The Revolving Credit Facility also provides $75 million availability for the issuance of letters of credit and a maximum of $20 million for swing line borrowing.borrowings. Any amount of the facility utilized for letters of credit or swing line loans outstanding will reduce the amount available under the amendedexisting Revolving Credit Facility. The Company may request increases in the limits under the amended Term Facility and the amended Revolving Credit FacilityAgreement and may request the addition of one or more term loan facilities under the Credit Agreement.facilities. Outstanding borrowings may be prepaid without penalty (other than borrowings made for the purpose of reducing the effective interest rate margin or weighted average yield of the loans). There are mandatory prepayments of principalprinciple in connection with: (i) excess cash flow sweeps above certain leverage thresholds, (ii) certain asset sales or other dispositions, (iii) certain refinancing of indebtedness and (iv) over-advances under the Revolving Credit Facility. There are no excess cash flow sweeps required at the Company’s current leverage level.
The Company's net periodic benefit costs for all defined benefit plans for the three month periods ended September 30, 20172022 and 20162021 were as follows:
The Company's net periodic benefit costs for all defined benefit plans for the nine month periods ended September 30, 20172022 and 20162021 were as follows:
The Company's provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against income before income taxes, excluding equity in net income of non-consolidated affiliates for the period. Effective tax rates vary from period to period as separate calculations are performed for those countries where the Company's operations are profitable and whose results continue to be tax-effected and for those countries where full deferred tax valuation allowances exist and are maintained. In determining the estimated annual effective tax rate, the Company analyzes various factors, including but not limited to, forecasts of projected annual earnings, taxing jurisdictions in which the pretax income and/or pretax losses will be generated and available tax planning strategies. The Company’s estimated annual effective tax rate is updated each quarter and may be significantly impacted by changes to the mix of forecasted earnings by tax jurisdiction. The tax impact of adjustments to the estimated annual effective tax rate are recorded in the period such estimates are revised. The Company is also required to record the tax impact of certain other non-recurring tax items, including changes in judgment about valuation allowances and uncertain tax positions, and changes in tax laws or rates, in the interim period in which they occur, rather than include them in the estimated annual effective tax rate.
The need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s quarterly and annual effective tax rates. Full valuation allowances against deferred tax assets in the U.S. and applicable foreign countries will be maintained until sufficient positive evidence exists to reduce or eliminate them. The factors considered by management inCompany evaluates its determination of the probability of the realization of the deferred tax assets include, but are not limitedincome taxes quarterly to recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses, in particular, when there is a cumulative loss incurred over a three-year period. In regards to the full valuation allowance recorded against the U.S. net deferred tax assets, the cumulative U.S. pretax book loss adjusted for significant permanent items incurred over the three-year period ended December 31, 2016 limits the ability to consider other subjective evidence such as the Company’s plans to improve U.S. profits, and as such, the Company continues to maintain a full valuation allowance against the U.S. net deferred tax assets. Based on the Company’s current assessment, it is possible that within the next 12 to 24 months, the existing valuation allowance against the U.S. net deferred tax assets could be partially released. Any such release is dependent upon the sustained improvement in U.S. operating results, and,determine if such a release of the valuation allowance were to occur, it could have a significant impact on net income in the quarter in which it is deemed appropriate to partially release the reserve.
Basic earnings per share is calculated by dividing net income attributable to Visteon by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computedcalculated by dividing net income by the weighted average number of common and potentially dilutive common shares outstanding. Performance based share units are considered contingently issuable shares and are included in the computation of diluted earnings per share based on the number of shares that would be issuable if the reporting date were the end of the contingency period and if the result would be dilutive.
16
The table below provides details underlying the calculations of basic and diluted earnings (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
Net income (loss) attributable to Visteon | $ | 44 | | | $ | 5 | | | $ | 90 | | | $ | 10 | |
Denominator: | | | | | | | |
Average common stock outstanding - basic | 28.1 | | | 28.0 | | | 28.1 | | | 27.9 | |
Dilutive effect of performance based share units and other | 0.4 | | | 0.4 | | | 0.4 | | | 0.4 | |
Diluted shares | 28.5 | | | 28.4 | | | 28.5 | | | 28.3 | |
Basic and Diluted Per Share Data: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Basic earnings (loss) per share attributable to Visteon | $ | 1.57 | | | $ | 0.18 | | | $ | 3.20 | | | $ | 0.36 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted earnings (loss) per share attributable to Visteon: | $ | 1.54 | | | $ | 0.18 | | | $ | 3.16 | | | $ | 0.35 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In Millions, Except Per Share Amounts) |
Numerator: | | | | | | | |
Net income from continuing operations attributable to Visteon | $ | 43 |
| | $ | 21 |
| | $ | 143 |
| | $ | 88 |
|
Income (loss) from discontinued operations, net of tax | — |
| | 7 |
| | 8 |
| | (15 | ) |
Net income attributable to Visteon | $ | 43 |
| | $ | 28 |
| | $ | 151 |
| | $ | 73 |
|
Denominator: | | | | | | | |
Average common stock outstanding - basic | 31.2 |
| | 34.0 |
| | 31.8 |
| | 35.6 |
|
Dilutive effect of performance based share units and other | 0.6 |
| | 0.4 |
| | 0.5 |
| | 0.4 |
|
Diluted shares | 31.8 |
| | 34.4 |
| | 32.3 |
| | 36.0 |
|
| | | | | | | |
Basic and Diluted Per Share Data: | | | | | | | |
Basic earnings (loss) per share attributable to Visteon: | | | | | | | |
Continuing operations | $ | 1.38 |
| | $ | 0.62 |
| | $ | 4.50 |
| | $ | 2.47 |
|
Discontinued operations | — |
| | 0.21 |
| | 0.25 |
| | (0.42 | ) |
| $ | 1.38 |
| | $ | 0.83 |
| | $ | 4.75 |
| | $ | 2.05 |
|
Diluted earnings (loss) per share attributable to Visteon: | | | | | | | |
Continuing operations | $ | 1.35 |
| | $ | 0.61 |
| | $ | 4.43 |
| | $ | 2.44 |
|
Discontinued operations | — |
| | 0.20 |
| | 0.25 |
| | (0.41 | ) |
| $ | 1.35 |
| | $ | 0.81 |
| | $ | 4.68 |
| | $ | 2.03 |
|
NOTE 16.13. Fair Value Measurements and Financial Instruments
Fair Value Measurements
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.
•Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
•Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
•Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
Items Measured at Fair Value on a NonrecurringRecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. The fair value measurements are generally determined using unobservable inputs and are classified within Level 3 of the fair value hierarchy. These assets include long-lived assets, intangible assets and investments in affiliates, which may be written down to fair value as a result of impairment. During the third quarter there were no items measured at fair value on a nonrecurring basis.
Items Not Carried at Fair Value
The Company's fair value of debt was approximately $397 million and $389 million as of September 30, 2017 and December 31, 2016, respectively. Fair value estimates were based on the current rates offered to the Company for debt of the same remaining maturities. Accordingly, the Company's debt fair value disclosures are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.
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.
The Company presents its derivative positions and any related material collateral under master netting arrangements that provide for the net settlement of contracts, by counterparty, in the event of default or termination. Derivative financial instruments designated and non-designated as hedging instruments are included in the Company’s consolidated balance sheets. There is no cash collateral on any of these derivatives.
Items Measured at Fair Value on a Recurring Basis
Foreign currency hedgeHedge instruments are measured at fair value on a recurring basis under an income approach using industry-standard models that consider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying and non-performance risk. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument canor may be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.data. Accordingly, the Company's foreign currency instruments are classified as Level 2 "Other Observable Inputs" in the fair value hierarchy.
Interest rate swaps are valuedThe Company presents its derivative positions and any related material collateral under an income approach using industry-standard modelsmaster netting arrangements that consider various assumptions, including time value, volatility factors, current market and contractual pricesprovide for the underlying and non-performance risk. Substantially allnet settlement of contracts, by counterparty, in the event of default or termination. Derivative financial instruments are included in the Company’s condensed consolidated balance sheets. There is no cash collateral on any of these assumptions are observable in the marketplace throughout the full term of the instrument, and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Accordingly, the Company's interest rate swaps are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.derivatives.
Currency Exchange Risk: The Company’s net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, subsidiary dividends and investments in subsidiaries. Rate Instruments: The Company primarily uses foreign currency derivative instruments, including forward contracts denominated in euro, Japanese yen, Thai baht, Brazilian real, and option contracts,Mexican peso intended to mitigate the variability of the value of cash flows denominated in currency other than the hedging entity's functional currency. Foreign currency exposures are reviewed periodically and any natural offsets are considered prior to entering into a derivative financial instrument. The Company’s current hedged foreign currency exposures include the Euro, Japanese Yen, Thailand Bhat and Mexican Peso.
As of September 30, 2017, and2022 the Company had no foreign currency economic derivative instruments. At December 31, 2016,2021, the Company had economic foreign currency derivative instruments with aggregate notional valueamounts of approximately $133$32 million and $169 million, respectively. At September 30, 2017, approximately $89 million of the hedge instruments have been designated as cash flow hedges. Accordingly, the effective portion of changes in thean aggregate fair value of a liability of less than $1 million.
Cross Currency Swaps: During the first nine months of 2022, the Company terminated existing cross currency swaps and received $9 million upon settlement. During the third quarter 2022, subsequent to terminations, the Company executed cross-currency swap transactions with aggregate notional amounts of $200 million intended to mitigate the variability of U.S. dollar value investment in certain of its non-U.S. entities. These transactions are initially recognized in other comprehensive income, a component of shareholders' equity. Upon settlement of the transactions, the accumulated gains and losses are reclassified to income in the same periods during which the hedged cash flows impact earnings. The ineffective portion of changes in the fair value of the transactions, if any, is recognized directly in income.designated as net investment hedges. There was no ineffectiveness associated with such derivatives as of September 30, 2017 and December 31, 20162022, and the fair value of these derivatives was a liabilityis an asset of $3 million and a liabilitymillion.
As of $6 million, respectively. The difference between the gross and net value of these derivatives after offset by counter party is not material. The estimated AOCI that is expected to be reclassified into earnings within the next 12 months is an approximate loss of $1 million.
During 2015,December 31, 2021, the Company entered intohad cross currency swaps to mitigate the variability of the value of the Company's investment in certain non-U.S. entities. In April 2017, the Company terminated the cross currency swaps 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 periodic changes in the fair value of the transactions is 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$250 million. The fair value of these derivatives was a liability of $19 million and an asset of $6$2 million respectively.and a non-current liability of $9 million.
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 connection with its risk management policies.
Swaps: During 2015, the Company entered into interest rate swaps to manage interest rate risk associated with the Term Facility. In April 20172022, the Company terminated theexisting interest rate swaps and paidreceived less than $1 million upon settlement. Subsequent to settlethese terminations, during the contracts.
During the secondthird quarter, of 2017, the Company entered intoexecuted new interest rate swap contracts with an aggregate notional valueinstruments. The Company utilizes interest rate swap instruments to manage its exposure and to mitigate the impact 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 obligations under the amended Term Facility.rate variability. The instruments have beenare designated as cash flow hedges, andaccordingly, the effective portion of the periodic changes in the fair value of the swap transactions is recognized in accumulated other comprehensive income, a component of shareholders' equity. Subsequently, the accumulated gains and losses recorded in equity are reclassified to income in the period during which the hedged cash transactionflow impacts earnings. The ineffective portion of changes in the fair value of the swap transactions, if any, is recognized directly in income.
As of September 30, 2017 and December 31, 2016,2022 the Company had interest rate swaps of $250 million. The fair value wasof these derivatives is an asset of $11 million as of September 30, 2022. As of September 30, 2022, a gain of less than $1 million and a liability of $1 million, respectively and there has been no ineffectiveness associated with these derivatives. AOCIis expected to be reclassified out of accumulated other comprehensive income into earnings within the next 12 months istwelve months.
As of December 31, 2021, the Company had interest rate swaps with an aggregate notional value of $300 million. The fair value of these derivatives was a lossnon-current liability of less than $1$4 million.
Financial Statement Presentation
Gains and losses on derivative financial instruments for the three and nine months ended September 30, 20172022 and 20162021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded Income (Loss) into AOCI, net of tax | | Reclassified from AOCI into Income (Loss) | | Recorded in (Income) Loss | | |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Three months ended September 30, | | | | | | | | | | | | | | | |
Foreign currency risk - Cost of sales: | | | | | | | | | | | | | | | |
Foreign currency derivative instruments | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
Interest rate risk - Interest expense, net: | | | | | | | | | | | | | | | |
Interest rate swaps | 9 | | | — | | | — | | | (2) | | | — | | | — | | | | | |
Cross currency swaps | 5 | | | 5 | | | — | | | 1 | | | — | | | — | | | | | |
| $ | 14 | | | $ | 5 | | | $ | — | | | $ | (1) | | | $ | — | | | $ | — | | | | | |
Nine months ended September 30, | | | | | | | | | | | | | | | |
Foreign currency risk - Cost of sales: | | | | | | | | | | | | | | | |
Foreign currency derivative instruments | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | | | $ | 1 | | | | | |
Interest rate risk - Interest expense, net: | | | | | | | | | | | | | | | |
Interest rate swaps | 13 | | | (1) | | | (1) | | | (5) | | | — | | | — | | | | | |
Cross currency swaps | 20 | | | 18 | | | 1 | | | 4 | | | — | | | — | | | | | |
| $ | 33 | | | $ | 17 | | | $ | — | | | $ | (1) | | | $ | 3 | | | $ | 1 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | ) |
Items Not Carried at Fair Value
The Company's fair value of debt was $323 million and $354 million as of September 30, 2022 and December 31, 2021, respectively. Fair value estimates were based on the current rates offered to the Company for debt of the same remaining maturities. Accordingly, the Company's debt fair value disclosures are classified as Level 2 in the fair value hierarchy.
Concentrations of Credit Risk
Financial instruments including cash equivalents, derivative contracts, and accounts receivable, expose the Company to counter-partycounterparty 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 whichGM and their affiliates. Ford represents 17%16% and 16%18% of the Company's balance as of September 30, 20172022 and December 31, 2016, respectively, Mazda which2021, respectively. GM represents 11%12% and 10%8% of the Company's balance as of September 30, 20172022 and December 31, 2016, and Nissan/Renault which represents 11% and 10% of the balance as of September 30, 2017 and December 31, 2016,2021, 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 September 30, 2022. 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 reduction in vehicle production 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 has led to a worldwide semiconductor supply shortage. The Company's semiconductor suppliers, along with most automotive component supply companies that use semiconductors, have been unable to fully meet the vehicle production demands of our customers due to events which are outside the Company's control, including but not limited to, the COVID-19 pandemic, the global semiconductor shortage, a fire at a semiconductor fabrication facility in Japan, significant weather events impacting semiconductor supplier facilities in the southern United States, and other extraordinary events. The Company is working closely with suppliers and customers to attempt to minimize potential adverse impacts of these events. Certain customers have communicated that they expect the Company to absorb some of the financial impact of their reduced production and are reserving their rights to claim damages arising from supply shortages, however, 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 2015 divestitures involving the agreements of the Climate TransactionCompany's former climate and Interiors Divestiture,interiors businesses, the Company continues to provide lease guarantees to divested Climate and Interiors entities. AtAs of September 30, 20172022, the Company has approximately $7$2 million and $2 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.
The Company also guarantees certain lease obligations of affiliates. Expiration dates vary and guarantees will terminate on payment and/or cancellation of the underlying obligation.
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.
The following table provides a reconciliationrollforward of changes in the product warranty and recall claims liability:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
(In millions) | 2022 | | 2021 |
Beginning balance | $ | 50 | | | $ | 64 | |
Provisions | 13 | | | 12 | |
Changes in estimates | 1 | | | 1 | |
Currency | (6) | | | (3) | |
Settlements, net | (11) | | | (16) | |
Ending balance | $ | 47 | | | $ | 58 | |
|
| | | | | | | |
| 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; customs and international trade regulations; product recalls; product liability claims; 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, 20172022 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 single 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, head-up displays, as well as battery monitoring systems. As the Company has one 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, restructuringnon-cash stock-based compensation expense, provision for income taxes, net interest expense, loss on debt extinguishment,net income attributable to non-controlling interests, restructuring and impairment expense, equity in net income of non-consolidated affiliates, 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 September 30, | | Nine Months Ended September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) attributable to Visteon Corporation | $ | 44 | | | $ | 5 | | | $ | 90 | | | $ | 10 | |
Depreciation and amortization | 27 | | | 27 | | | 79 | | | 82 | |
Provision for income taxes | 9 | | | 4 | | | 24 | | | 20 | |
Non-cash, stock-based compensation expense | 6 | | | 4 | | | 19 | | | 13 | |
Restructuring and impairment | 1 | | | (2) | | | 12 | | | (2) | |
Interest expense, net | 2 | | | 2 | | | 7 | | | 6 | |
Net income (loss) attributable to non-controlling interests | 5 | | | 2 | | | 5 | | | 5 | |
Equity in net income of non-consolidated affiliates | 1 | | | (2) | | | (3) | | | (2) | |
Other | — | | | 2 | | | 12 | | | 4 | |
Adjusted EBITDA | $ | 95 | | | $ | 42 | | | $ | 245 | | | $ | 136 | |
Revenue Recognition
Disaggregated net sales by geographical market and product lines is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Geographical Markets | | | | | | | |
Europe | $ | 335 | | | $ | 212 | | | $ | 929 | | | $ | 707 | |
Americas | 308 | | | 158 | | | 828 | | | 519 | |
China Domestic | 180 | | | 145 | | | 431 | | | 384 | |
China Export | 72 | | | 51 | | | 166 | | | 148 | |
Other Asia-Pacific | 175 | | | 94 | | | 439 | | | 309 | |
Eliminations | (44) | | | (29) | | | (101) | | | (80) | |
| $ | 1,026 | | | $ | 631 | | | $ | 2,692 | | | $ | 1,987 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Product Lines | | | | | | | |
Instrument clusters | $ | 481 | | | $ | 309 | | | $ | 1,286 | | | $ | 958 | |
Information Displays | 122 | | | 86 | | | 376 | | | 301 | |
Infotainment | 141 | | | 86 | | | 357 | | | 281 | |
Cockpit domain controller | 130 | | | 60 | | | 313 | | | 149 | |
Body and security | 58 | | | 25 | | | 127 | | | 88 | |
Telematics | 14 | | | 15 | | | 51 | | | 49 | |
Other | 80 | | | 50 | | | 182 | | | 161 | |
| $ | 1,026 | | | $ | 631 | | | $ | 2,692 | | | $ | 1,987 | |
During the nine months ended September 30, 2022, revenue recognized related to 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 September 30, 2022.
|
| | | | | | | | | | | | | | | |
| 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, 20162021 filed with the Securities and Exchange Commission on February 23, 2017,17, 2022 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,technology company serving the mobility industry, dedicated to creating more enjoyable, connected, and safe driving experiences. Our platforms leverage proven, scalable hardware and software solutions that enable the design, development, manufacturedigital, electric and supportautonomous evolution of its product offerings and itsour global automotive customers. The Company's manufacturingautomotive mobility market is expected to grow faster than underlying vehicle production volumes as the vehicle shifts from analog to digital and engineering footprint is principally located outside of the United States.towards device and cloud connected, electric vehicles, and vehicles with more advanced safety features.
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. 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 cockpit electronics and is positioned to provide solutions as the industry transitions to the next generation automotive cockpit experience. The Company projects a launchcockpit is becoming fully digital, connected, automated, learning, and voice enabled. 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 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 Business•Long-Term Growth - 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 While Maintaining a Strong Balance Sheet - On January 10, 2017, the Company's board of directors authorized managementThe Company has returned approximately $3.3 billion 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.shareholders since 2015. In addition, to the ASB program, the Company has purchased 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 sharecontinued to maintain a strong balance sheet to withstand near-term industry volatility while providing a foundation for a total of $170 million in share repurchases during 2017.future growth and shareholder returns.
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 Electronics sales for the three months ended September 30, 2017 totaled $765 million, the pie charts below highlight the net sales breakdown for Visteon for the three and nine months ended September 30, 2017.
2022.
Three Months Ended September 30, 20172022
Nine Months Ended September 30, 20172022
Third quarter 2017 global light vehicle production increased 2.1% over*Regional net sales are based on the same period last year. 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.
Light vehicle production levels for the three and nine months ended September 30, 2017 and 2016, by geographic region are provided below:where sales originate and not where customer is located (excludes inter-regional eliminations).
|
| | | | | | | | | | | | | | | | | |
| 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 aspects of the Company's financial results during the threeGlobal Automotive Market Conditions and nine months periods ended September 30, 2017 include the following:
Production Levels
The Company recorded sales of $765 million forautomotive industry has been negatively impacted by 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,COVID-19 pandemic and the exit of other climate operationsongoing semiconductor shortage. Industry vehicle volumes have increased 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 exit of the Company's other climate operations in 2016, favorable volumes, net new business and improved cost performance including higher engineering recoveries, partially offset by customer pricing, currency impacts, and product mix.
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 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 income2022 however remain at historically low levels despite strong consumer demand due to the non-recurrenceongoing semiconductor shortage. Vehicle production volumes will continue to be negatively impacted by the on-going shortages of 2016 losses from discontinued operationssemiconductors, disruptions caused by the geopolitical situation in Eastern Europe, and the COVID-19 related lockdowns in China through mid-2023. The magnitude 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 gainsimpact on the salefinancial statements and results of non-consolidated affiliates of $3 million. Gross margin improved $24 million including $17 million for electronics operations and $7 million related tocash flows will depend on the 2016 exitevolution of the climate operations. These improvements were partially offset by higher income taxessemiconductor supply shortage, plant production schedules, and supply chain impacts.
Results of $7 million.
Including discontinued operations, the Company generated $131 million of cash in operating activities during the nine months endedOperations - Three 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 million2022 and lower cash tax payments, net of expense of $67 million primarily due to the non-recurrence of
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 million 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.
2021
The Company's consolidated results of operations for the three months ended September 30, 20172022 and 20162021 were as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(In millions) | 2022 | | 2021 | | Change |
Net sales | $ | 1,026 | | | $ | 631 | | | $ | 395 | |
Cost of sales | (922) | | | (584) | | | (338) | |
Gross margin | 104 | | | 47 | | | 57 | |
Selling, general and administrative expenses | (47) | | | (42) | | | (5) | |
Restructuring and impairment | (1) | | | 2 | | | (3) | |
Interest expense, net | (2) | | | (2) | | | — | |
Equity in net income of non-consolidated affiliates | (1) | | | 2 | | | (3) | |
Other income, net | 5 | | | 4 | | | 1 | |
Provision for income taxes | (9) | | | (4) | | | (5) | |
| | | | | |
| | | | | |
Net income (loss) | 49 | | | 7 | | | 42 | |
Less: Net (income) loss attributable to non-controlling interests | (5) | | | (2) | | | (3) | |
Net income (loss) attributable to Visteon Corporation | $ | 44 | | | $ | 5 | | | $ | 39 | |
Adjusted EBITDA* | $ | 95 | | | $ | 42 | | | $ | 53 | |
* 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 September 30, 2021 | $ | 631 | | | $ | (584) | | | $ | 47 | | |
Volume, mix, and net new business | 319 | | | (250) | | | 69 | | |
Currency | (43) | | | 34 | | | (9) | | |
Customer pricing | 125 | | | — | | | 125 | | |
Engineering costs, net * | — | | | (9) | | | (9) | | |
Cost performance, design changes and other | (6) | | | (113) | | | (119) | | |
Three months ended September 30, 2022 | $ | 1,026 | | | $ | (922) | | | $ | 104 | | |
*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, 20172022 totaled $765$1,026 million, which representsrepresenting an decreaseincrease of $5$395 million compared with the same period of 2016. Favorable volumes, product mix,2021. Volumes and net new business increased net sales by $26$319 million. Product mix reflects the Company specific content across product lines. FavorableUnfavorable currency increaseddecreased net sales by $9$43 million, primarily attributable to the Euroeuro, Chinese renminbi, and Indian Rupee. The exit of other climate operations in 2016 decreasedJapanese yen. Favorable customer pricing increased net sales by $21 million. Other reductions were associated with$125 million primarily driven by customer pricing 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 |
|
recoveries related to material cost increases.
Cost of sales decreased $16increased by $338 million for the three months ended September 30, 2017 when2022 compared with the same period in 2016. Increased volumes, product2021. Volume, mix and net new business increased cost of sales by $30$250 million. Foreign currency decreased cost of sales by $34 million, primarily attributable to the euro, Chinese renminbi, and Japanese yen. Net engineering costs, excluding currency, increased cost of sales by $7 million primarily attributable to the Euro$9 million. Unfavorable cost performance, design changes, and Brazilian Real. The exit and wind down of other climate operations decreased costs by $21 million. Net efficiencies, including material, design and usage economics and higher engineering recoveries, partially offset by increased manufacturing expense, decreased cost of sales by $29 million. Cost$113 million primarily due to material cost increases.
A summary of sales also included a $3 million benefit related to legacy South America climate operations for freight recoveries and a favorable ruling on a litigation matter.
Cost of sales includes net engineering costs comprised of grossis shown below:
| | | | | | | | | | | |
| Three Months Ended September 30, |
(In millions) | 2022 | | 2021 |
Gross engineering costs | $ | (83) | | | $ | (80) | |
Engineering recoveries | 25 | | | 28 | |
Engineering costs, net | $ | (58) | | | $ | (52) | |
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 $58 million for the three months ended September 30, 2017, consistent with2022, including the impacts of currency, were $6 million higher than the same period of 2016. Engineering2021. This increase is primarily related to lower engineering recoveries were $33during the third quarter of 2022.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses was $47 million for the three months ended September 30, 2017, $92022. The increase of $5 million higher thanas compared to the same periodthree months ended and 2021 is primarily due to increased employee related expenses.
Restructuring and impairment
During the third quarter 2022, the Company recorded $1 million of 2016. Engineering cost recoveries can fluctuate periodrestructuring expense primarily related to period depending on underlying contractual terms and conditions and achievement of related development milestones.employee severance.
Gross MarginInterest Expense, Net
Gross margin was $116 million or 15.2% of salesInterest expense, net, for the three months ended September 30, 2017 compared to $105 million or 13.6% of sales2022 and 2021 was $2 million. Interest expense for the same period of 2016. The increase in gross margin of $10 million included $9 million of favorable net cost performance reflecting material cost efficiencies and higher engineering recoveries which more than offset customer pricing and higher manufacturing costs. Favorable 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 reducing gross margin by $4 million. The year-over-year change in gross margin also included a $3 million benefit related to legacy South America climate operations for freight recoveries and a favorable ruling on a litigation matter.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses were $54 million or 7.1% and $53 million or 6.9% during the three months ended September 30, 2017 and 2016, respectively. The increasethese periods is related to higher incentive compensation costs and economics partially offset by cost efficiencies.
Restructuring Expense
During the fourth quarter of 2016, the Company announced a restructuring program impacting the engineering and administrative functions to further align the Company's engineering and related administrative footprint with its core product technologies and customers. During the three months ended September 30, 2017, the Company recorded $6 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 expects to incur up to $45 million of restructuring costs associated with approximately 250 employees.
During the three months ended September 30, 2016, the Company recorded $4 million of restructuring expenses primarily 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 $3 million and $5 million for the three months ended September 30, 2017 and 2016, respectively. Interest expense for the three months ended September 30, 2017 includes termination impacts of the Company's interest rate swap as further described in Note 16, "Fair Value Measurements and Financial Instruments."
term debt facility.
Equity in Net Income of Non-Consolidated Affiliates
Equity in net income of non-consolidated affiliates was $1 million for the three month period ending September 30, 2017.
Other (Income) Expense, Net
Other (income) expense, net consists of the following:
|
| | | | | | | |
| 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,loss 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$2 million duringincome for the three months ended September 30, 2016, related2022 and 2021, respectively. The decrease in income is primarily attributable due to foreign currency translation amounts recorded in accumulated other comprehensive loss associated with the agreement to selldecreased volumes at the Company's South Africa climate operations. In connection withnon-consolidated affiliates.
Other Income, Net
Other income, net of $5 million and $4 million for the closure of the Climate facility in Argentina, the Company entered an agreementthree-month periods ending September 30, 2022 and 2021 is primarily due to contribute land and building with a net book value of $2 million to the local municipality.pension financing benefits.
Income Taxes
The Company's provision for income taxes of $8$9 million for the three months ended September 30, 2017,2022 represents an increase of $3$5 million when compared with $5$4 million in the same period of 2016.2021. The increase in tax expense is primarily attributable to the year-over-yearoverall year over year increase in profit before tax excluding equity income, including 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 of $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)15, "Segment Information") was $83$95 million for the three months ended September 30, 2017, representing an2022. The increase of $8$53 million, when compared with Adjusted EBITDA of $75to $42 million for the same period of 2016. The increase includes favorable net cost performance of $10 million reflecting material cost efficiencies and2021 was primarily driven by 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.sales volumes.
The reconciliation of Adjusted EBITDA to net income (loss) attributable to Visteon to Adjusted EBITDA for the three months ended September 30, 20172022 and 2016,2021, is as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(In millions) | 2022 | | 2021 | | Change |
Net income (loss) attributable to Visteon Corporation | $ | 44 | | | $ | 5 | | | $ | 39 | |
Depreciation and amortization | 27 | | | 27 | | | — | |
Provision for income taxes | 9 | | | 4 | | | 5 | |
Non-cash, stock-based compensation expense | 6 | | | 4 | | | 2 | |
Net income attributable to non-controlling interests | 5 | | | 2 | | | 3 | |
Interest expense, net | 2 | | | 2 | | | — | |
Restructuring and impairment | 1 | | | (2) | | | 3 | |
| | | | | |
Equity in net income of non-consolidated affiliates | 1 | | | (2) | | | 3 | |
Other | — | | | 2 | | | (2) | |
Adjusted EBITDA | $ | 95 | | | $ | 42 | | | $ | 53 | |
|
| | | | | | | | | | | |
| 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 |
|
Results of Operations - Nine Months Ended September 30, 2022 and 2021 The Company's consolidated results of operations for the nine months ended September 30, 20172022 and 20162021 were as follows:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(In millions) | 2022 | | 2021 | | Change |
Net sales | $ | 2,692 | | | $ | 1,987 | | | $ | 705 | |
Cost of sales | (2,438) | | | (1,832) | | | (606) | |
Gross margin | 254 | | | 155 | | | 99 | |
Selling, general and administrative expenses | (134) | | | (131) | | | (3) | |
Restructuring and impairment | (12) | | | 2 | | | (14) | |
Interest expense, net | (7) | | | (6) | | | (1) | |
Equity in net income of non-consolidated affiliates | 3 | | | 2 | | | 1 | |
Other income, net | 15 | | | 13 | | | 2 | |
Provision for income taxes | (24) | | | (20) | | | (4) | |
| | | | | |
| | | | | |
Net income (loss) | 95 | | | 15 | | | 80 | |
Less: Net (income) loss attributable to non-controlling interests | (5) | | | (5) | | | — | |
Net income (loss) attributable to Visteon Corporation | $ | 90 | | | $ | 10 | | | $ | 80 | |
Adjusted EBITDA* | $ | 245 | | | $ | 136 | | | $ | 109 | |
* 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 | |
Nine Months Ended September 30, 2021 | $ | 1,987 | | | $ | (1,832) | | | $ | 155 | | |
Volume, mix, and net new business | 501 | | | (389) | | | 112 | | |
Currency | (76) | | | 66 | | | (10) | | |
Customer pricing | 288 | | | — | | | 288 | | |
Engineering costs, net * | — | | | 5 | | | 5 | | |
Cost performance, design changes and other | (8) | | | (288) | | | (296) | | |
Nine Months Ended September 30, 2022 | $ | 2,692 | | | $ | (2,438) | | | $ | 254 | | |
*Excludes the impact of currency. | | | | | | |
28
|
| | | | | | | | | | | |
| 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 |
|
SalesNet sales for the nine months ended September 30, 20172022 totaled $2,349$2,692 million, which representsrepresenting an increase of $4$705 million compared with the same period of 2016. Favorable volumes, product mix,2021. Volumes and net new business increased net sales by $117$501 million. Product mix reflects the Company specific content across product lines. Unfavorable currency decreased net sales by $14$76 million, primarily attributable to the euro, Chinese Renminbirenminbi, and Euro partially offset by the Brazilian Real and Indian Rupee. The exit of other climate operations in 2016 decreasedJapanese yen. Favorable customer pricing increased net sales by $41 million. Other reductions were associated with$288 million primarily driven by 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 |
|
recoveries related to material cost increases.
Cost of sales decreased $20increased by $606 million for the nine months ended September 30, 2017 when2022 compared with the same period in 2016. Increased volumes, product2021. Volume, mix, and net new business increased cost of sales by $112$389 million. Foreign currency decreased cost of sales by $12$66 million, primarily attributable to the euro, Chinese Renminbi,renminbi, and Japanese Yen, and Mexican Peso, partially offset by the Euro, Brazilian Real, and Thai Bhat. The exit and wind down of other climate operationsyen. Net engineering costs, excluding currency, decreased cost of sales by $48$5 million. Net efficiencies, including material,Unfavorable cost performance, design changes and usage economics, and higher engineering recoveries, partially offset by higher manufacturing and warranty costs, decreasedother increased cost of sales by $68 million. Cost$288 million primarily due to material cost increases.
A summary 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 grossis shown below:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
(In millions) | 2022 | | 2021 |
Gross engineering costs | $ | (245) | | | $ | (246) | |
Engineering recoveries | 98 | | | 88 | |
Engineering costs, net | $ | (147) | | | $ | (158) | |
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 $288costs of $147 million for the nine months ended September 30, 2017, a decrease2022, including the impacts of $3currency, were $11 million compared tolower than the same period of 2016. Engineering2021. This decrease is primarily related to increased engineering recoveries were $79during 2022.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses was $134 million for the nine months ended September 30, 2017, $192022. The increase of $3 million higher thanas compared to the recoveriesnine months ended 2021 is primarily due to increased employee related expenses.
Restructuring and impairment
During 2022, the Company approved and recorded $5 million of restructuring expense, primarily impacting Europe, in order to improve efficiencies and rationalize the Company's footprint, including the indefinite suspension of operations in Russia. As of September 30, 2022, $4 million remains accrued related to these actions.
During the nine months ended September 30, 2022, due to the current geopolitical situation in Eastern Europe the Company indefinitely suspended operations in Russia beginning in the same periodsecond quarter 2022. As such, the Company recognized a non-cash impairment charge of 2016. Engineering cost recoveries can fluctuate period$2 million to period depending on underlying contractual termsfully impair property and conditionsequipment and achievementa non-cash $2 million charge to reduce certain inventory in Russia to its net realizable value as of related development milestones.September 30, 2022.
Gross MarginInterest Expense, Net
Gross margin was $359 million or 15.3% of salesInterest expense, net, 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 volumes2022 and net new business, partially offset by product mix and2021 was $7 million related to the exit of climate operations. Currency decreased gross margin by $2and $6 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 decreaseInterest expense for these periods 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 alignborrowings on 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. The 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."
term debt facility.
Equity in Net Income of Non-Consolidated Affiliates
Equity in net income of non-consolidated affiliates was $6$3 million and $3$2 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 related2022 and 2021, respectively. The increase in income is primarily attributable due to foreign currency translation amounts recorded in accumulated other comprehensive loss associated with the agreement to sellincreased sales at the Company's South Africa climate operations. In connection withnon-consolidated affiliates.
Other Income, Net
Other income, net of $15 million and $13 million for the closure of the Climate facility in Argentina, the Company entered an agreementnine-month periods ending September 30, 2022 and 2021 is primarily due to contribute land and building with a net book value of $2 million to the local municipality.pension financing benefits.
Income Taxes
The Company's provision for income taxes of $34$24 million for the nine months ended September 30, 20172022 represents an increase of $7$4 million when compared with $27$20 million in the same period of 2016.2021. The increase in tax expense isincludes approximately $7 million primarily attributable to several items including the year-over-yearoverall increase in pretax earnings, as well asincluding changes in the mix of earnings and differing tax rates between jurisdictions, withholding taxes, the non-recurrence of a $3 million discrete income tax benefit in connection with certain income tax incentives formally approved by the Portuguese tax authorities during the first quarter of 2016, and $2 million resulting from changes in assessments regarding the potential realization of deferred tax assets.jurisdictions. These increases were partially offset by the year-over-year decreasenon-recurrence of a $2 million provision for income taxes related to 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 $151certain related party transactions and the $1 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 equitydecrease 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 offsetwithholding taxes driven primarily by higher income taxes of $7 million.favorable exchange.
Adjusted EBITDA
Adjusted EBITDA (a non-GAAP financial measure, as defined in Note 18)15, "Segment Information") was $268$245 million for the nine months ended September 30, 2017, representing an2022. The increase of $27$109 million when compared with Adjusted EBITDA of $241to $136 million for the same period of 2016. The increase includes $5 million from favorable volumes and net new business partially offset2021 was primarily driven by product mix 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.sales volumes.
The reconciliation of Adjusted EBITDA to net income (loss) attributable to Visteon to Adjusted EBITDA for the nine months ended September 30, 20172022 and 2016,2021, is as follows:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(In millions) | 2022 | | 2021 | | Change |
Net income (loss) attributable to Visteon Corporation | $ | 90 | | | $ | 10 | | | $ | 80 | |
Depreciation and amortization | 79 | | | 82 | | | (3) | |
Provision for income taxes | 24 | | | 20 | | | 4 | |
Non-cash, stock-based compensation expense | 19 | | | 13 | | | 6 | |
Restructuring and impairment | 12 | | | (2) | | | 14 | |
Interest expense, net | 7 | | | 6 | | | 1 | |
Net income (loss) attributable to non-controlling interests | 5 | | | 5 | | | — | |
Equity in net income of non-consolidated affiliates | (3) | | | (2) | | | (1) | |
Other | 12 | | | 4 | | | 8 | |
Adjusted EBITDA | $ | 245 | | | $ | 136 | | | $ | 109 | |
|
| | | | | | | | | | | |
| 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, 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. On March 7, 2017,As of September 30, 2022, the Company’s corporate credit rating is BB- by 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. 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, are primarily usedwhich may be utilized by the Company's local subsidiaries and consolidated joint ventures.ventures, had availability of $178 million and the
Company had $400 million of available credit under the revolving credit facility, as of September 30, 2022. As of September 30, 2017, these lines had availability of approximately $18 million.
2022, the Company was in compliance with all its debt covenants.
Cash Balances
As of September 30, 2017,2022, the Company had total cash and cash equivalents of $735$365 million, including $3 million of restricted cash. Cash balances totaling $467$280 million were located in jurisdictions outside of the United States, of which approximately $195$27 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 nine months ended September 30, 2017,2022, cash contributions to the Company's U.S. anddefined benefit plans were $5 million related to its non-U.S. plans. The Company estimates that total cash contributions to its non-U.S. defined benefit pension plan were $5plans during 2022 will be $6 million.
During the nine months ended September 30, 2022, the Company paid $12 million related to restructuring activities. Additional discussion regarding the Company's restructuring activities is included in Note 3, "Restructuring Activities."
The Company expectscommitted to make a $15 million investment in two funds managed by venture capital firms principally focused on the automotive sector pursuant to limited partnership agreements. As of September 30, 2022, the Company contributed $10 million toward the aggregate investment commitments. As a limited partner in each entity, the Company will periodically make capital contributions toward this total commitment amount.
The Company may be required to make significant cash contributionsoutlays related to its defined benefit pension plansunrecognized tax benefits, including interest and penalties. As of $7 millionSeptember 30, 2022, the Company had unrecognized tax benefits, including interest and penalties, that would be expected to result in 2017.a cash outlay of $8 million. Given the number of years, jurisdictions and positions subject to examination, the Company is unable to estimate the period of cash settlement, if any, with the respective taxing authorities.
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 $131provided $2 million of cash infrom 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.2022. The increase in operating cash flowsfrom operations of $14 million is primarily 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 transaction related taxes incurredan increase in 2016,Adjusted EBITDA (a non-GAAP financial measure, as discussed in Note 15, "Segment Information") partially offset by higherincreased outflows in working capital use of approximately $10$83 million primarily driven by the timing of customer pricing recoveries and higher warranty payments netinventory levels due to uneven supply of expense of $21 million and an increase in China bank notes of $11 million. semiconductors.
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 nine months ended September 30, 2017, includes the purchase2022 totaled $44 million as compared to cash used of the India electronics operations associated with the Climate Transaction for $47$50 million and 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 forduring the nine months ended September 30, 2016 includes2021. The decreased use of cash was primarily due to the Climate Transaction withholding tax refundsettlement of $356 million, liquidationnet investment hedges 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.
$9 million.
Financing Activities
Cash used by financing activities during the nine months ended September 30, 2017, totaled $1972022 was $7 million as compared to $2,260the use of cash of $26 million used by financing activities for the same period in 2016, for a decrease in cash used by financing activities of $2,063 million. Cash used by financing activities during the nine months ended September 30, 2017 included share repurchases2021. The decreased use of $170 million and dividends paidcash was primarily due to non-recurrence of dividend payments to non-controlling interests of $29 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.third quarter 2022.
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:
•Significant or prolonged shortage of critical components from Visteon’s suppliers including, but not limited to semiconductors and those components from suppliers who are sole or primary sources.
•Continued and future impacts related to the conflict between Russia and the Ukraine including supply chain disruptions, reduction in customer demand, and the imposition of sanctions on Russia.
•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 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.
•Disruptions in information technology systems including, but not limited to, system failure, cyber-attack, malicious computer software (malware), unauthorized physical or electronic access, or other natural or man-made incidents or disasters.
•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.
| |
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, Japanese Yen, Thailand Bhatthe euro, Chinese renminbi, Brazilian real, Indian rupee, and Mexican Peso.Bulgarian lev. 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 offoreign currency risk related to its foreign operating income into U.S. dollars.
During 2015, theoperations. The Company has not entered 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$19 million and $31$29 million for foreign currency derivative financial instruments as of September 30, 20172022 and December 31, 2016,2021, 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.
| |
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, 2017,2022, an evaluation was performed under the supervision and with the participation of the Company’s management, including its Chief Executive Officer 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.
2022.
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, 20172022 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 resultsExcept as set forth below, as of operations, financial condition and liquidity, seeSeptember 30, 2022, there have been no material changes to the risk factors discussedthat were previously disclosed in Item 1A in the Company’s Form 10-K for the year ended December 31, 2021 filed with the SEC on February 17, 2022.
We are currently operating in a period of significant macro-economic uncertainty, including supply-chain disruptions and COVID-related lockdowns and increasing inflationary pressures and component costs. Although we have minimal operations in Russia, the conflict in Ukraine and the current COVID-related lockdowns in China are exacerbating component cost increases, supply chain challenges including the availability of natural resources used in production by our suppliers, and volatility with our customers’ production schedules. If the conflict in Ukraine continues for a lengthy period or spreads or the COVID-related lockdowns in China continue for a lengthy period or spread, it may have a materially negative impact on our business and results of operations.
The macro-economic uncertainty has been exacerbated by the conflict in Ukraine. Although the length and impact of the ongoing conflict is highly unpredictable, it has exacerbated the availability, and volatility in prices, of commodities and components, inflationary pressures, credit markets, foreign exchange rates and supply chain disruptions. Furthermore, governments in the United States, United Kingdom, Canada and European Union have each imposed financial and economic sanctions on certain industry sectors and parties in Russia. These sanctions include controls on the export, re-export, and in-country transfer in Russia of certain goods, supplies, and technologies, including some that we use in our business in Russia. Existing or additional sanctions could further adversely affect the global economy, lead to litigation related to compliance with such sanctions, or further disrupt the global supply chain. Inflation is also currently high world-wide and may continue for an unforeseen time.
The negative impact of the conflict in Ukraine and the current COVID lock-downs in China may exacerbate cost increases in raw material, transportation, energy, and commodities. Although we are negotiating with our customers with respect to these additional cost increases, commercial negotiations with our customers may not be successful or may not offset all of the adverse impact of higher transportation, energy and commodity costs. Additionally, even if we are successful with respect to negotiations with customers relating to cost increases, there may be delay before we recover any increased costs. These may have a material negative impact on our business and results of operations.
For additional information see Part I, "Item 1A. RiskItem 1A, "Risk Factors" in the Company'sour Annual Report on Form 10-K for the year ended December 31, 2016.2021 filed with the SEC on February 17, 2022. See also, "Forward-Looking Statements" included in Part I, Item 2 of this Quarterly Report on Form 10-Q.
| |
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 third quarter of 2017.2022.
|
| | | | | | | | | |
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. |
| |
(2) | During the third quarter 2017 the Company acquired 82,513 shares from the open market share repurchases. |
| |
(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 4935 hereof are filed with this report or incorporated by reference as set forth therein.
Exhibit Index
|
| | | | | | | |
Exhibit No. | | Description |
| | |
| | |
| | |
| | |
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.** |
| |
* | 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.
| | | | | | | | |
| 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: October 26, 201727, 2022