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VISTEON CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2013, filed with the Securities and Exchange Commission on February 25, 2014, and the financial statements and accompanying notes to the financial statements included elsewhere herein. Executive Summary Overview Visteon is a global supplier of climate, electronics and interiors systems, modules and components to automotive original equipment manufacturers ("OEMs") including BMW, Chrysler, Daimler, Ford, General Motors, Honda, Hyundai, Kia, Nissan, PSA Peugeot Citroën, Renault, Toyota and Volkswagen. The Company has an international network of manufacturing operations, technical centers and joint venture operations, supported by approximately 29,000 employees dedicated to the design, development, manufacture and support of its product offerings and its global customers. Shareholder Value Creation Plan The Company continued to execute its Shareholder Value Creation Plan during the three month period ended September 30, 2014. • Electronics Optimization - Visteon closed the acquisition of substantially all of the global automotive electronics business of Johnson Controls Inc. (the "Electronics Acquisition") effective July 1, 2014. The Electronics Acquisition was completed for the aggregate purchase price of $295 million, including $31 million of cash and equivalents at the acquired business. The purchase price was funded with cash on hand and remains subject to adjustments as provided in the Purchase Agreement. The Electronics Acquisition is expected to enhance Visteon's competitive position in the fast-growing vehicle cockpit electronics segment by strengthening its global scale, manufacturing and engineering footprint, product portfolio and customer penetration. Net sales for the acquired business were approximately $1.3 billion for the annual period ended September 30, 2013. On a combined basis the Company's Electronics business is expected to have approximately $3 billion in annual revenue with a No. 2 global position in driver information and above-average growth rates for the cockpit electronics segment, supplying nine of the world's ten largest vehicle manufacturers. In connection with the Electronics Acquisition, the Company expects to achieve $40 million to $70 million in annual cost synergies by the end of 2017. In order to achieve these cost synergies, the Company announced a restructuring program designed to reduce fixed costs and to improve operational efficiencies across the Electronics product group including administrative, engineering and manufacturing functions. The Company expects to incur approximately $40 million to $60 million in restructuring costs through the duration of the program and anticipates recording additional restructuring charges related to this program in future periods as underlying plans are finalized. • Interiors Exit Strategy - The Company continued its efforts to complete the divestiture of substantially all of its global Interiors business (the "Interiors Divestiture") pursuant to a Master Purchase Agreement initially executed in May 2014 and subsequently amended (the "Purchase Agreement"). On November 1, 2014, the Company closed on the majority of the Interiors Divestiture (the "Master Closing") completing the largest phase of the Interiors Divestiture to Reydel Automotive Holdings B.V., an affiliate of Cerberus Capital Management, L.P. In connection with the Master Closing, the Company made a cash payment of approximately $120 million, which included the $95 million Cash Contribution and adjustments primarily for working capital subject to further adjustments. The Company also agreed to provide a $56 million revolving credit facility in connection with the Master Closing, which is the shortfall to the agreed $90 million target in external financing arrangements. As transaction related customer purchase order changes are effected over the next several months, increasing the backing of the buyer implemented factoring facility, the seller backed facility is expected to be substantially reduced. The seller-backed facility obligation can also be reduced if the buyer adds working capital facilities in Russia and Thailand. Draws under this seller-backed facility will only be available if certain of the external credit facilities are fully drawn, and any draws on the seller-backed facility generally must be repaid prior to the repayment of the external credit facilities. The seller-backed facility has a maturity of three years and will have an interest rate of Libor plus 5%. Additionally, Visteon will separate the portion of its Interiors business conducted through its facilities in Chennai and Pune, India into a new legal entity, which will be sold to the buyer as part of the Interiors Divestiture. Due to the time required to effect such separation under Indian law, the consummation of the Indian portion of the Interiors Divestiture will occur subsequent to the Master Closing but is expected before December 31, 2014. The Thailand, Argentina and Brazil portions of 33 -------------------------------------------------------------------------------- Table of Contents the Interiors Divestiture will also occur subsequent to the Master Closing and are expected to close during the first quarter of 2015. The remaining transactions are subject to various conditions, including regulatory and antitrust approvals, receipt of other third party consents and approvals and other customary closing conditions, and may be subject to further cash impacts based on purchase price adjustments at the time of closing. The Company expects to record additional losses in connection with the Interiors Divestiture in future periods upon closing. The losses are estimated to range from $150 million to $200 million, of which the majority is likely to be recorded during the three months ending December 31, 2014 associated with the Master Closing. • Strengthen Balance Sheet - On July 16, 2014, the Company entered into an agreement to transfer certain U.S. pension assets to Prudential Insurance Company of America, to settle approximately $350 million of its U.S. outstanding pension obligation. As a result, the Company recorded a settlement gain of $25 million during the three months ended September 30, 2014. • Enhance Shareholder Returns - On May 8, 2014, the Company announced an accelerated stock buyback ("ASB") program with a third-party financial institution to purchase shares of common stock for an aggregate purchase price of $500 million. Under the program, the Company paid the financial institution $500 million and, through September 30, 2014, had received delivery of 4,523,158 shares of common stock under the program. On October 15, 2014, the capped portion of the program concluded, and the Company received an additional 112,269 shares. As of September 30, 2014, $375 million remained authorized and available for repurchase through December 31, 2015. The Company anticipates that additional repurchases of common stock, 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. Financial Results Summary Visteon recorded net sales of $1,970 million for the third quarter of 2014, an increase of $486 million from the same period in 2013. For the nine months ended September 30, 2014, the Company recorded sales of $5,470 million, an increase of $790 million from the same period in 2013. The increase in sales for the three and nine month periods ended September 30, 2014, was primarily due to the Electronics Acquisition, the November 2013 acquisition of a controlling ownership interest in Yanfeng Visteon Electronics Co., Ltd. ("YFVE"), higher production volumes and favorable product mix. The Company's sales for the three and nine months ended September 30, 2014, were distributed by product group, geographic region, and customer as follows: Three Months Ended September 30, 2014 [[Image Removed]] [[Image Removed]] [[Image Removed]] Nine Months Ended September 30, 2014 [[Image Removed]] [[Image Removed]] [[Image Removed]] 34 -------------------------------------------------------------------------------- Table of Contents The Company's sales are significantly impacted by global light vehicle production volumes. A summary of global light vehicle production levels for the three and nine months ended September 30, 2014 and 2013, are presented below by geographic region. Three Months Ended September 30 Nine Month Ended September 30 2014 2013 Change 2014 2013 Change (Units in Millions) Global 20.9 20.3 3.3 % 65.3 62.7 4.1 % North America 4.2 3.9 8.2 % 12.8 12.2 5.4 % South America 1.0 1.2 (20.5 )% 2.9 3.5 (18.0 )% Europe 4.5 4.6 (0.6 )% 15.1 14.5 3.7 % China 5.5 5.0 10.1 % 16.9 15.3 10.2 % Japan/Korea 3.3 3.3 0.7 % 10.4 9.9 5.1 % India 0.9 0.9 4.0 % 2.7 2.8 (2.6 )% ASEAN 1.0 1.0 (6.5 )% 3.0 3.2 (7.2 )% Source: IHS Automotive Gross margin was $192 million, or 9.8% of sales, for the three months ended September 30, 2014, compared to $135 million, or 9.1% of sales, for the same period of 2013. The increase was attributable to favorable volume and mix, the Electronics Acquisition, the acquisition of a controlling ownership interest in YFVE, and a pension settlement gain of $25 million. Net loss attributable to Visteon was $21 million for the three months ended September 30, 2014 representing a decrease of $64 million when compared to Net income attributable to Visteon of $43 million for same period in 2013. The decrease was largely due to the Interiors asset impairment of $15 million, a decrease in equity in net income of affiliates of $46 million related to the disposition of the Company's 50% ownership interest in Yanfeng. Including discontinued operations, the Company generated $180 million of cash from operating activities during the nine months ended September 30, 2014, an increase of $1 million when compared to the same period of 2013. As of September 30, 2014, the Company had total cash balances of $1,060 million, including $12 million of restricted cash, $99 million of cash held for sale and $13 million of restricted cash held for sale. The Company had total debt balances of $994 million, including $13 million of debt held for sale. As of September 30, 2014, the Company had $66 million of cash in excess of total debt. 35 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations - Three Months Ended September 30, 2014 and 2013 The Company's consolidated results of operations for the three months ended September 30, 2014 and 2013 were as follows: |