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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 24,000 employees dedicated to the design, development, manufacture and support of its product offerings and its global customers. Interiors Transaction On May 1, 2014, the Company entered into a Master Purchase Agreement (the "Purchase Agreement") pursuant to which, Visteon will reorganize substantially all of its global Interiors business under a newly-formed holding company (the "Reorganization") and will sell all of the equity of that holding company (the "Interiors Transaction") in exchange for the assumption of certain pension and other liabilities related to the Company's Interiors business and the payment of nominal cash consideration. Visteon agreed to contribute up to $95 million (the "Cash Contribution") to the Interiors business and the Purchase Agreement includes net working capital adjustments whereby the Cash Contribution will be effectively adjusted based on the actual net working capital levels as of the closing date. Visteon also agreed to support the buyer in establishing external credit facilities. To the extent that $90 million of external credit facilities are not available to the Interiors business by the date of closing, Visteon is required to provide a seller-backed revolving credit facility in the amount of any shortfall. Draws under any such 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 will have a maturity of three years and will have a default rate of interest for any interest and/or principal payment defaults. The closing of the Interiors Transaction is expected to occur by December 31, 2014 and is subject to various conditions, including the completion of the Reorganization, regulatory and antitrust approvals, receipt of other third party consents and approvals and other closing conditions. As part of the Reorganization, 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 transferred to the holding company and sold to the buyer as part of the Interiors Transaction. Due to the time required to effect such separation under Indian law, the consummation of the Indian portion of the Interiors Transaction may occur subsequent to the closing of the balance of the Interiors Transaction. The Company determined that assets and liabilities subject to the Interiors Transaction met the "held for sale" criteria during the quarterly period ended June 30, 2014. As the fair value of the assets and liabilities subject to the Interiors Transaction was less than the carrying value, the long-lived assets were reduced to zero, which resulted in an impairment loss of $173 million. The Company expects to record additional losses in connection with the Interiors Transaction upon closing, which are estimated to range from $150 million to $200 million, including the Cash Contribution, net working capital adjustments, and other contractual obligations resulting from the closing. The results of operations for Interiors business subject to the Interiors Transaction have been reclassified as discontinued operations. While the Interiors Transaction represents the substantially majority of the Company's Interiors operations, other operations previously reported within the Company's Interiors reporting segment were excluded from the scope of the Interiors Transaction. These other operations have been classified within the Other reportable segment. The Company's goal is to complete the disposal of its remaining Interiors business during 2014. Due to certain liabilities and capital requirements of the remaining business, Visteon may be required to contribute cash to such business in connection with any disposition and such amounts could be material. Electronics Acquisition On July 1, 2014, the Company completed the acquisition of substantially all of the global automotive electronics business of Johnson Controls Inc., in exchange for the payment of $265 million in cash (subject to working capital, net cash and other adjustments). Net sales for the acquired electronics 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 annual sales in excess of $3 billion. 29 -------------------------------------------------------------------------------- Table of Contents Financial Results Summary Visteon recorded net sales of $1,782 million for the second quarter of 2014, an increase of $172 million from the same period in 2013. For the six months ended June 30, 2014, the Company recorded sales of $3,500 million, an increase of $304 million from the same period in 2014. The increase in sales for the three and six months ended June 30, 2014, was primarily due to higher production volumes and favorable product mix for the Climate product group and the acquisition of a controlling ownership interest in Yanfeng Visteon Electronics Co., Ltd. ("YFVE") with effect from November 2013. The Company's sales for the three and six months ended June 30, 2014, were distributed by product group, geographic region, and customer as follows: Three Months Ended June 30, 2014 [[Image Removed]] [[Image Removed]] [[Image Removed]] Six Months Ended June 30, 2014 [[Image Removed]] [[Image Removed]] [[Image Removed]] 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 six months ended June 30, 2014 and 2013, are presented below by geographic region. Three Months Ended June 30 Six Month Ended June 30 2014 2013 Change 2014 2013 Change (Units in Millions) Global 21.9 21.4 2.4 % 44.1 42.5 3.9 % North America 4.4 4.3 3.6 % 8.6 8.3 4.2 % South America 0.9 1.3 (24.2 )% 1.9 2.3 (16.8 )% Europe 5.3 5.2 1.9 % 10.5 10 5.0 % China 5.7 5.1 11.0 % 11.3 10.3 9.9 % Japan/Korea 3.4 3.3 2.3 % 7.0 6.6 6.1 % India 0.9 0.9 (0.5 )% 1.8 1.9 (5.7 )% ASEAN 1.0 1.0 (7.3 )% 2.0 2.2 (7.2 )% Source: IHS Automotive Gross margin was $194 million, or 10.9% of sales, for the three months ended June 30, 2014, compared to $163 million, or 10.1% of sales, for the same period of 2013. The increase was primarily attributable to the acquisition of a controlling ownership interest in YFVE with effect from November 2013 and higher production volumes and favorable cost performance. 30 -------------------------------------------------------------------------------- Table of Contents Net loss attributable to Visteon was $155 million for the three months ended June 30, 2014 representing a decrease of $220 million when compared to the same period in 2013. The decrease was due to the Interiors asset impairment loss of $173 million, a decrease in equity in net income of non-consolidated affiliates of $31 million, and a loss on debt extinguishment of $23 million incurred in connection with the redemption of the Company's 6.75% senior notes due April 2019. Including discontinued operations, the Company generated $127 million of cash from operating activities during the six months ended June 30, 2014, a decrease of $31 million when compared to the same period of 2013. As of June 30, 2014, the Company had total cash balances of $1,425 million, including $12 million of restricted cash, $114 million of cash held for sale and $14 million of restricted cash held for sale. The Company had total debt balances of $960 million, including $32 million of debt held for sale. As of June 30, 2014, the Company had $465 million of cash in excess of total debt. Share Repurchase Program Since July 2012, the Company's board of directors has authorized a total of $1.175 billion in share repurchases. 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 received an initial delivery of 3,394,157 shares of common stock using a reference price of $92.07, and an additional delivery of 1,129,001 shares of common stock following the conclusion of the hedge period which determined a certain minimum amount of shares guaranteed under a portion of the program that had a maximum per share price of $100.54. The final settlement will be generally based on the volume-weighted average price of the Company's common stock over a period of up to approximately 12 months, less a negotiated discount, 50 percent of which will be subject to a maximum per share price. As of June 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. Pension Settlement 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. The Company expects to record a settlement gain estimated to be approximately $20 million during the three months ending September 30, 2014. 31 -------------------------------------------------------------------------------- Table of Contents |