 1 |
| | $ | 3 |
|
Gain on non-consolidated affiliate transactions, net | (4 | ) | | (1 | ) |
Foreign currency translation charge | — |
| | 11 |
|
Loss on asset contribution | — |
| | 2 |
|
Transaction exchange losses
| — |
| | 1 |
|
| $ | (3 | ) | | $ | 16 |
|
Transformation initiative costs include information technology separation costs, integration of acquired business, and financial and advisory services incurred in connection with the Company's transformation into a pure play cockpit electronics business. The gain on non-consolidated affiliate transactions, net are described in Note 5, "Non-Consolidated Affiliates."
During the nine months ended September 30, 2016, the Company recorded an impairment charge of $11 million related to foreign currency translation amounts recorded in accumulated other comprehensive loss associated with the agreement to sell the Company's South Africa climate operations. In connection with the closure of the Climate facility in Argentina, the Company entered an agreement to contribute land and building with a net book value of $2 million to the local municipality.
Income Taxes
The Company's provision for income taxes of $34 million for the nine months ended September 30, 2017 represents an increase of $7 million when compared with $27 million in the same period of 2016. The increase in tax expense is attributable to several items including the year-over-year increase in earnings, as well as changes in the mix of earnings and differing tax rates between jurisdictions, and withholding taxes. Other increases in provision for income taxes the non-recurrence of a $3include $2 million discrete incomerelated to uncertain tax benefit in connection withpositions attributable to certain income tax incentives formally approved by the Portuguese tax authorities during the first quarter of 2016,related party transactions and $2 million resulting fromrelated to enacted tax law changes in assessments regarding the potential realization of deferred tax assets. These increases were partially offset by the year-over-year decrease for uncertain tax positions, including interest, of approximately $3 million.
Discontinued Operations
The operations subject to the Interiors Divestiture and Climate Transaction met conditions required to qualify for discontinued operations reporting. Accordingly, the results of operations for the Interiors and Climate businesses have been reclassified to income (loss) from discontinued operations, net of tax in the consolidated statements of comprehensive income for the nine month periods ended September 30, 2017 and 2016. The nine months ending September 30, 2017 included a $7 million gain on the repurchase of the India electronics operations associated with the 2015 Climate Transaction. The nine months ending September 30, 2016 primarily included results of the South America interiors operations divested on December 1, 2016 and a tax benefit related to previously divested climate operations.
Net Income
Net income attributable to Visteon was $151 million for the nine months ended September 30, 2017, compared to net income of $73 million for the same period of 2016. The increase of $78 million includes discontinued operations impacts of $23 million, lower restructuring charges of $12 million, the non-recurrence of charges associated with the 2016 South Africa climate disposition of $11 million, lower selling, general and administrative expenses of $5 million, higher equity in net income of non-consolidated affiliates of $3 million and gains on the sale of non-consolidated affiliates of $3 million. Gross margin improved $24 million including $17 million for electronics operations and $7 million related to the 2016 exit of the climate operations. These improvements were partially offset by higher income taxes of $7 million.India.
Adjusted EBITDA
Adjusted EBITDA (a non-GAAP financial measure, as defined in Note 18)15, "Segment Information") was $268$64 million for the ninethree months ended September 30, 2017,March 31, 2021, representing an increase of $27$31 million when compared withto Adjusted EBITDA of $241$33 million for the same period of 2016. The increase includes2020. Foreign currency increased Adjusted EBITDA by $5 million, from favorableprimarily attributable to the euro, Mexican peso, and Chinese renminbi. Favorable volumes andincreased Adjusted EBITDA by $13 million. Lower net new businessengineering costs, excluding currency, increased Adjusted EBITDA by $16 million. Other changes include annual customer pricing of $19 million partially offset by product mixfavorable material, design and $7 million related to other climate operations exited in 2016 . Foreign currency decreased Adjusted EBITDA by $1 million attributable to the Chinese Renminbi and Euro partially offset by the Japanese Yen, Mexican Peso, and Brazilian Real. Net cost performance of $16 million includes material cost efficiencies, higher engineering recoveries, and lower selling, general and administrative costs, offset by unfavorable customer pricing reductions, higher manufacturing costs, and increased warranty costs.
usage economics.
The reconciliation of Adjusted EBITDA to net income (loss) attributable to Visteon to Adjusted EBITDA for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, is as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2021 | | 2020 | | Change |
Net income (loss) attributable to Visteon Corporation | $ | 16 | | | $ | (35) | | | $ | 51 | |
Depreciation and amortization | 27 | | | 25 | | | 2 | |
Provision for income taxes | 12 | | | 5 | | | 7 | |
Non-cash, stock-based compensation expense | 4 | | | 5 | | | (1) | |
Interest expense, net | 2 | | | 2 | | | — | |
Net income (loss) attributable to non-controlling interests | 3 | | | (1) | | | 4 | |
Restructuring expense, net | (1) | | | 33 | | | (34) | |
| | | | | |
Equity in net income of non-consolidated affiliates | — | | | (1) | | | 1 | |
Other | 1 | | | — | | | 1 | |
Adjusted EBITDA | $ | 64 | | | $ | 33 | | | $ | 31 | |
|
| | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2017 | | 2016 | | Change |
| (Dollars in Millions) |
Adjusted EBITDA | $ | 268 |
| | $ | 241 |
| | $ | 27 |
|
Depreciation and amortization | 62 |
| | 62 |
| | — |
|
Restructuring expense | 10 |
| | 22 |
| | (12 | ) |
Interest expense, net | 12 |
| | 10 |
| | 2 |
|
Equity in net income of non-consolidated affiliates | (6 | ) | | (3 | ) | | (3 | ) |
Other (income) expense, net | (3 | ) | | 16 |
| | (19 | ) |
Provision for income taxes | 34 |
| | 27 |
| | 7 |
|
(Income) loss from discontinued operations, net of tax | (8 | ) | | 15 |
| | (23 | ) |
Net income attributable to non-controlling interests | 11 |
| | 12 |
| | (1 | ) |
Non-cash, stock-based compensation expense | 9 |
| | 6 |
| | 3 |
|
Other | (4 | ) | | 1 |
| | (5 | ) |
Net income attributable to Visteon Corporation | $ | 151 |
| | $ | 73 |
| | $ | 78 |
|
Liquidity
The Company's primary sources of liquidity are cash flows from operations, existing cash balances, and borrowings under available credit facilities, if necessary. Thefacilities. As we continue to evaluate ongoing impacts of the COVID-19 pandemic including the semiconductor supply shortage and other supply chain impacts, such as the Suez Canal blockage, the Company believes that funds generated from these sources will be adequatecontinue to fundsufficiently sustain ongoing operations and support investment in differentiating technologies. The Company will continue to closely monitor its available liquidity for current businessand maintain access to additional liquidity to weather these challenging conditions. The Company's intra-year needs are normally impacted by seasonal effects in the industry, such as mid-year shutdowns, the ramp-up of new model production, and year-end shutdowns at key customers. The ongoing COVID-19 pandemic and related semiconductor supply shortage may exacerbate the intra-year requirements.
A substantial portion of the Company's cash flows from operations are generated by operations located outside of the U.S.United States. Accordingly, the Company utilizes a combination of cash repatriation strategies, including dividends and distributions, royalties, intercompany loan arrangements and other distributions and advancesintercompany arrangements to provide the funds necessary to meet obligations globally. The Company’s ability to access funds from its subsidiaries is subject to, among other things, customary regulatory and statutory requirements and contractual arrangements including joint venture agreements and local credit facilities. Moreover, repatriation efforts may be modified by the Company according to prevailing circumstances.
The Company's ability to generate operating cash flow is dependent on the level, variability and timing of its customers' worldwide vehicle production, which may be affected by many factors including, but not limited to, general economic conditions, specific industry conditions, financial markets, competitive factors and legislative and regulatory changes. The Company monitors the macroeconomic environment and its impact on vehicle production volumes in relation to the Company's specific cash needs. The Company's intra-year needs are impacted by seasonal effects in the industry, such as mid-year shutdowns, the subsequent ramp-up of new model production and year-end shutdowns at key customers.
In the event that the Company's funding requirements exceed cash provided by its operating activities, the Company will meet such requirements by reduction of existing cash balances, by drawing on its $300 million Revolving Credit Facility or other affiliate working capital lines, by seeking additional capital through debt or equity markets, or some combination thereof.
Access to additional capital through the debt or equity markets is influenced by the Company's credit ratings. OnAs of March 7, 2017,31, 2021, the Company’s corporate credit rating is Ba3 and BB- by Moody’s and Standard & Poor's Ratings Services upgraded the Company to 'BB', from 'BB-', with stable outlook. Moody's has reaffirmed the Company's credit rating of Ba3.Poor’s, respectively. See Note 118, "Debt" to the accompanying consolidated financial statements for a more comprehensive discussion of the Company's debt facilities. Incremental funding requirements of the Company's
consolidated foreign entities are primarily accommodated by intercompany cash pooling structures. Affiliate working capital lines, which are primarily usedutilized by the Company's consolidated joint ventures. As of September 30, 2017, these linesventures, had availability of approximately $18 million.
$178 million and the Company had $400 million of available credit under the revolving credit facility, as of March 31, 2021.
Cash Balances
As of September 30, 2017,March 31, 2021, the Company had total cash of $735$486 million, including $3$4 million of restricted cash. Cash balances totaling $467$414 million were located in jurisdictions outside of the United States, of which approximately $195$190 million is considered permanently reinvested for funding ongoing operations outside of the U.S. If such permanently reinvested funds arewere repatriated to operations in the U.S., no U.S. federal taxes would be imposed on the distribution of such foreign earnings due to U.S. tax reform enacted in December 2017. However, the Company would be required to accrue additional tax expense, primarily related to foreign withholding taxes.
Other Items Affecting Liquidity
During 2017, the Company expects to make remaining payments of approximately $35 million related to the Germany interiors divestiture that closed on December 1, 2015. Also, as announced during the fourth quarter of 2016, the Company expects to incur restructuring costs to further align the Company's engineering and related administrative footprint with its core product technologies and customers. The Company estimates that it may incur up to $45 million in cumulative expenses to complete these actions of which $37 million has been expensed and $14 million has been paid since inception to date through September 30, 2017.
The Company is actively negotiating the possible exit of a European facility that may involve contributing cash working capital to the purchaser. The estimated contribution includes cash and working capital ranging from $15 million to $20 million .
Management continually seeks to streamline the Company's operations and may incur additional restructuring charges in the future.
The Company is authorized to spend an additional $230 million to repurchase Visteon common stock pursuant to the $400 million share repurchase authorization, as discussed in Note 14, "Stockholders' Equity and Non-Controlling Interests" of the consolidated financial statements under Item 1.
During the ninethree months ended September 30, 2017,March 31, 2021, cash contributions to the Company's U.S. and non-U.S. defined benefit pension planplans were $5 million.approximately $4 million for U.S. plans and $2 million for non-U.S. plans. The Company expects to makeestimates that total cash contributions to its defined benefit pension plans during 2021 will be approximately $25 million.
During the three months ended March 31, 2021, the Company paid $16 million related to restructuring activities. Additional discussion regarding the Company's restructuring activities is included in Note 3, "Restructuring Activities."
The Company committed to make a $15 million investment in two entities principally focused on the automotive sector pursuant to limited partnership agreements. As of $7March 31, 2021, the Company contributed $5 million toward the aggregate investment commitments. As a limited partner in 2017.
each entity, the Company will periodically make capital contributions toward this total commitment amount.
Estimated cash contributions for 2018 through 2020, under current regulations and market assumptions are approximately $29 million.
Cash Flows
Operating Activities
Including discontinued operations, theThe Company generated $131$11 million of cash infrom operating activities during the ninethree months ended September 30, 2017,March 31, 2021, representing a $14 million decrease as compared to cash providedgenerated by operations of $38$25 million during the same period of 2016, representing a $93 million improvement. The increase in2020. Lower cash flow from operating cash flowsactivities is primarily attributable to higher net income of $77a $55 million andreduction in working capital, substantially related to lower cash tax payments, netprovided from accounts receivable of expense of $67$98 million primarily due to the non-recurrence of transaction related taxes incurred in 2016, partially offset by higher working capital use of approximately $10 million, higher warranty payments net of expense of $21 million and an increase in Chinaaccounts payable of $44 million. The working capital cash reduction was partially offset by a $31 million increase in Adjusted EBITDA (a non-GAAP financial measure, as discussed in Note 15, "Segment Information") and $14 million of increased proceeds from discounted bank notes of $11 million. partially offset by an increase in incentive compensation and restructuring payments.
Investing Activities
Cash used from investing activities during the nine months ended September 30, 2017 totaled $97 million, compared to net cash provided by investing activities of $339 million for the same period in 2016, representing a decrease of $436 million. Net cash used by investing activities during the ninethree months ended September 30, 2017, includesMarch 31, 2021 totaled $15 million, representing a $26 million decrease, primarily related to the purchase of the India electronics operations associated with the Climate Transaction for $47 million anddecrease in capital expenditures, of $69 million. These outflows were partially offset by proceeds for divestitures of equity and cost based investments in China and Europe of $15 million and net investment hedge settlement proceeds of $5 million.
Net cash flow provided by investing activities foras compared to the ninethree months ended September 30, 2016 includes the Climate Transaction withholding tax refund of $356 million, liquidation of investments of short-term securities of $47 million and proceeds from asset sales of $15 million, partially offset by capital expenditures of $56 million, the acquisition of AllGo Embedded Systems Private Limited of $15 million and an $8 million shareholder loan to a non-consolidated affiliate.
March 31, 2020.
Financing Activities
Cash usedprovided by financing activities during the ninethree months ended September 30, 2017,March 31, 2021 totaled $197less than a million, as compared to $2,260a source of cash of $377 million used by financing activities forduring the same period in 2016, for a decrease in2020, representing an increase of cash used by financing activities of $2,063 million. Cash used by financing activities during the nine months ended September 30, 2017 included share repurchases of $170 million and dividends paid to non-controlling interests of $29$377 million.
Cash used by financing activities during the nine months ended September 30, 2016 of $2,260 million included a distribution payment of $1,736 million, share repurchases of $500 million, stock based compensation tax withholding payments of $11 million and net payments on debt of $13 million.
Debt and Capital Structure
See Note 11,8, “Debt” to the condensed consolidated financial statements included in Item 1.
Off-Balance Sheet ArrangementsSignificant Accounting Policies and Critical Accounting Estimates
See Note 1, “Summary of Significant Accounting Policies” to the accompanying condensed consolidated financial statements in Item 1.
The Company does not have any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Fair Value Measurement
Measurements
See Note 16,13, “Fair Value Measurements and Financial Instruments” to the condensed consolidated financial statements included in Item 1.
Recent Accounting Pronouncements
See Note 21, “Summary of Significant Accounting Policies” to the accompanying condensed consolidated financial statements in Item 1.
Forward-Looking Statements
Certain statements contained or incorporated in this Quarterly Report on Form 10-Q which are not statements of historical fact constitute “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Forward-looking statements give current expectations or forecasts of future events. Words such as “anticipate”, “expect”, “intend”, “plan”, “believe”, “seek”, “estimate” and other words and terms of similar meaning in connection with discussions of future operating or financial performance signify forward-looking statements. These statements reflect the Company’s current views with respect to future events and are based on assumptions and estimates, which are subject to risks and uncertainties including those discussed in Item 1A under the heading “Risk Factors” and elsewhere in this report.uncertainties. Accordingly, undue reliance should not be placed on these forward-looking statements. Also, these forward-looking statements represent the Company’s estimates and assumptions only as of the date of this report. The Company does not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made and qualifies all of its forward-looking statements by these cautionary statements.
You should understand that various factors, in addition to those discussed elsewhere in this document, could affect the Company’s future results and could cause results to differ materially from those expressed in such forward-looking statements, including:
•Continued and future impacts of the coronavirus ("COVID-19") pandemic on the Visteon’s financial condition and business operations including global supply chain disruptions, market downturns, reduced consumer demand, and new government actions or restrictions.
•Significant or prolonged shortage of critical components from Visteon’s suppliers including, but not limited to semiconductors, and particularly those components from suppliers who are sole or primary sources.
•Significant changes in the competitive environment in the major markets where Visteon procures materials, components, or supplies or where its products are manufactured, distributed, or sold.
•Visteon’s ability to satisfy its future capital and liquidity requirements; Visteon’s ability to access the credit and capital markets at the times and in the amounts needed and on terms acceptable to Visteon; Visteon’s ability to comply with covenants applicable to it; and the continuation of acceptable supplier payment terms.
Visteon’s ability to satisfy its pension and other postretirement employee benefit obligations, and to retire outstanding debt and satisfy other contractual commitments, all at the levels and times planned by management.
•Visteon’s ability to access funds generated by its foreign subsidiaries and joint ventures on a timely and cost effectivecost-effective basis.
•Changes in the operations (including products, product planning and part sourcing), financial condition, results of operations, or market share of Visteon’s customers.
•Changes in vehicle production volume of Visteon’s customers in the markets where it operates, and in particular changes in Ford’s vehicle production volumes and platform mix.operates.
•Increases in our vendor's commodity costs or disruptions in the supply of commodities, including aluminum,resins, copper, fuel, and natural gas.
•Visteon’s ability to generate cost savings to offset or exceed agreed uponagreed-upon price reductions or price reductions to win additional business and, in general, improve its operating performance; to achieve the benefits of its restructuring actions; and to recover engineering and tooling costs and capital investments.
•Visteon’s ability to compete favorably with automotive parts suppliers with lower cost structures and greater ability to rationalize operations; and to exit non-performing businesses on satisfactory terms, particularly due to limited flexibility under existing labor agreements.
•Restrictions in labor contracts with unions that restrict Visteon’s ability to close plants, divest unprofitable, noncompetitive businesses, change local work rules and practices at a number of facilities and implement cost-saving measures.
•The costs and timing of facility closures or dispositions, business or product realignments, or similar restructuring actions, including potential asset impairment or other charges related to the implementation of these actions or other adverse industry conditions and contingent liabilities.
Significant changes in the competitive environment in the major markets where Visteon procures materials, components or supplies or where its products are manufactured, distributed or sold.
•Legal and administrative proceedings, investigations and claims, including shareholder class actions, inquiries by regulatory agencies, product liability, warranty, employee-related, environmental and safety claims and any recalls of products manufactured or sold by Visteon.
•Changes in economic conditions, currency exchange rates, changes in foreign laws, regulations or trade policies or political stability in foreign countries where Visteon procures materials, components or supplies or where its products are manufactured, distributed, or sold.
•Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages or other interruptions to or difficulties in the employment of labor in the major markets where Visteon purchases materials, components or supplies to manufacture its products or where its products are manufactured, distributed or sold.
•Visteon’s ability to satisfy its pension and other postretirement employee benefit obligations, and to retire outstanding debt and satisfy other contractual commitments, all at the levels and times planned by management.
•Changes in laws, regulations, policies or other activities of governments, agencies and similar organizations, domestic and foreign, that may tax or otherwise increase the cost of, or otherwise affect, the manufacture, licensing, distribution, sale, ownership, or use of Visteon’s products or assets.
•Possible terrorist attacks or acts of war, which could exacerbate other risks such as slowed vehicle production, interruptions in the transportation system, orchanges in fuel prices, and disruptions of supply.
•The cyclical and seasonal nature of the automotive industry.
•Visteon’s ability to comply with environmental, safety, and other regulations applicable to it and any increase in the requirements, responsibilities and associated expenses and expenditures of these regulations.
•Visteon’s ability to protect its intellectual property rights and to respond to changes in technology and technological risks and to claims by others that Visteon infringes their intellectual property rights.
•Visteon’s ability to quickly and adequately remediate control deficiencies in its internal control over financial reporting.
•Other factors, risks and uncertainties detailed from time to time in Visteon’s Securities and Exchange Commission filings.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 3.Quantitative and Qualitative Disclosures About Market Risk
The primary market risks to which the Company is exposed includesinclude changes in foreign currency exchange rates, interest rates and certain commodity prices. The Company manages these risks through derivative instruments and various operating actions including fixed price contracts with suppliers and cost sourcing arrangements with customers.customers and through various derivative instruments. The Company's use of derivative instruments is limitedstrictly intended for hedging purposes to mitigation ofmitigate market risks including hedging activities. However,pursuant to written risk management policies. Accordingly, derivative instruments are not used for speculative or trading purposes, as per clearly defined risk management policies.purposes. The Company's use of derivative instruments may entail risk ofcreates exposure to credit loss in the event of non-performance of aby the counter-party to athe derivative financial derivative contract.instruments. The Company limits its counterpartythis exposure by entering into agreements directly with a variety of major financial institutions with high credit profilesstandards and that are expected to support an expectation that the counterparty is capable of meeting thefully satisfy their obligations under the contracts. In addition,Additionally, the Company's ability to utilize derivatives to manage market risk is dependent on credit conditions, and market conditions, given the currentand prevailing economic environment.
Foreign Currency Risk
The Company's net cash inflows and outflows thatflows are exposed to the risk of adverse changes in exchange rates as related to the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, subsidiary dividends, investments in subsidiaries, and anticipated foreign currency denominated transaction proceeds. TheWhere possible, the Company utilizes derivative financial instruments to manage foreign currency exchange rate risks. Forward and option contracts may be utilized to reducemitigate the impact toexchange rate variability on the Company's cash flows from adverse movements in exchange rates.flows. Foreign currency exposures are reviewed periodically and any natural offsets are considered prior to entering into a derivative financial derivative instrument. The Company’s current primary hedged foreign currency exposures include Euro,the Japanese Yen, Thailand Bhatyen, euro, Thai baht, and Mexican Peso.peso. The Company utilizes a strategy of partial coverage for transactions in these currencies. The Company's policy requires that hedge transactions relate to a specific portion of the exposure not to exceed the aggregate amount of the underlying transaction. As of September 30, 2017, and December 31, 2016, the net fair value of foreign currency forward and option contracts was a net liability of $4 million and less than $1 million, respectively. Maturities of these instruments generally do not exceed eighteen months.
In addition to the transactional exposure described above, the Company's operating results are impacted by the translation of its foreign operating income into U.S. dollars.
During 2015, the The Company entereddoes not enter into cross currency swap transactionsexchange rate contracts to mitigate the variability of the value of the Company's investment in certain non-U.S. entities. In April 2017, the Company terminated and received $5 million of proceeds upon settlement. There was no ineffectiveness associated with such derivatives at the time of the termination. The Company subsequently entered into new cross currency swap transactions with an aggregate notional amount of $150 million. The transactions are designated as net investment hedges of certain of the Company's European affiliates. Accordingly, the effective portion of changes in the fair value of the transactions are recognized in other comprehensive income, a component of shareholders' equity. There was no ineffectiveness associated with such derivatives as of September 30, 2017 and December 31, 2016 and the fair value of these derivatives was a liability of $19 million and an asset of $6 million, respectively.
this exposure.
The hypothetical pre-tax gain or loss in fair value from a 10% favorable or adverse change in quoted currency exchange rates would be approximately $30$32 million and $31 million for foreign currency derivative financial instruments as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. These estimated changes assume a parallel shift in all currency exchange rates and include the gain or loss on financial instruments used to hedge loans toinvestments in subsidiaries. AsBecause exchange rates typically do not all move in the same direction, the estimate may overstate the impact of changing exchange rates on the net fair value of the Company's financial derivatives. It is also important to note that gains and losses indicated in the sensitivity analysis would generally be offset by gains and losses on the underlying exposures being hedged.
Interest Rate Risk
The Company is subject to interest rate risk principally in relation to variable-rate debt. The Company uses financial derivative instruments to manage exposure to fluctuations in interest rates in accordance with its risk management policies. During 2015, the Company entered into interest rate swaps to manage interest rate risk relatedSee Note 13, "Fair Value Measurements and Financial Instruments" to the variable rate interest payments of the Term Facility. In April 2017, the Company terminated these swaps and paid $1 million to settle the contracts.
During the second quarter of 2017, the Company entered into new interest rate swap contracts with an aggregate notional value of $150 million to effectively convert designated interest payments related to the amended Term Facility from variable to fixed cash flows. The maturities of these swaps do not exceed the underlying amended Term Facility. The instruments have been designated as cash flow hedges and accordingly, the effective portion of the changescondensed consolidated financial statements included in the fair value of the swap transactions are initially recognized in other comprehensive income. Subsequently, the accumulated gains and losses recorded in equity are
reclassified to income in the period during which the hedged transaction impacts earnings. The ineffective portion of changes in the fair value of the swap transactions, if any, are recognized directly in income. As of September 30, 2017 and December 31, 2016, the fair value of the Company's interest rate swaps was an asset of less than $1 million and a liability of $1 million, respectively. There has been no ineffectiveness associated with these derivatives.
The Company significantly reduced interest rate exposure after entering the swap transactions in 2015. The variable rate basis of debt is approximately 60% and 59% as of September 30, 2017 and December 31, 2016, respectively.
Item 1 for additional information.
Commodity Risk
The Company's exposures to market risk arising from changes in the price of production material are managed primarily through negotiations with suppliers and customers, although there can be no assurance that the Company will recover all such costs. The Company continues to evaluate derivatives available in the marketplace and may determinedecide to utilize derivatives in the future.future to manage select commodity risks if an acceptable hedging instrument is identified for the Company's exposure level at that time, as well as the effectiveness of the financial hedge among other factors.
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Item 4. | Controls and Procedures |
Item 4.Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in periodic reports filed with the SEC under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and ExecutiveSenior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2017,March 31, 2021, an evaluation was performed under the supervision and with the participation of the Company’s management, including its Chief Executive and Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and ExecutiveSenior Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.
March 31, 2021.
Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the three months ended September 30, 2017March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Part II
Other Information
Item 1. Legal Proceedings
See the information above under Note 17,14, "Commitments and Contingencies," to the condensed consolidated financial statements which is incorporated herein by reference.
Item 1A.Risk Factors
For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, seeThe Company is supplementing the risk factors discussed in Part I, "Itemdescribed under “Item 1A. Risk Factors"Factors” in the Company'sits Annual Report on Form 10-K for the year ended December 31, 2016. See also, "Forward-Looking Statements" included in Part I, Item 2 of this Quarterly Report on Form 10-Q.2020, which supplement, and to the extent inconsistent, supersedes such risk factors.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
PeriodItem 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes information relating toThere were no purchases made by or on behalf of the Company, or an affiliated purchaser, of shares of the Company’s common stock during the thirdfirst quarter of 2017.2021.
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| | | | | | | | | |
Period | Total Number of Shares (or Units) Purchased (1) | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (3) (in millions) |
Jul. 1, 2017 to Sep. 30, 2017 | 82,780 |
| | $121.24 | | 82,513 |
| | $230 |
Total | 82,780 |
| | $121.24 | | 82,513 |
| | $230 |
| |
(1) | Includes 267 shares surrendered to the Company by employees to satisfy tax withholding obligations in connection with the vesting of restricted share and stock unit awards made pursuant to the Visteon Corporation 2010 Incentive Plan. |
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(2) | During the third quarter 2017 the Company acquired 82,513 shares from the open market share repurchases. |
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(3) | On January 10, 2017, the Company's board of directors authorized $400 million of share repurchase of its shares of common stock. As of September 30, 2017, there is $230 million remaining on the authorization. Additional repurchases of common stock, if any, may occur at the discretion of the Company. |
Item 6.Exhibits
The exhibits listed on the "Exhibit Index" on Page 4940 hereof are filed with this report or incorporated by reference as set forth therein.
Exhibit Index
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Exhibit No. | | Description |
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101.INS | | XBRL Instance Document.** |
101.SCH | | XBRL Taxonomy Extension Schema Document.** |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document.** |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document.** |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document.** |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document.** |
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* | Indicates that exhibit is a management contract or compensatory plan or arrangement. |
* Indicates that exhibit is a management contract or compensatory plan or arrangement.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files as Exhibit 101 hereto are deemed not filed or part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes
of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
In lieu of filing certain instruments with respect to long-term debt of the kind described in Item 601(b)(4) of Regulation S-K, Visteon agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Visteon Corporation has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| VISTEON CORPORATION |
| | |
| VISTEON CORPORATIONBy: | /s/ ABIGAIL S. FLEMING |
| | Abigail S. Fleming |
| By: | /s/ Stephanie S. Marianos |
| | Stephanie S. Marianos |
| | Vice President and Chief Accounting Officer |
Date: April 29, 2021
Date: October 26, 2017