Attached files
file | filename |
---|---|
8-K - FORM 8-K - VISTEON CORP | k50623e8vk.htm |
EX-99.4 - EX-99.4 - VISTEON CORP | k50623exv99w4.htm |
EX-99.1 - EX-99.1 - VISTEON CORP | k50623exv99w1.htm |
EX-23.1 - EX-23.1 - VISTEON CORP | k50623exv23w1.htm |
EX-99.2 - EX-99.2 - VISTEON CORP | k50623exv99w2.htm |
Exhibit 99.3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page No. | ||||
Managements Report on Internal Control Over Financial Reporting |
2 | |||
Report of Independent Registered Public Accounting Firm |
3 | |||
Consolidated Statements of Operations for the three months
ended December 31, 2010, the nine months ended October 1, 2010
and the years ended December 31, 2009 and 2008 |
5 | |||
Consolidated Balance Sheets as of December 31, 2010 and 2009 |
6 | |||
Consolidated Statements of Cash Flows for the three months
ended December 31, 2010, the nine months ended October 1, 2010
and the years ended December 31, 2009 and 2008 |
7 | |||
Consolidated Statements of Shareholders Equity (Deficit) for
the periods ended December 31, 2010, October 1, 2010 and
December 31, 2009 and 2008 |
8 | |||
Notes to Consolidated Financial Statements |
9 |
1
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting as such term is defined under Rule 13a-15(f) of the Securities Exchange Act of 1934.
Under the supervision and with the participation of the principal executive and financial officers
of the Company, an evaluation of the effectiveness of internal control over financial reporting was
conducted based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations (the COSO Framework) of the Treadway Commission. Based on
the evaluation performed under the COSO Framework as of December 31, 2010, management has concluded
that the Companys internal control over financial reporting is effective.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the
effectiveness of the Companys internal control over financial reporting as of December 31, 2010,
as stated in their report which is included herein.
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Visteon Corporation
In our opinion, the accompanying consolidated balance sheet as of December 31, 2010 and the related
consolidated statements of operations, shareholders equity (deficit) and cash flows for the three
months ended December 31, 2010 present fairly, in all material respects, the financial position of
Visteon Corporation and its subsidiaries (Successor Company) at December 31, 2010, and the results
of their operations and their cash flows for the three months ended December 31, 2010 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15 (a) (2)
for the period from October 1, 2010 through December 31, 2010 presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible
for these financial statements and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express opinions on these financial statements, on
the financial statement schedule, and on the Companys internal control over financial reporting
based on our integrated audit. We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audit of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, Visteon Corporation and certain of
its U.S. subsidiaries (the Debtors) voluntarily filed a petition on May 28, 2009 with the United
States Bankruptcy Court for the District of Delaware for reorganization under Chapter 11 of the
Bankruptcy Code. The Companys Fifth Amended Joint Plan of Reorganization (the Plan) was
confirmed on August 31, 2010. Confirmation of the Plan resulted in the discharge of certain claims
against the Debtors that arose before May 28, 2009 and substantially alters rights and interests of
equity security holders as provided for in the Plan. The Plan was substantially consummated on
October 1, 2010 and the Company emerged from bankruptcy. In connection with its emergence from
bankruptcy, the Company adopted fresh-start accounting on October 1, 2010.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, Michigan
PricewaterhouseCoopers LLP
Detroit, Michigan
March 9, 2011, except with respect to our opinion on the consolidated financial statements insofar
as it relates to the effects of the change in reportable segments discussed in Note 23, as to which
the date is August 4, 2011
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Visteon Corporation
In our opinion, the accompanying consolidated balance sheet as of December 31, 2009 and the related
consolidated statements of operations, shareholders equity (deficit) and cash flows for the nine
months ended October 1, 2010 and for each of the two years in the period ended December 31, 2009
present fairly, in all material respects, the financial position of Visteon Corporation and its
subsidiaries (Predecessor Company) at December 31, 2009, and the results of their operations and
their cash flows for the nine months ended October 1, 2010 and for each of the two years in the
period ended December 31, 2009 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15 (a) (2) for the nine months ended October 1, 2010 and
for each of the two years in the period ended December 31, 2009 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. The Companys management is responsible for these financial statements and
financial statement schedule. Our responsibility is to express an opinion on these financial
statements and on the financial statement schedule based on our audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in
which it accounts for noncontrolling interests in 2009.
As discussed in Note 1 to the consolidated financial statements, Visteon Corporation and certain of
its U.S. subsidiaries voluntarily filed a petition on May 28, 2009 with the United States
Bankruptcy Court for the District of Delaware for reorganization under the provisions of Chapter 11
of the Bankruptcy Code. The Companys Fifth Amended Joint Plan of Reorganization (the Plan) was
confirmed on August 31, 2010. The Plan was substantially consummated on October 1, 2010 and the
Company emerged from bankruptcy. In connection with its emergence from bankruptcy, the Company
adopted fresh-start accounting.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, Michigan
PricewaterhouseCoopers LLP
Detroit, Michigan
March 9, 2011, except with respect to our opinion on the consolidated financial statements insofar
as it relates to the effects of the change in reportable segments discussed in Note 23, as to which
the date is August 4, 2011
4
VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor | Predecessor | |||||||||||||||
Three Months Ended | Nine Months Ended | Year Ended | ||||||||||||||
December 31 | October 1 | December 31 | ||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
(Dollars in Millions, Except Per Share Amounts) | ||||||||||||||||
Net sales |
||||||||||||||||
Products |
$ | 1,886 | $ | 5,437 | $ | 6,420 | $ | 9,077 | ||||||||
Services |
1 | 142 | 265 | 467 | ||||||||||||
1,887 | 5,579 | 6,685 | 9,544 | |||||||||||||
Cost of sales |
||||||||||||||||
Products |
1,642 | 4,874 | 5,827 | 8,621 | ||||||||||||
Services |
1 | 140 | 261 | 464 | ||||||||||||
1,643 | 5,014 | 6,088 | 9,085 | |||||||||||||
Gross margin |
244 | 565 | 597 | 459 | ||||||||||||
Selling, general and administrative expenses |
124 | 271 | 331 | 553 | ||||||||||||
Restructuring expenses |
28 | 20 | 84 | 147 | ||||||||||||
Reorganization items, net |
| (933 | ) | 60 | | |||||||||||
Asset impairments and other (gains) and losses |
(1 | ) | 25 | (11 | ) | 275 | ||||||||||
Reimbursement from escrow account |
| | 62 | 113 | ||||||||||||
Deconsolidation gain |
| | (95 | ) | | |||||||||||
Operating income (loss) |
93 | 1,182 | 290 | (403 | ) | |||||||||||
Interest expense |
16 | 170 | 117 | 215 | ||||||||||||
Interest income |
6 | 10 | 11 | 46 | ||||||||||||
Equity in net income of non-consolidated affiliates |
41 | 105 | 80 | 41 | ||||||||||||
Income (loss) before income taxes |
124 | 1,127 | 264 | (531 | ) | |||||||||||
Provision for income taxes |
19 | 131 | 80 | 116 | ||||||||||||
Net income (loss) |
105 | 996 | 184 | (647 | ) | |||||||||||
Net income attributable to noncontrolling interests |
19 | 56 | 56 | 34 | ||||||||||||
Net income (loss) attributable to Visteon Corporation |
$ | 86 | $ | 940 | $ | 128 | $ | (681 | ) | |||||||
Earnings (loss) per share: |
||||||||||||||||
Basic earnings (loss) attributable to Visteon Corporation |
$ | 1.71 | $ | 7.21 | $ | 0.98 | $ | (5.26 | ) | |||||||
Diluted earnings (loss) attributable to Visteon Corporation |
$ | 1.66 | $ | 7.21 | $ | 0.98 | $ | (5.26 | ) |
See accompanying notes to the consolidated financial statements.
5
VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
Successor | Predecessor | |||||||
December 31 | ||||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
ASSETS |
||||||||
Cash and equivalents |
$ | 905 | $ | 962 | ||||
Restricted cash |
74 | 133 | ||||||
Accounts receivable, net |
1,101 | 1,055 | ||||||
Inventories, net |
364 | 319 | ||||||
Other current assets |
258 | 236 | ||||||
Total current assets |
2,702 | 2,705 | ||||||
Property and equipment, net |
1,582 | 1,936 | ||||||
Equity in net assets of non-consolidated affiliates |
439 | 294 | ||||||
Intangible assets, net |
396 | | ||||||
Other non-current assets |
89 | 84 | ||||||
Total assets |
$ | 5,208 | $ | 5,019 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
||||||||
Short-term debt, including current portion of long-term debt |
$ | 78 | $ | 225 | ||||
Accounts payable |
1,211 | 977 | ||||||
Accrued employee liabilities |
196 | 161 | ||||||
Other current liabilities |
357 | 302 | ||||||
Total current liabilities |
1,842 | 1,665 | ||||||
Long-term debt |
483 | 6 | ||||||
Employee benefits |
522 | 568 | ||||||
Deferred tax liabilities |
190 | 159 | ||||||
Other non-current liabilities |
221 | 257 | ||||||
Liabilities subject to compromise |
| 2,819 | ||||||
Shareholders equity (deficit) |
||||||||
Preferred stock (par value $0.01, 50 million shares
authorized, none outstanding at December 31, 2010) |
| | ||||||
Common stock (par value $0.01, 250 million shares
authorized, 51 million shares issued and outstanding at
December 31, 2010) |
1 | | ||||||
Stock warrants |
29 | | ||||||
Predecessor preferred stock (par value $1.00, 50 million
shares authorized, none outstanding at December 31, 2009) |
| | ||||||
Predecessor common stock (par value $1.00, 500 million
shares authorized, 131 million shares issued and 130
million shares outstanding at December 31, 2009) |
| 131 | ||||||
Predecessor stock warrants |
| 127 | ||||||
Additional paid-in capital |
1,099 | 3,407 | ||||||
Retained earnings (accumulated deficit) |
86 | (4,576 | ) | |||||
Accumulated other comprehensive income |
50 | 142 | ||||||
Treasury stock |
(5 | ) | (3 | ) | ||||
Total Visteon Corporation shareholders equity (deficit) |
1,260 | (772 | ) | |||||
Noncontrolling interests |
690 | 317 | ||||||
Total shareholders equity (deficit) |
1,950 | (455 | ) | |||||
Total liabilities and shareholders equity (deficit) |
$ | 5,208 | $ | 5,019 | ||||
See accompanying notes to the consolidated financial statements.
6
VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor | Predecessor | |||||||||||||||
Three Months Ended | Nine Months Ended | Year Ended | ||||||||||||||
December 31 | October 1 | December 31 | ||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
(Dollars in Millions) | ||||||||||||||||
Operating Activities |
||||||||||||||||
Net income (loss) |
$ | 105 | $ | 996 | $ | 184 | $ | (647 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided from (used by) operating activities: |
||||||||||||||||
Depreciation and amortization |
73 | 207 | 352 | 416 | ||||||||||||
Pension and OPEB, net |
(146 | ) | (41 | ) | (215 | ) | (72 | ) | ||||||||
Deconsolidation gain |
| | (95 | ) | | |||||||||||
Asset impairments and other (gains) and losses |
(1 | ) | 25 | (11 | ) | 275 | ||||||||||
Equity in net income of non-consolidated affiliates, net of dividends remitted |
(41 | ) | (92 | ) | (38 | ) | 5 | |||||||||
Reorganization items |
| (933 | ) | 60 | | |||||||||||
Other non-cash items |
45 | 40 | 8 | 11 | ||||||||||||
Changes in assets and liabilities: |
||||||||||||||||
Accounts receivable |
(53 | ) | (79 | ) | (127 | ) | 509 | |||||||||
Inventories |
5 | (75 | ) | 33 | 44 | |||||||||||
Accounts payable |
174 | 55 | 79 | (504 | ) | |||||||||||
Income taxes deferred and payable, net |
| 12 | 47 | 30 | ||||||||||||
Other assets and other liabilities |
(7 | ) | (95 | ) | (136 | ) | (183 | ) | ||||||||
Net cash provided from (used by) operating activities |
154 | 20 | 141 | (116 | ) | |||||||||||
Investing Activities |
||||||||||||||||
Capital expenditures |
(92 | ) | (117 | ) | (151 | ) | (294 | ) | ||||||||
Investments in joint ventures |
| (3 | ) | (30 | ) | (1 | ) | |||||||||
Proceeds from divestitures and asset sales |
16 | 45 | 69 | 83 | ||||||||||||
Cash associated with deconsolidation and other |
| | (11 | ) | 4 | |||||||||||
Net cash used by investing activities |
(76 | ) | (75 | ) | (123 | ) | (208 | ) | ||||||||
Financing Activities |
||||||||||||||||
Short-term debt, net |
6 | (9 | ) | (19 | ) | 28 | ||||||||||
Cash restriction, net |
16 | 43 | (133 | ) | | |||||||||||
Proceeds from (payments on) DIP facility, net of issuance costs |
| (75 | ) | 71 | | |||||||||||
Proceeds from rights offering, net of issuance costs |
| 1,190 | | | ||||||||||||
Proceeds from issuance of debt, net of issuance costs |
| 481 | 57 | 260 | ||||||||||||
Principal payments on debt |
(61 | ) | (1,651 | ) | (173 | ) | (88 | ) | ||||||||
Repurchase of unsecured debt securities |
| | | (337 | ) | |||||||||||
Other |
(1 | ) | (21 | ) | (62 | ) | (56 | ) | ||||||||
Net cash used by financing activities |
(40 | ) | (42 | ) | (259 | ) | (193 | ) | ||||||||
Effect of exchange rate changes on cash |
1 | 1 | 23 | (61 | ) | |||||||||||
Net increase (decrease) in cash and equivalents |
39 | (96 | ) | (218 | ) | (578 | ) | |||||||||
Cash and equivalents at beginning of period |
866 | 962 | 1,180 | 1,758 | ||||||||||||
Cash and equivalents at end of period |
$ | 905 | $ | 866 | $ | 962 | $ | 1,180 | ||||||||
Supplemental Disclosures: |
||||||||||||||||
Cash paid for interest |
$ | 5 | $ | 179 | $ | 126 | $ | 226 | ||||||||
Cash paid for income taxes, net of refunds |
$ | 20 | $ | 83 | $ | 77 | $ | 86 |
See accompanying notes to the consolidated financial statements.
7
VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
Retained | Accumulated | |||||||||||||||||||||||||||||||
Additional | Earnings | Other | ||||||||||||||||||||||||||||||
Common | Stock | Paid-In | (Accumulated | Comprehensive | Treasury | |||||||||||||||||||||||||||
Stock | Warrants | Capital | Deficit) | Income (Loss) | Stock | NCI | Total | |||||||||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||||||||||
Balance at January 1, 2008 Predecessor |
$ | 131 | $ | 127 | $ | 3,406 | $ | (4,016 | ) | $ | 275 | $ | (13 | ) | $ | 293 | $ | 203 | ||||||||||||||
Net (loss)/income |
| | | (681 | ) | | | 34 | (647 | ) | ||||||||||||||||||||||
Foreign currency translation |
| | | | (89 | ) | | (49 | ) | (138 | ) | |||||||||||||||||||||
Benefit plans |
| | | | (29 | ) | | | (29 | ) | ||||||||||||||||||||||
Other |
| | | | | | 3 | 3 | ||||||||||||||||||||||||
Comprehensive loss |
| | | (681 | ) | (118 | ) | | (12 | ) | (811 | ) | ||||||||||||||||||||
Stock-based compensation, net |
| | (1 | ) | (7 | ) | | 11 | | 3 | ||||||||||||||||||||||
Cash dividends |
| | | | | | (17 | ) | (17 | ) | ||||||||||||||||||||||
Other |
| | | | | (1 | ) | | (1 | ) | ||||||||||||||||||||||
Balance at December 31, 2008 Predecessor |
$ | 131 | $ | 127 | $ | 3,405 | $ | (4,704 | ) | $ | 157 | $ | (3 | ) | $ | 264 | $ | (623 | ) | |||||||||||||
Net income |
| | | 128 | | | 56 | 184 | ||||||||||||||||||||||||
Foreign currency translation |
| | | | (119 | ) | | 11 | (108 | ) | ||||||||||||||||||||||
Benefit plans |
| | | | 92 | | | 92 | ||||||||||||||||||||||||
Other |
| | | | 12 | | (2 | ) | 10 | |||||||||||||||||||||||
Comprehensive income (loss) |
| | | 128 | (15 | ) | | 65 | 178 | |||||||||||||||||||||||
Stock-based compensation, net |
| | 2 | | | | | 2 | ||||||||||||||||||||||||
Cash dividends |
| | | | | | (12 | ) | (12 | ) | ||||||||||||||||||||||
Balance at December 31, 2009 Predecessor |
$ | 131 | $ | 127 | $ | 3,407 | $ | (4,576 | ) | $ | 142 | $ | (3 | ) | $ | 317 | $ | (455 | ) | |||||||||||||
Net income |
| | | 940 | | | 56 | 996 | ||||||||||||||||||||||||
Foreign currency translation |
| | | | 14 | | 6 | 20 | ||||||||||||||||||||||||
Benefit plans |
| | | | (232 | ) | | | (232 | ) | ||||||||||||||||||||||
Other |
| | | | 2 | | 3 | 5 | ||||||||||||||||||||||||
Comprehensive income (loss) |
| | | 940 | (216 | ) | | 65 | 789 | |||||||||||||||||||||||
Stock-based compensation, net |
| | 1 | | | | | 1 | ||||||||||||||||||||||||
Cash dividends |
| | | | | | (23 | ) | (23 | ) | ||||||||||||||||||||||
Reorganization and fresh-start related adjustments |
(130 | ) | (86 | ) | (2,345 | ) | 3,636 | 74 | 3 | 308 | 1,460 | |||||||||||||||||||||
Balance at October 1, 2010 Successor |
$ | 1 | $ | 41 | $ | 1,063 | $ | | $ | | $ | | $ | 667 | $ | 1,772 | ||||||||||||||||
Net income |
| | | 86 | | | 19 | 105 | ||||||||||||||||||||||||
Foreign currency translation |
| | | | 1 | | 2 | 3 | ||||||||||||||||||||||||
Benefit plans |
| | | | 51 | | | 51 | ||||||||||||||||||||||||
Other |
| | | | (2 | ) | | 1 | (1 | ) | ||||||||||||||||||||||
Comprehensive income |
| | | 86 | 50 | | 22 | 158 | ||||||||||||||||||||||||
Stock-based compensation, net |
| | 21 | | | (5 | ) | | 16 | |||||||||||||||||||||||
Warrant exercises |
| (12 | ) | 15 | | | | | 3 | |||||||||||||||||||||||
Other |
| | | | | | 1 | 1 | ||||||||||||||||||||||||
Balance at December 31, 2010 Successor |
$ | 1 | $ | 29 | $ | 1,099 | $ | 86 | $ | 50 | $ | (5 | ) | $ | 690 | $ | 1,950 | |||||||||||||||
See accompanying notes to the consolidated financial statements.
8
VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Description of Business
Visteon Corporation (the Company or Visteon) is a leading global supplier of automotive
systems, modules and components to global automotive original equipment manufacturers (OEMs). The
Companys operations are organized by global product lines including Climate, Electronics,
Interiors and Lighting and are conducted through a network of manufacturing operations, technical
centers and joint ventures in every major geographic region of the world.
Reorganization under Chapter 11 of the U.S. Bankruptcy Code
On May 28, 2009, Visteon and certain of its U.S. subsidiaries (the Debtors) filed voluntary
petitions for reorganization relief under chapter 11 of the United States Bankruptcy Code (the
Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Court)
in response to sudden and severe declines in global automotive production during the latter part of
2008 and early 2009 and the resulting adverse impact on the Companys cash flows and liquidity. On
August 31, 2010 (the Confirmation Date), the Court entered an order (the Confirmation Order)
confirming the Debtors joint plan of reorganization (as amended and supplemented, the Plan),
which was comprised of two mutually exclusive sub plans, the Rights Offering Sub-Plan and the
Claims Conversion Sub-Plan. On October 1, 2010 (the Effective Date), all conditions precedent to
the effectiveness of the Rights Offering Sub-Plan and related documents were satisfied or waived
and the Company emerged from bankruptcy. Prior to the Effective Date, the Debtors operated their
businesses as debtors-in-possession under the jurisdiction of the Court and in accordance with
the applicable provisions of the Bankruptcy Code and orders of the Court. The Companys other
subsidiaries, primarily non-U.S. subsidiaries, were excluded from the Chapter 11 Proceedings and
continued to operate their businesses without supervision from the Court and were not subject to
the requirements of the Bankruptcy Code.
Additional details regarding the status of the Companys Chapter 11 Proceedings are included herein
under Note 4, Voluntary Reorganization under Chapter 11 of the United States Bankruptcy Code.
Visteon UK Limited Administration
On March 31, 2009, in accordance with the provisions of the United Kingdom Insolvency Act of 1986
and pursuant to a resolution of the board of directors of Visteon UK Limited, a company organized
under the laws of England and Wales (the UK Debtor) and an indirect, wholly-owned subsidiary of
the Company, representatives from KPMG (the Administrators) were appointed as administrators in
respect of the UK Debtor (the UK Administration). The UK Administration was initiated in response
to continuing operating losses of the UK Debtor and mounting labor costs and their related demand
on the Companys cash flows, and does not include the Company or any of the Companys other
subsidiaries. The effect of the UK Debtors entry into administration was to place the management,
affairs, business and property of the UK Debtor under the direct control of the Administrators.
Since their appointment, the Administrators have wound down the business of the UK Debtor and
closed its operations in Enfield, UK, Basildon, UK and Belfast, UK, and made the employees
redundant. The Administrators are in the process of reconciling claims and pursuing recoveries on
behalf of the UK Debtor.
As of March 31, 2009, total assets of $64 million, total liabilities of $132 million and related
amounts deferred as Accumulated other comprehensive income of $84 million, were deconsolidated
from the Companys balance sheet resulting in a deconsolidation gain of $152 million. The Company
also recorded $57 million for contingent liabilities related to the UK Administration, including
$45 million of costs associated with former employees of the UK Debtor, for which the Company was
reimbursed from the escrow account on a 100% basis. Additional amounts related to these items or
other contingent liabilities for potential claims under the UK Administration, which may result
from (i) negotiations; (ii) actions of the Administrators; (iii) resolution of contractual
arrangements, including unexpired leases; (iv) assertions by the UK Pensions Regulator; and, (v)
material adverse developments; or other events, may be recorded in future periods. No assurance can
be provided that the Company will not be subject to future litigation and/or liabilities related to
the UK Administration, including assertions by the UK Pensions Regulator. Additional liabilities,
if any, will be recorded when they become probable and estimable and could materially affect the
Companys results of operations and financial condition in future periods.
9
Transactions with Ford Motor Company
On September 29, 2010, the Company entered into a Global Settlement and Release Agreement (the
Release Agreement) with Ford and Automotive Components Holdings, LLC (ACH) conditioned on the
effectiveness of the Companys Plan. The Release Agreement provides, among other things, for: (i)
the termination of the Companys future obligations to reimburse Ford for certain pension and
retiree benefit costs; (ii) the resolution of and release of claims and causes of actions against
the Company and certain claims, liabilities, or actions against the Companys non-debtor
affiliates; (iii) withdrawal of all proofs of claim, with a face value of approximately $163
million, including a claim for pension and retiree benefit liabilities described above, filed
against the Company by Ford and/or ACH and an agreement to not assert any further claims against
the estates, other than with respect to preserved claims; (iv) the rejection of all purchase orders
under which the Company is not producing component parts and other agreements which would not
provide a benefit to the reorganized Company and waiver of any claims against the Company arising
out of such rejected agreements; (v) the reimbursement by Ford of up to $29 million to the Company
for costs associated with restructuring initiatives in various parts of the world; and (vi) a
commitment by Ford and its affiliates to source the Company new and replacement business totaling
approximately $600 million in annual sales for vehicle programs launching through 2013.
In exchange for these benefits, the Company assumed all outstanding purchase orders and related
agreements under which the Company is currently producing parts for Ford and/or ACH and agreed to
continue to produce and deliver component parts to Ford and ACH in accordance with the terms of
such purchase orders to ensure Ford continuity of supply. The Company also agreed to release Ford
and ACH from any claims, liabilities, or actions that the Company may potentially assert against
Ford and/or ACH.
On July 26, 2010, the Company, Visteon Global Technologies, Inc., ACH and Ford entered into an
agreement (the ACH Termination Agreement) to terminate each of (i) the Master Services Agreement,
dated September 30, 2005 (as amended); (ii) the Visteon Salaried Employee Lease Agreement, dated
October 1, 2005 (as amended); and, (iii) the Visteon Hourly Employee Lease Agreement, dated October
1, 2005 (as amended). On August 17, 2010, the Court approved the ACH Termination Agreement,
pursuant to which Ford released Visteon from certain OPEB obligations related to employees
previously leased to ACH resulting in a $9 million gain during the third quarter of 2010.
NOTE 2. Basis of Presentation and Recent Accounting Pronouncements
The consolidated financial statements include the accounts of the Company and all subsidiaries that
are more than 50% owned and over which the Company exercises control. Investments in affiliates of
greater than 20% and for which the Company does not exercise control are accounted for using the
equity method.
The Companys financial statements have been prepared in conformity with accounting principles
generally accepted in the United States (GAAP) on a going concern basis, which contemplates the
continuity of operations, realization of assets and satisfaction of liabilities in the normal
course of business. The preparation of the financial statements in conformity with GAAP requires
management to make estimates, judgments and assumptions that affect amounts reported herein.
Management believes that such estimates, judgments and assumptions are reasonable and appropriate.
However, due to the inherent uncertainty involved, actual results may differ from those provided in
the Companys consolidated financial statements. Certain prior year amounts have been reclassified
to conform to current year presentation.
The Company adopted fresh-start accounting upon emergence from the Chapter 11 Proceedings and
became a new entity for financial reporting purposes as of the Effective Date. Therefore, the
consolidated financial statements for the reporting entity subsequent to the Effective Date (the
Successor) are not comparable to the consolidated financial statements for the reporting entity
prior to the Effective Date (the Predecessor). Additional details regarding the adoption of
fresh-start accounting are included herein under Note 5, Fresh-Start Accounting.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance amending fair
value disclosures for interim and annual reporting periods beginning after December 15, 2009. This
guidance requires disclosures about transfers of financial instruments into and out of Level 1 and
2 designations and disclosures about purchases, sales, issuances and settlements of financial
instruments with a Level 3 designation. The Company adopted this guidance with effect from January
1, 2010 without material impact on its consolidated financial statements.
10
In June 2009, the FASB issued guidance which amends the consolidation provisions that apply to
Variable Interest Entities (VIEs). This guidance is effective for fiscal years that begin after
November 15, 2009. The Company adopted this guidance without material impact on its consolidated
financial statements.
In June 2009, the FASB issued guidance which revised the accounting for transfers and servicing of
financial assets. This guidance is effective for fiscal years that begin after November 15, 2009.
The Company adopted this guidance without material impact on its consolidated financial statements.
Effective January 1, 2009, the Company adopted new FASB guidance on the accounting and reporting
for business combination transactions and noncontrolling interests. In adopting the new FASB
guidance on noncontrolling interests, the Company adjusted its previously reported Net loss on the
consolidated statement of operations for the year ended December 31, 2008 to include net income
attributable to noncontrolling interests (previously Minority interests in consolidated
subsidiaries).
NOTE 3. Significant Accounting Policies
Revenue Recognition: The Company records revenue when persuasive evidence of an arrangement
exists, delivery occurs or services are rendered, the sales price or fee is fixed or determinable
and collectibility is reasonably assured. The Company ships product and records revenue pursuant to
commercial agreements with its customers generally in the form of an approved purchase order,
including the effects of contractual customer price productivity. The Company does negotiate
discrete price changes with its customers, which are generally the result of unique commercial
issues between the Company and its customers and are generally the subject of specific negotiations
between the Company and its customers. The Company records amounts associated with discrete price
changes as a reduction to revenue when specific facts and circumstances indicate that a price
reduction is probable and the amounts are reasonably estimable. The Company records amounts
associated with discrete price changes as an increase to revenue upon execution of a legally
enforceable contractual agreement and when collectibility is reasonably assured.
Services revenues are recognized as services are rendered and associated costs of providing such
services are recorded as incurred. Services revenues and related costs included approximately $30
million in both 2009 and 2008 of contractual reimbursement from Ford under the Amended
Reimbursement Agreement for costs associated with the separation of ACH leased employees no longer
required to provide such services.
Foreign Currency: Assets and liabilities of the Companys non-U.S. businesses are translated into
U.S. Dollars at end-of-period exchange rates and the related translation adjustments are reported
in the consolidated balance sheets under the classification of Accumulated other comprehensive
income (loss). The effects of remeasurement of assets and liabilities of the Companys non-U.S.
businesses that use the U.S. Dollar as their functional currency are included in the consolidated
statements of operations as transaction gains and losses. Income and expense elements of the
Companys non-U.S. businesses are translated into U.S. Dollars at average-period exchange rates and
are reflected in the consolidated statements of operations as part of sales, costs and expenses.
Additionally, gains and losses resulting from transactions denominated in a currency other than the
functional currency are included in the consolidated statements of operations as transaction gains
and losses. Transaction losses of $2 million and $4 million for the nine months ended October 1,
2010 and the year ended December 31, 2009 and gains of $14 million in 2008 resulted from the
remeasurement of certain deferred foreign tax liabilities and are included within income taxes. Net
transaction gains and losses increased net income by less than $1 million in the three months ended
December 31, 2010 and $12 million in the nine months ended October 1, 2010. Net transaction gains
and losses decreased net income by $18 million in 2009 and increased net loss by $3 million in
2008.
Restructuring: The Company defines restructuring expense to include costs directly associated with
exit or disposal activities as defined in GAAP. Such costs include employee severance, special
termination benefits, pension and other postretirement benefit plan curtailments and/or
settlements, contract termination fees and penalties, and other exit or disposal costs. In general,
the Company records employee-related exit and disposal costs when such costs are probable and
estimable, with the exception of one-time termination benefits and employee retention costs, which
are recorded when earned. Contract termination fees and penalties and other exit and disposal costs
are generally recorded when incurred.
Environmental Costs: Costs related to environmental assessments and remediation efforts at
operating facilities, previously owned or operated facilities, and Superfund or other waste site
locations are accrued when it is probable that a liability has been incurred and the amount of that
liability can be reasonably estimated. Estimated costs are recorded at undiscounted amounts, based
on experience and assessments and are regularly evaluated. The liabilities
11
are recorded in other current liabilities and other non-current liabilities in the Companys
consolidated balance sheets.
Other Costs: Advertising and sales promotion costs, repair and maintenance costs, research and
development costs, and pre-production operating costs are expensed as incurred. Research and
development expenses include salary and related employee benefits, contractor fees, information
technology, occupancy, telecommunications and depreciation. Advertising costs were less than $1
million in the three months ended December 31, 2010, $1 million in the nine months ended October 1,
2010, $1 million in 2009 and $2 million in 2008. Research and development costs were $89 million in
the three months ended December 31, 2010, $264 million in the nine months ended October 1, 2010,
$328 million in 2009 and $434 million in 2008. Shipping and handling costs are recorded in the
Companys consolidated statements of operations as Cost of sales.
Cash and Equivalents: The Company considers all highly liquid investments purchased with a
maturity of three months or less, including short-term time deposits, commercial paper, repurchase
agreements and money market funds to be cash equivalents.
Restricted Cash: Restricted cash represents amounts designated for uses other than current
operations and includes $55 million related to escrowed pre-emergence professional fees, $15
million related to the Letter of Credit Reimbursement and Security Agreement, and $4 million
related to cash collateral for other corporate purposes at December 31, 2010.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable are stated at
historical value, which approximates fair value. The Company does not generally require collateral
from its customers. Accounts receivable are reduced by an allowance for amounts that may be
uncollectible in the future. This estimated allowance is determined by considering factors such as
length of time accounts are past due, historical experience of write-offs and customer financial
condition. If not reserved through specific examination procedures, the Companys general policy
for uncollectible accounts is to reserve based upon the aging categories of accounts receivable.
Past due status is based upon the invoice date of the original amounts outstanding. Included in
selling, general and administrative (SG&A) expenses are recoveries in excess of provisions for
estimated uncollectible accounts receivable of $4 million for the threemonth Successor period
ended December 31, 2010 and provisions for estimated uncollectible accounts receivable of $3
million, $5 million and $1 million for the nine-month Predecessor period ended October 1, 2010 and
years ended December 31, 2009 and 2008, respectively. No reserve for doubtful accounts was recorded
at December 31, 2010 due to the adoption of fresh-start accounting on October 1, 2010 (see Note 5,
Fresh-Start Accounting for additional details). The allowance for doubtful accounts balance was
$23 million at December 31, 2009.
Inventories: Inventories are stated at the lower of cost, determined on a first-in, first-out
(FIFO) basis, or market. Inventories are reduced by an allowance for excess and obsolete
inventories based on managements review of on-hand inventories compared to historical and
estimated future sales and usage. Inventory reserves were $6 million and $43 million at as of
December 31, 2010 and 2009, respectively. Inventory reserves decreased primarily as a result of the
adoption of fresh-start accounting on October 1, 2010 (see Note 5, Fresh-Start Accounting for
additional details).
Product Tooling: Product tooling includes molds, dies and other tools used in production of a
specific part or parts of the same basic design. It is generally required that non-reimbursable
design and development costs for products to be sold under long-term supply arrangements be
expensed as incurred and costs incurred for molds, dies and other tools that will be owned by the
Company or its customers and used in producing the products under long-term supply arrangements be
capitalized and amortized over the shorter of the expected useful life of the assets or the term of
the supply arrangement. Contractually reimbursable design and development costs that would
otherwise be expensed are recorded as an asset as incurred. Product tooling owned by the Company is
capitalized as property and equipment, and amortized to cost of sales over its estimated economic
life, generally not exceeding six years. The net book value of product tooling owned by the Company
was $84 million and $78 million as of December 31, 2010 and 2009, respectively. As of December 31,
2010, the Company had receivables of $26 million related to production tools in progress, which
will not be owned by the Company and for which there is a contractual agreement for reimbursement
from the customer.
Property and Equipment: Property and equipment are stated at cost or fair value for impaired
assets. However, as a result of the adoption of fresh-start accounting property and equipment were
re-measured and adjusted to estimated fair value as of October 1, 2010 (see Note 5, Fresh-Start
Accounting). Depreciation expense is computed principally by the straight-line method over
estimated useful lives for financial reporting purposes and by accelerated
12
methods for income tax purposes in certain jurisdictions. See Note 10, Property and Equipment for
additional details.
Certain costs incurred in the acquisition or development of software for internal use are
capitalized. Capitalized software costs are amortized using the straight-line method over estimated
useful lives generally ranging from three to eight years. The net book value of capitalized
software costs was approximately $15 million and $31 million at December 31, 2010 and 2009,
respectively. Related amortization expense was approximately $2 million, $18 million, $27 million
and $41 million for the three-month Successor period ended December 31, 2010, nine-month
Predecessor period ended October 1, 2010 and years ended December 31, 2009 and 2008, respectively.
Amortization expense of approximately $5 million is expected for 2011 and is expected to decrease
to $4 million, $4 million and less than $1 million for 2012, 2013 and 2014, respectively.
Asset impairment charges are recorded when events and circumstances indicate that such assets may
not be recoverable and the undiscounted net cash flows estimated to be generated by those assets
are less than their carrying amounts. If estimated future undiscounted cash flows are not
sufficient to recover the carrying value of the assets, an impairment charge is recorded for the
amount by which the carrying value of the assets exceeds its fair value. The Company classifies
assets and liabilities as held for sale when management approves and commits to a formal plan of
sale and it is probable that the sale will be completed. The carrying value of the assets and
liabilities held for sale are recorded at the lower of carrying value or fair value less cost to
sell, and the recording of depreciation is ceased. For impairment purposes, fair value is
determined using appraisals, management estimates or discounted cash flow calculations.
Definite-Lived Intangible Assets: In connection with the adoption of fresh-start accounting
identifiable intangible assets were recorded at their estimated fair value as of October 1, 2010
(see Note 5, Fresh-Start Accounting). Definite-lived intangible assets, primarily including
developed technology and customer-related assets, are amortized on a straight-line basis over
estimated useful lives. Definite-lived intangible assets must be assessed for impairment when
events and circumstances indicate that such assets may not be recoverable and the undiscounted net
cash flows estimated to be generated by those assets are less than their carrying amounts. Under
such circumstances, an impairment charge is recorded for the amount by which the carrying value of
the intangible asset exceeds its estimated fair value. See Note 12, Intangible Assets for
additional details.
Indefinite-Lived Intangible Assets: In connection with the adoption of fresh-start accounting
identifiable intangible assets were recorded at their estimated fair value as of October 1, 2010
(see Note 5, Fresh-Start Accounting). Indefinite-lived intangible assets are not amortized, but
are tested at least annually for impairment by reporting unit. Impairment testing is also required
if an event or circumstance indicates that an impairment is more likely than not to have occurred.
In testing for impairment the fair value of each reporting unit is compared to its carrying value.
If the carrying value exceeds fair value an impairment loss is measured and recognized. See Note
12, Intangible Assets for additional details.
Debt Issuance Costs: The costs related to the issuance or modification of long-term debt are
deferred and amortized into interest expense over the life of each respective debt issue. Deferred
amounts associated with debt extinguished prior to maturity are expensed.
Pensions and Other Postretirement Employee Benefits: Pensions and other postretirement employee
benefit costs and related liabilities and assets are dependent upon assumptions used in calculating
such amounts. These assumptions include discount rates, expected return on plan assets, health care
cost trends, compensation and other factors. In accordance with GAAP, actual results that differ
from the assumptions used are accumulated and amortized into expense over future periods.
Product Warranty: The Company accrues for warranty obligations for products sold based on
management estimates, with support from its sales, engineering, quality and legal functions, of the
amount that eventually will be required to settle such obligations. This accrual is based on
several factors, including contractual arrangements, past experience, current claims, production
changes, industry developments and various other considerations.
Product Recall: The Company accrues for product recall claims related to probable financial
participation in customers actions to provide remedies related primarily to safety concerns as a
result of actual or threatened regulatory or court actions or the Companys determination of the
potential for such actions. The Company accrues for recall claims for products sold based on
management estimates, with support from the Companys engineering, quality and legal functions.
Amounts accrued are based upon managements best estimate of the amount that will ultimately be
required to settle such claims.
13
Income Taxes: Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The Company records a valuation allowance to reduce deferred tax assets when it is more
likely than not that such assets will not be realized. This assessment requires significant
judgment, and must be done on a jurisdiction-by-jurisdiction basis. In determining the need for a
valuation allowance, all available positive and negative evidence, including historical and
projected financial performance, is considered along with any other pertinent information.
Financial Instruments: The Company uses derivative financial instruments, including forward
contracts, swaps and options, to manage exposures to changes in currency exchange rates and
interest rates. All derivative financial instruments are classified as held for purposes other
than trading. The Companys policy specifically prohibits the use of derivatives for speculative
purposes.
Fair Value Measurements: The Company uses fair value measurements in the preparation of its
financial statements, which utilize various inputs including those that can be readily observable,
corroborated or are generally unobservable. The Company utilizes market-based data and valuation
techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
Additionally, the Company applies assumptions that market participants would use in pricing an
asset or liability, including assumptions about risk.
NOTE 4. Voluntary Reorganization under Chapter 11 of the United States Bankruptcy Code
The Chapter 11 Proceedings were initiated in response to sudden and severe declines in global
automotive production during the latter part of 2008 and early 2009 and the adverse impact on the
Companys cash flows and liquidity. The reorganization cases are being jointly administered as Case
No. 09-11786 under the caption In re Visteon Corporation, et al. On August 31, 2010, the Court
entered the Confirmation Order confirming the Debtors Plan and on the Effective Date all
conditions precedent to the effectiveness of the Rights Offering Sub-Plan and related documents
were satisfied or waived and the Company emerged from bankruptcy.
Plan of Reorganization
A plan of reorganization determines the rights and satisfaction of claims of various creditors and
security holders, but the ultimate settlement of certain claims will be subject to the uncertain
outcome of litigation, negotiations and Court decisions up to and for a period of time after a plan
of reorganization is confirmed. At this time, it is not possible to predict with certainty the
effect of the Chapter 11 Proceedings on the Companys business. The following is a summary of the
substantive provisions of the Rights Offering Sub-Plan and related transactions and is not intended
to be a complete description of, or a substitute for a full and complete reading of, the Plan.
| Cancellation of any shares of Visteon common stock and any options, warrants or rights to purchase shares of Visteon common stock or other equity securities outstanding prior to the Effective Date; | |
| Issuance of approximately 45,000,000 shares of Successor common stock to certain investors in a private offering (the Rights Offering) exempt from registration under the Securities Act for proceeds of approximately $1.25 billion; | |
| Execution of an exit financing facility including $500 million in funded, secured debt and a $200 million asset-based, secured revolver that was undrawn at the Effective Date; and, | |
| Application of proceeds from such borrowings and sales of equity along with cash on hand to make settlement distributions contemplated under the Plan, including; |
| cash settlement of the pre-petition seven-year secured term loan claims of approximately $1.5 billion, along with interest of approximately $160 million; | ||
| cash settlement of the U.S. asset-backed lending facility (ABL) and related letters of credit of approximately $128 million | ||
| establishment of a professional fee escrow account of $68 million; and, | ||
| cash settlement of other claims and fees of approximately $119 million; |
| Issuance of approximately 2,500,000 shares of Successor common stock to holders of pre-petition notes, including 7% Senior Notes due 2014, 8.25% Senior Notes due 2010, and 12.25% Senior Notes due 2016; |
14
holders of the 12.25% senior notes also received warrants to purchase up to 2,355,000 shares of reorganized Visteon common stock at an exercise price of $9.66 per share; | ||
| Issuance of approximately 1,000,000 shares of Successor common stock and warrants to purchase up to 1,552,774 shares of Successor common stock at an exercise price of $58.80 per share for Predecessor common stock interests; | |
| Issuance of approximately 1,700,000 shares of restricted stock to management under a post-emergence share-based incentive compensation program; and, | |
| Reinstatement of certain pre-petition obligations including certain OPEB liabilities and administrative, general and other unsecured claims. |
Financial Statement Classification
Financial reporting applicable to a company in chapter 11 of the Bankruptcy Code generally does not
change the manner in which financial statements are prepared. However, financial statements for
periods including and subsequent to a chapter 11 bankruptcy filing must distinguish between
transactions and events that are directly associated with the reorganization proceedings and the
ongoing operations of the business. Accordingly, revenues, expenses, realized gains and losses and
provisions for losses that can be directly associated with the reorganization of the business have
been reported separately as Reorganization items, net in the Companys statement of operations.
Additionally, pre-petition liabilities subject to compromise under a plan of reorganization have
been reported separately from both pre-petition liabilities that are not subject to compromise and
from liabilities arising subsequent to the Petition Date. Liabilities that were expected to be
affected by a plan of reorganization were reported at amounts expected to be allowed, even if they
may be settled for lesser amounts.
Reorganization items, net included in the consolidated financial statements is comprised of the
following:
Predecessor | ||||||||
Nine Months | Year Ended | |||||||
Ended October 1 | December 31 | |||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
Gain on settlement of Liabilities subject to compromise |
$ | (956 | ) | $ | | |||
Professional fees and other direct costs, net |
129 | 60 | ||||||
Gain on adoption of fresh-start accounting |
(106 | ) | | |||||
$ | (933 | ) | $ | 60 | ||||
Cash payments for reorganization expenses |
$ | 111 | $ | 26 |
On the Effective Date and in connection with the Plan, the Company recorded a pre-tax gain of
approximately $1.1 billion for reorganization related items. This gain included $956 million
related to the cancellation of certain pre-petition obligations previously recorded as Liabilities
subject to compromise in accordance with terms of the Plan. Additionally, on the Effective Date,
the Company became a new entity for financial reporting purposes and adopted fresh-start
accounting, which requires, among other things, that all assets and liabilities be recorded at fair
value resulting in a gain of $106 million. For additional information regarding fresh-start
accounting see Note 5, Fresh-Start Accounting.
Liabilities subject to compromise as of December 31, 2009 are set forth below.
December 31 | ||||
2009 | ||||
(Dollars in Millions) | ||||
Debt |
$ | 2,490 | ||
Employee liabilities |
170 | |||
Accounts payable |
115 | |||
Interest payable |
31 | |||
Other accrued liabilities |
13 | |||
$ | 2,819 | |||
Substantially all of the Companys pre-petition debt was in default, including $1.5 billion
principal amount under the secured term loans due 2013; $862 million principal amount under various
unsecured notes due 2010, 2014 and 2016; and $127 million of other secured and unsecured
borrowings. Debt discounts of $8 million, deferred financing
15
costs of $14 million and terminated interest rate swaps of $23 million were included in Liabilities
subject to compromise as a valuation adjustment to the related pre-petition debt.
Contractual interest expense represents amounts due under the contractual terms of outstanding
debt, including debt subject to compromise. The Company ceased recording interest expense on
outstanding pre-petition debt instruments classified as Liabilities subject to compromise from the
May 28, 2009 petition date as such amounts of contractual interest were not being paid and were not
determined to be probable of being an allowed claim. Adequate protection amounts pursuant to the
cash collateral order of the Court, and as related to the ABL Credit Agreement have been classified
as Interest expense on the Companys consolidated statement of operations. Interest expense on a
contractual basis would have been $159 million and $226 million for the nine-month period ended
October 1, 2010 and the year ended December 31, 2009, respectively.
During the second quarter of 2010, the Company recorded $122 million of prior contractual interest
expense related to the seven-year secured term loans because it became probable that the interest
would become an allowed claim. Additionally, effective July 1, 2010 the Company commenced recording
interest expense at the default rate set forth in the credit agreements associated with the
seven-year secured term loans, which amounted to approximately $30 million through the Effective
Date on amounts due and owing under the seven-year secured term loans.
NOTE 5. Fresh-Start Accounting
The application of fresh-start accounting results in the allocation of reorganization value to the
fair value of assets and is permitted only when the reorganization value of assets immediately
prior to confirmation of a plan of reorganization is less than the total of all post-petition
liabilities and allowed claims and the holders of voting shares immediately prior to the
confirmation of the plan of reorganization receive less than 50% of the voting shares of the
emerging entity. The Company adopted fresh-start accounting as of the Effective Date, which
represents the date that all material conditions precedent to the Plan were resolved, because
holders of existing voting shares immediately before filing and confirmation of the plan received
less than 50% of the voting shares of the emerging entity and because its reorganization value is
less than post-petition liabilities and allowed claims, as shown below:
October 1, 2010 | ||||
(Dollars in Millions) | ||||
Post-petition liabilities |
$ | 2,763 | ||
Liabilities subject to compromise |
3,121 | |||
Total post-petition liabilities and allowed claims |
5,884 | |||
Reorganization value of assets |
(5,141 | ) | ||
Excess post-petition liabilities and allowed claims |
$ | 743 | ||
Reorganization Value
The Companys reorganization value includes an estimated enterprise value of approximately $2.4
billion, which represents managements best estimate of fair value within the range of enterprise
values contemplated by the Court of $2.3 billion to $2.5 billion. The range of enterprise values
considered by the Court was determined using certain financial analysis methodologies including the
comparable companies analysis, the precedent transactions analysis and the discounted cash flow
analysis. The application of these methodologies requires certain key judgments and assumptions,
including financial projections, the amount of cash available to fund operations and current market
conditions.
The comparable companies analysis estimates the value of a company based on a comparison of such
companys financial statistics with the financial statistics of publicly-traded companies with
similar characteristics. Criteria for selecting comparable companies for this analysis included,
among other relevant characteristics, similar lines of business, geographic presence, business
risks, growth prospects, maturity of businesses, market presence, size and scale of operations. The
comparable companies analysis established benchmarks for valuation by deriving financial multiples
and ratios for the comparable companies, standardized using common metrics of (i) EBITDAP (Earnings
Before Interest, Taxes, Depreciation, Amortization and Pension expense) and (ii) EBITDAP minus
capital expenditures. EBITDAP based metrics were utilized to ensure that the analysis allowed for
valuation comparability between companies which sponsor pensions and those that do not. The
calculated range of multiples for the comparable companies was used to estimate a range which was
applied to the Companys projected EBITDAP and projected EBITDAP minus capital expenditures to
determine a range of enterprise values. The multiples ranged from 4.6 to 7.8 depending on the
comparable company for EBITDAP and from 6.1 to 14.6 for EBITDAP minus capital expenditures. Because
the multiples derived excluded pension expense, the analysis further deducted an estimated amount
of pension underfunding totaling $455 million from the resulting enterprise value.
16
The precedent transactions analysis is based on the enterprise values of companies involved in
public or private merger and acquisition transactions that have operating and financial
characteristics similar to Visteon. Under this methodology, the enterprise value of such companies
is determined by an analysis of the consideration paid and the debt assumed in the merger,
acquisition or restructuring transaction. As in a comparable companies valuation analysis, the
precedent transactions analysis establishes benchmarks for valuation by deriving financial
multiples and ratios, standardized using common variables such as revenue or EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization). In performing the precedent transactions
analysis an EBITDAP metric was not able to be used due to the unavailability of pension expense
information for the transactions analyzed. Therefore, the precedent transactions analysis relied on
derived EBITDA multiples, which were then applied to the Companys operating statistics to
determine enterprise value. Different than the comparable companies analysis in that the EBITDA
metric is already burdened by pension costs, the precedent transactions analysis did not need to
separately deduct pension underfunding in order to calculate enterprise value. The calculated
multiples used to estimate a range of enterprise values for the Company, ranged from 4.0 to 7.1
depending on the transaction.
The discounted cash flow analysis estimates the value of a business by calculating the present
value of expected future cash flows to be generated by such business. This analysis discounts the
expected cash flows by an estimated discount rate. This approach has three components: (i)
calculating the present value of the projected unlevered after-tax free cash flows for a determined
period of time, (ii) adding the present value of the terminal value of the cash flows and (iii)
subtracting the present value of projected pension payments in excess of the terminal year pension
expense through 2017, due to the underfunded status of such pension plans. These calculations were
performed on unlevered after-tax free cash flows, using an estimated tax rate of 35%, for the
period beginning July 1, 2010 through December 31, 2013 (the Projection Period), discounted to
the assumed effective date of June 30, 2010.
The discounted cash flow analysis was based on financial projections as included in the Fourth
Amended Disclosure Statement (the Financial Projections) and included assumptions for the
weighted average cost of capital (the Discount Rate), which was used to calculate the present
value of future cash flows and a perpetuity growth rate for the future cash flows, which was used
to determine the enterprise value represented by the time period beyond the Projection Period. The
Discount Rate was calculated using the capital asset pricing model resulting in Discount Rates
ranging from 14% to 16%, which reflects a number of Company and market-specific factors. The
perpetuity growth rate was calculated using the perpetuity growth rate method resulting in a
perpetuity growth rate for free cash flow of 0% to 2%. Projected pension payments were discounted
on a similar basis as the overall discounted cash flow Discount Rate range.
The estimated enterprise value was based upon an equally weighted average of the values resulting
from the comparable companies, precedent transactions and discounted cash flow analyses, as
discussed above, and was further adjusted for the estimated value of non-consolidated joint
ventures and the estimated amounts of available cash (i.e. cash in excess of estimated minimum
operating requirements). The value of non-consolidated joint ventures was calculated using a
discounted cash flow analysis of the dividends projected to be received from these operations and
also includes a terminal value based on the perpetuity growth method, where the dividend is assumed
to continue into perpetuity at an assumed growth rate. This discounted cash flow analysis utilized
a discount rate based on the cost of equity range of 13% to 21% and a perpetuity growth rate after
2013 of 2% to 4%. Application of this valuation methodology resulted in an estimated value of
non-consolidated joint ventures of $195 million, which was incremental to the estimated enterprise
value. Projected global cash balances were utilized to determine the estimated amount of available
cash of $242 million, which was incremental to the estimated enterprise value. Amounts of cash
expected to be used for settlements under the terms of the Plan and the estimated minimum level of
cash required for ongoing operations were deducted from total projected cash to arrive at an amount
of remaining or available cash. The estimated enterprise value, after adjusting for the estimated
fair values of non-debt liabilities, is intended to approximate the reorganization value, or the
amount a willing buyer would pay for the assets of the company immediately after restructuring. A
reconciliation of the reorganization value is provided in the table below.
Components of Reorganization Value | October 1, 2010 | |||
(Dollars in Millions) | ||||
Enterprise value |
$ | 2,390 | ||
Non-debt liabilities |
2,751 | |||
Reorganization value |
$ | 5,141 | ||
The value of a business is subject to uncertainties and contingencies that are difficult to predict
and will fluctuate with changes in factors affecting the prospects of such a business. As a result,
the estimates set forth herein are not necessarily indicative of actual outcomes, which may be
significantly more or less favorable than those set forth herein. These estimates assume that the
Company will continue as the owner and operator of these businesses and
17
related assets and that such businesses and assets will be operated in accordance with the business
plan, which is the basis for Financial Projections. The Financial Projections are based on
projected market conditions and other estimates and assumptions including, but not limited to,
general business, economic, competitive, regulatory, market and financial conditions, all of which
are difficult to predict and generally beyond the Companys control. Depending on the actual
results of such factors, operations or changes in financial markets, these valuation estimates may
differ significantly from that disclosed herein.
The Companys reorganization value was first allocated to its tangible assets and identifiable
intangible assets and the excess of reorganization value over the fair value of tangible and
identifiable intangible assets was recorded as goodwill. Liabilities existing as of the Effective
Date, other than deferred taxes, were recorded at the present value of amounts expected to be paid
using appropriate risk adjusted interest rates. Deferred taxes were determined in conformity with
applicable income tax accounting standards. Accumulated depreciation, accumulated amortization,
retained deficit, common stock and accumulated other comprehensive loss attributable to the
predecessor entity were eliminated.
Adjustments recorded to the predecessor entity to give effect to the Plan and to record assets and
liabilities at fair value pursuant to the adoption of fresh-start accounting are summarized below
(dollars in millions):
Predecessor | Reorganization | Fair Value | Successor | |||||||||||||
10/1/10 | Adjustments (a) | Adjustments (b) | 10/1/10 | |||||||||||||
Assets |
||||||||||||||||
Cash and equivalents |
$ | 918 | $ | (52 | ) (c) | $ | | $ | 866 | |||||||
Restricted cash |
195 | (105 | ) (d) | | 90 | |||||||||||
Accounts receivable, net |
1,086 | (4 | ) (e) | | 1,082 | |||||||||||
Inventories, net |
395 | | 4 | (q) | 399 | |||||||||||
Other current assets |
283 | (11 | ) (f) | (14 | ) (r),(aa) | 258 | ||||||||||
Total current assets |
2,877 | (172 | ) | (10 | ) | 2,695 | ||||||||||
Property and equipment, net |
1,812 | | (240 | ) (s) | 1,572 | |||||||||||
Equity in net assets of non-consolidated affiliates |
378 | 5 | (g) | 13 | (t) | 396 | ||||||||||
Intangible assets, net |
6 | | 361 | (u) | 367 | |||||||||||
Goodwill |
| | 38 | (v) | 38 | |||||||||||
Other non-current assets |
74 | 13 | (h) | (14 | ) (w),(aa) | 73 | ||||||||||
Total assets |
$ | 5,147 | $ | (154 | ) | $ | 148 | $ | 5,141 | |||||||
Liabilities and Stockholders Equity (Deficit) |
||||||||||||||||
Short-term debt, including current portion of
long-term debt |
$ | 128 | $ | 5 | (k) | $ | | $ | 133 | |||||||
Account payable |
1,043 | | | 1,043 | ||||||||||||
Accrued employee liabilities |
196 | 19 | (i) | 3 | (x) | 218 | ||||||||||
Other current liabilities |
326 | 95 | (j) | (58 | ) (y) | 363 | ||||||||||
Total current liabilities |
1,693 | 119 | (55 | ) | 1,757 | |||||||||||
Long-term debt |
12 | 473 | (k) | | 485 | |||||||||||
Employee benefits |
632 | 154 | (l) | (63 | ) (x) | 723 | ||||||||||
Deferred income taxes |
175 | (5 | ) (m) | (27 | ) (aa) | 197 | ||||||||||
Other non-current liabilities |
251 | (5 | ) (n) | (39 | ) (y),(aa) | 207 | ||||||||||
Liabilities subject to compromise |
3,121 | (3,121 | ) (o) | | | |||||||||||
Common stock Successor |
| 1 | (p) | | 1 | |||||||||||
Stock warrants Successor |
| 41 | (p) | | 41 | |||||||||||
Common stock Predecessor |
131 | (131 | ) (p) | | | |||||||||||
Stock warrants Predecessor |
127 | (127 | ) (p) | | | |||||||||||
Additional paid-in capital |
3,407 | (2,175 | ) (p) | (169 | ) (p) | 1,063 | ||||||||||
Accumulated deficit |
(4,684 | ) | 4,619 | (p) | 65 | (p) | | |||||||||
Accumulated other comprehensive loss |
(74 | ) | | 74 | (p) | | ||||||||||
Treasury stock |
(3 | ) | 3 | (p) | | | ||||||||||
Total Visteon shareholders equity (deficit) |
(1,096 | ) | 2,231 | (30 | ) | 1,105 | ||||||||||
Noncontrolling interests |
359 | | 308 | (z) | 667 | |||||||||||
Total shareholders equity (deficit) |
(737 | ) | 2,231 | 278 | 1,772 | |||||||||||
Total liabilities and shareholders equity
(deficit) |
$ | 5,147 | $ | (154 | ) | $ | 148 | $ | 5,141 | |||||||
18
Explanatory Notes
(a) | Records adjustments necessary to give effect to the Plan, including the receipt of cash proceeds associated with the Rights Offering and Exit Facility, settlement of liabilities subject to compromise, elimination of Predecessor equity and other transactions as contemplated under the Plan. These adjustments resulted in a pre-tax gain on the settlement of liabilities subject to compromise of $956 million in the nine-month Predecessor period ended October 1, 2010 (see explanatory note o., as follows). The Company recorded a $5 million income tax benefit attributable to cancellation of inter-company indebtedness with foreign affiliates pursuant to the Plan. | |
(b) | Records adjustments necessary to reflect assets and liabilities at fair value and to eliminate Accumulated deficit and Accumulated other comprehensive income/(loss). These adjustments resulted in a pre-tax gain of $106 million in the nine-month Predecessor period ended October 1, 2010. Adjustments to record assets and liabilities at fair value on the Effective Date are as follows (dollars in millions): |
Inventory |
$ | 4 | ||
Property and equipment |
(240 | ) | ||
Equity in net assets of non-consolidated affiliates |
13 | |||
Intangible assets |
361 | |||
Goodwill |
38 | |||
Other assets |
(14 | ) | ||
Employee benefits |
60 | |||
Other liabilities |
97 | |||
Noncontrolling interests |
(308 | ) | ||
Elimination of Predecessor accumulated other comprehensive loss and other equity |
95 | |||
Pre-tax gain on fair value adjustments |
$ | 106 | ||
Net tax expense related to fresh-start adjustments |
(41 | ) | ||
Net income on fresh-start adjustments |
$ | 65 | ||
(c) | This adjustment reflects the net use of cash on the Effective Date and in accordance with the Plan (dollars in millions): |
Rights offering proceeds |
$ | 1,250 | ||
Exit financing proceeds, net |
482 | |||
Net release of restricted cash |
105 | |||
Total sources |
1,837 | |||
Seven year secured term loan and interest |
1,660 | |||
ABL and letters of credit |
128 | |||
Rights offering fees |
49 | |||
Payment of administrative and professional claims |
23 | |||
Debt issue fees |
10 | |||
Claim settlements and other |
19 | |||
Total uses |
1,889 | |||
Net decrease in cash |
$ | (52 | ) | |
(d) | The decrease in restricted cash reflects the release of $173 million of cash that was restricted under various orders of the Bankruptcy Court, partially offset by the establishment of a professional fee escrow account of $68 million. | |
(e) | This adjustment reflects the settlement of a receivable in connection with the Release Agreement. | |
(f) | This adjustment relates to the Rights Offering commitment premium deposit paid in July 2010. | |
(g) | This adjustment records additional equity in net income of non-consolidated affiliates related to the nine-month Predecessor period ended October 1, 2010. | |
(h) | This adjustment records $13 million of estimated debt issuance costs capitalized in connection with the exit financing facility. |
19
(i) | This adjustment reflects the reinstatement of OPEB and non-qualified pension obligations expected to be paid within 12 months. | |
(j) | This adjustment reflects the establishment of a liability for the payment of $122 million of allowed general unsecured and other claims in accordance with the Plan partially offset by $23 million of accrued reorganization items that were paid on the Effective Date and $4 million for amounts settled in connection with the Release Agreement. | |
(k) | This adjustment reflects the new $500 million secured term loan, net of $10 million original issuance discount and $12 million of fees paid to the lenders. | |
(l) | This adjustment represents the reinstatement of $154 million of other postretirement employee benefit (OPEB) and non-qualified pension obligations from Liabilities subject to compromise in accordance with the terms of the Plan. | |
(m) | This adjustment reflects the deferred tax impact of certain intercompany liabilities subject to compromise that were cancelled in accordance with the Plan. | |
(n) | This adjustment eliminates incentive compensation accruals for terminated Predecessor compensation plans. | |
(o) | This adjustment reflects the settlement of liabilities subject to compromise (LSC) in accordance with the Plan, as shown below (dollars in millions): |
LSC | Settlement per | Gain on | ||||||||||
September 30, 2010 | Fifth Amended Plan | Settlement of LSC | ||||||||||
Debt |
$ | 2,490 | $ | 1,717 | $ | 773 | ||||||
Employee liabilities |
324 | 218 | 106 | |||||||||
Interest payable |
183 | 160 | 23 | |||||||||
Other claims |
124 | 70 | 54 | |||||||||
$ | 3,121 | $ | 2,165 | $ | 956 | |||||||
Income tax benefit |
5 | |||||||||||
After-tax gain on settlement of LSC |
$ | 961 | ||||||||||
(p) | The cancellation of Predecessor Visteon common stock in accordance with the Plan and elimination of corresponding shareholders deficit balances, are shown below (dollars in millions): |
Predecessor | ||||||||||||||||
Shareholders | Successor | |||||||||||||||
Deficit | Shareholders | |||||||||||||||
September 30, | Reorganization | Fresh-Start | Equity | |||||||||||||
2010 | Adjustments | Adjustments | October 1, 2010 | |||||||||||||
Common stock |
||||||||||||||||
Predecessor |
$ | 131 | $ | (131 | ) | $ | | $ | | |||||||
Successor |
| 1 | | 1 | ||||||||||||
Stock warrants |
||||||||||||||||
Predecessor |
127 | (127 | ) | | | |||||||||||
Successor |
| 41 | | 41 | ||||||||||||
Additional paid-in capital |
||||||||||||||||
Predecessor |
3,407 | (3,407 | ) | | | |||||||||||
Successor |
| 1,232 | (169 | ) | 1,063 | |||||||||||
Accumulated deficit |
(4,684 | ) | 4,619 | 65 | | |||||||||||
Accumulated other comprehensive loss |
(74 | ) | | 74 | | |||||||||||
Treasury stock |
(3 | ) | 3 | | | |||||||||||
Visteon Shareholders (deficit) equity |
$ | (1,096 | ) | $ | 2,231 | $ | (30 | ) | $ | 1,105 | ||||||
This adjustment also reflects the issuance of Successor common stock. A reconciliation of the reorganization value of assets to the Successors common stock is shown below (dollars in millions, except per share amounts): |
Reorganization value of assets |
$ | 5,141 | ||
Less: fair value of debt |
(618 | ) | ||
Less: fair value of noncontrolling interests |
(667 | ) | ||
Less: fair value of liabilities (excluding debt) |
(2,751 | ) | ||
Successor common stock and warrants |
$ | 1,105 | ||
Less: fair value of warrants |
(41 | ) | ||
Successor common stock |
$ | 1,064 | ||
Shares outstanding at October 1, 2010 |
48,642,520 | |||
Per share value |
$ | 21.87 |
20
The per-share value of $21.87 was utilized to determine the value of shares issued for settlement of allowed claims. | ||
(q) | Inventory was recorded at fair value and was estimated to exceed book value by approximately $26 million. Raw materials were valued at current replacement cost. Work-in-process was valued at estimated finished goods selling price less estimated disposal costs, completion costs and a reasonable profit allowance for selling effort. Finished goods were valued at estimated selling price less estimated disposal costs and a reasonable profit allowance for selling effort. Additionally, fresh-start accounting adjustments for supply and spare parts inventory items of $22 million were a partial offset. | |
(r) | The adjustment to other current assets includes a $7 million prepaid insurance balance and $2 million of other deferred fee amounts with no future benefit to the Successor. Additionally, this adjustment includes a $5 million decrease in deferred tax assets associated with fair value adjustments (see explanatory note aa for additional details related to deferred tax adjustments). | |
(s) | The Company estimates that the book value of property and equipment exceeds the fair value by $240 million after giving consideration to the highest and best use of the assets. Fair value estimates were based on a combination of the cost or market approach, as appropriate. Fair value under the market approach was based on recent sale transactions for similar assets, while fair value under the cost approach was based on the amount required to construct or purchase an asset of equal utility, considering physical deterioration, functional obsolescence and economic obsolescence. | |
(t) | Investments in non-consolidated affiliates were recorded at fair value primarily based on an income approach utilizing the dividend discount model. Significant assumptions included estimated future dividends for each applicable non-consolidated affiliate and discount rates. | |
(u) | Identifiable intangible assets are primarily comprised of developed technology, customer-related intangibles and trade names. Fair value estimates of intangible assets were based on income approaches utilizing projected financial information consistent with the Fourth Amended Disclosure Statement, as described below: |
| Developed technology and trade name intangible assets were valued using the relief from royalty method, which estimates the value of an intangible asset to be equal to the present value of future royalties that would be paid for the right to use the asset if it were not owned. Significant assumptions included estimated future revenues for each technology category and trade name, royalty rates, tax rates and discount rates. | ||
| Customer related intangible assets were valued using the multi-period excess earnings method, which estimates the value of an intangible asset to be equal to the present value of future earnings attributable to the asset group after recognition of required returns to other contributory assets. Significant assumptions included estimated future revenues for existing customers, retention rates based on historical experience, tax rates, discount rates, and contributory asset charges including employee intangibles. |
(v) | Reorganization value in excess of the fair value allocated to identifiable tangible and intangible assets was recorded as goodwill. In adjusting the balance sheet accounts to fair value, the Company estimated excess reorganization value of approximately $38 million, which has been reflected as goodwill and was determined as follows (dollars in millions): |
Enterprise value |
$ | 2,390 | ||
Add: Estimated fair value of non-debt liabilities |
2,751 | |||
Reorganization value |
5,141 | |||
Less: Estimated fair value of assets |
5,103 | |||
Reorganization value in excess of fair value of assets |
$ | 38 | ||
(w) | Adjustments to other non-current assets included a decrease of $10 million related to deferred tax assets associated with fair value adjustments and a decrease of $4 million related to discounting of amounts due in future periods (see explanatory note aa for additional details related to deferred tax adjustments). | |
(x) | The adjustments to accrued employee liabilities and employee benefits are related to the remeasurement of pension and OPEB obligations at the Effective Date, based on certain assumptions including discount rates. | |
(y) | The adjustments to other current and other non-current liabilities include decreases of $51 million and $31 million, respectively, to eliminate deferred revenue, which was initially recorded in connection with payments received from customers under various support and accommodation agreements. The decrease in other current liabilities also includes $5 million for discounting of future obligations, while the decrease in non-current liabilities also includes $8 million for non-income tax liabilities and $5 million for deferred tax liabilities, partially offset by $6 million related to leasehold intangibles (see explanatory note aa for additional details related to deferred tax adjustments). | |
(z) | Noncontrolling interests are recorded at fair value based on publicly available market values, where possible, and based on other customary valuation methodologies where publicly available market values are not possible, |
21
including comparable company and discounted cash flow models. The Company estimates that the fair value of noncontrolling interests exceeds book value by $308 million. | ||
(aa) | Deferred tax impacts associated with fresh-start adjustments result from changes in the book values of tangible and intangible assets while the tax basis in such assets remains unchanged. The Company anticipates that a full valuation allowance will be maintained in the U.S.; accordingly this adjustment relates to the portion of fresh-start adjustments applicable to certain non-U.S. jurisdictions where the Company is subject to and pays income taxes. Additionally, the amount of non-U.S. accumulated earnings considered permanently reinvested was modified in connection with the adoption of fresh-start accounting, resulting in a decrease in deferred tax liabilities associated with foreign withholding taxes of approximately $30 million. Deferred tax adjustments include the following (dollars in millions): |
Balance Sheet Account Classification: | ||||
Other current assets |
$ | 2 | ||
Other non-current assets |
10 | |||
Deferred income taxes |
27 | |||
Net increase in deferred tax liabilities |
39 | |||
Other balance sheet adjustments |
2 | |||
Net tax expense related to fresh-start adjustments |
$ | 41 | ||
NOTE 6. Restructuring Activities
The Company has undertaken various restructuring activities to achieve its strategic and financial
objectives. Restructuring activities include, but are not limited to, plant closures, production
relocation, administrative cost structure realignment and consolidation of available capacity and
resources. The Company expects to finance restructuring programs through cash on hand, cash
generated from its ongoing operations, reimbursements pursuant to customer accommodation and
support agreements or through cash available under its existing debt agreements, subject to the
terms of applicable covenants. Estimates of restructuring costs are based on information available
at the time such charges are recorded. In general, management anticipates that restructuring
activities will be completed within a timeframe such that significant changes to the plan are not
likely. Due to the inherent uncertainty involved in estimating restructuring expenses, actual
amounts paid for such activities may differ from amounts initially estimated, resulting in
unexpected costs in future periods. Generally, charges are recorded as elements of the plan are
finalized and the timing of activities and the amount of related costs are not likely to change.
Given the dynamic and highly competitive nature of the automotive industry, the Company continues
to closely monitor current market factors and industry trends taking action as necessary, including
but not limited to, additional restructuring actions. However, there can be no assurance that any
such actions will be sufficient to fully offset the impact of adverse factors on the Company or its
results of operations, financial position and cash flows.
Restructuring reserve balances of $43 million and $39 million at December 31, 2010 and 2009,
respectively, are classified as Other current liabilities on the consolidated balance sheets. The
Company anticipates that the activities associated with the restructuring reserve balance as of
December 31, 2010 will be substantially completed by the end of 2011. The following is a summary of
the Companys consolidated restructuring reserves and related activity. Substantially all of the
Companys restructuring expenses are related to employee severance and termination benefit costs.
22
Restructuring Reserves
Interiors |
Climate | Electronics | Lighting | Other/ Central |
Total | |||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||
Predecessor December 31, 2007 |
$ | 58 | $ | 23 | $ | 7 | $ | | $ | 24 | $ | 112 | ||||||||||||
Expenses |
42 | 20 | 3 | | 82 | 147 | ||||||||||||||||||
Exchange |
(3 | ) | | | | | (3 | ) | ||||||||||||||||
Utilization |
(48 | ) | (40 | ) | (6 | ) | | (98 | ) | (192 | ) | |||||||||||||
Predecessor December 31, 2008 |
$ | 49 | $ | 3 | $ | 4 | $ | | $ | 8 | $ | 64 | ||||||||||||
Expenses |
22 | 5 | 13 | 4 | 40 | 84 | ||||||||||||||||||
Utilization |
(50 | ) | (8 | ) | (4 | ) | (1 | ) | (46 | ) | (109 | ) | ||||||||||||
Predecessor December 31, 2009 |
$ | 21 | $ | | $ | 13 | $ | 3 | $ | 2 | $ | 39 | ||||||||||||
Expenses |
6 | 1 | 2 | 5 | 6 | 20 | ||||||||||||||||||
Exchange |
(1 | ) | | | | | (1 | ) | ||||||||||||||||
Utilization |
(9 | ) | (1 | ) | (13 | ) | (8 | ) | (6 | ) | (37 | ) | ||||||||||||
Predecessor October 1, 2010 |
$ | 17 | $ | | $ | 2 | $ | | $ | 2 | $ | 21 | ||||||||||||
Expenses |
24 | 2 | 1 | | 1 | 28 | ||||||||||||||||||
Exchange |
(1 | ) | | | | | (1 | ) | ||||||||||||||||
Utilization |
(3 | ) | | | | (2 | ) | (5 | ) | |||||||||||||||
Successor December 31, 2010 |
$ | 37 | $ | 2 | $ | 3 | $ | | $ | 1 | $ | 43 | ||||||||||||
2010 Restructuring Actions
During the three-month Successor period ended December 31, 2010 the Company recorded restructuring
expenses of $28 million, including $24 million for employee severance and termination costs at a
European Interiors facility pursuant to customer sourcing actions and a related business transfer
agreement. On October 1, 2010 the Company announced a voluntary workforce reduction program, which
extended through October 15, 2010, pursuant to which related severance and termination benefit
costs were recorded as employees executed separation agreements. The Company anticipates recovery
of approximately $18 million of such costs in accordance with a customer support agreement.
Utilization during the three-month Successor period ended December 31, 2010 includes $4 million in
payments for severance and other employee termination benefits and $1 million in payments related
to contract termination and equipment relocation costs.
During the nine-month Predecessor period ended October 1, 2010, the Company recorded $20 million of
restructuring expenses, including $14 million of employee severance and termination benefits and $6
million for equipment relocation costs. Employee severance and termination benefits were
attributable to the closure of a European Interiors facility, the closure of a North America
Lighting facility pursuant to a customer accommodation agreement, and the realignment of corporate
administrative and support functions. Equipment relocation costs were attributable to the
consolidation of certain North America production facilities pursuant to a customer accommodation
agreement. Utilization for the nine-month Predecessor period ended October 1, 2010 includes $26
million for payments of severance and other employee termination benefits, $9 million of payments
related to contract termination and equipment relocation costs, and $2 million of special
termination benefits reclassified to pension and other postretirement employee benefit liabilities,
where such payments are made from the Companys benefit plans.
2009 Restructuring Actions
The Company recorded restructuring expenses of $84 million during the twelve months ended December
31, 2009 including amounts related to administrative cost reductions to fundamentally re-align
corporate support functions with underlying operations in connection with the Companys
reorganization efforts and in response to recessionary economic conditions and related negative
impact on the automotive sector and the Companys results of operations and cash flows. During the
first half of 2009, the Company recorded $34 million of employee severance and termination benefit
costs related to approximately 300 salaried employees in the United States and 180 salaried
employees in other countries, primarily in Europe and $4 million related to approximately 200
employees associated with the consolidation of the Companys Electronics operations in South
America.
In connection with the Chapter 11 Proceedings, the Company entered into various support and
accommodation agreements with its customers as more fully described above. These actions included:
| $13 million of employee severance and termination benefit costs associated with approximately 170 employees at two European Interiors facilities. | |
| $11 million of employee severance and termination benefit costs associated with approximately 300 employees related to the announced closure of a North American Electronics facility. | |
| $10 million of employee severance and termination benefit costs related to approximately 120 salaried employees who were located primarily at the Companys North American headquarters. | |
| $4 million of employee severance and termination benefit costs associated with approximately 550 employees related to the consolidation of the Companys North American Lighting operations. |
23
Utilization for 2009 includes $81 million of payments for severance and other employee termination
benefits and $28 million of special termination benefits reclassified to pension and other
postretirement employee benefit liabilities, where such payments are made from the Companys
benefit plans.
2008 Restructuring Actions
During 2008 the Company recorded restructuring charges of $147 million, including $107 million
under a previously announced multi-year improvement plan. Significant actions under the multi-year
improvement plan include the following:
| $33 million of employee severance and termination benefit costs associated with approximately 290 employees to reduce the Companys salaried workforce in higher cost countries. | |
| $23 million of employee severance and termination benefit costs associated with approximately 20 salaried and 250 hourly employees at a European Interiors facility. | |
| $18 million of employee severance and termination benefit costs associated with 55 employees at the Companys Other products facility located in Swansea, UK. In connection with the divestiture of that facility, Visteon UK Limited agreed to reduce the number of employees to be transferred, which resulted in $5 million of employee severance benefits and $13 million of special termination benefits. | |
| $9 million of employee severance and termination benefit costs related to approximately 100 hourly and salaried employees at certain manufacturing facilities located in the UK. | |
| $6 million of employee severance and termination benefit costs associated with approximately 40 employees at a European Interiors facility. | |
| $5 million of contract termination charges related to the closure of a European Other facility. | |
| $5 million of employee severance and termination benefit costs for the closure of a European Interiors facility. |
In addition to the multi-year improvement plan, the Company commenced a program during September
2008 designed to fundamentally realign, consolidate and rationalize the Companys administrative
organization structure on a global basis through various voluntary and involuntary employee
separation actions. Related employee severance and termination benefit costs of $26 million were
recorded during 2008 associated with approximately 320 salaried employees in the United States and
100 salaried employees in other countries, for which severance and termination benefits were deemed
probable and estimable. The Company also recorded $9 million of employee severance and termination
benefit costs associated with approximately 850 hourly and 60 salaried employees at a North
American Climate facility.
Utilization for the year ended December 31, 2008 includes payments for severance and other employee
termination benefits of $131 million, special termination benefits reclassified to pension and
other postretirement employee benefit liabilities, where such payments are made from the Companys
benefit plans of $46 million, and payments related to contract termination and equipment relocation
costs of $15 million.
NOTE 7. Asset Impairments and Other Gains (Losses)
Nine Month Predecessor Period Ended October 1, 2010
In June 2010, the Company reached an agreement to sell its entire 46.6% interest in the shares of
Toledo Molding & Die, Inc., a supplier of interior components, for proceeds of approximately $10
million. Accordingly, the Company recorded an impairment charge of approximately $4 million,
representing the difference between the carrying value of the Companys investment in Toledo
Molding & Die, Inc. and the share sale proceeds. On March 8, 2010, the Company completed the sale
of substantially all of the assets of Atlantic Automotive Components, L.L.C., (Atlantic), to JVIS
Manufacturing LLC, an affiliate of Mayco International LLC. The Company recorded losses of
approximately $21 million in connection with the sale of Atlantic assets.
Twelve Months Ended December 31, 2009
During 2009 and pursuant to Section 365 of the Bankruptcy Code, the Company rejected a lease
arrangement that was subject to a previous sale-leaseback transaction for which the recognition of
transaction gains was deferred due to the Companys continuing involvement with the associated
property. The Companys continuing involvement was effectively ceased in connection with the
December 24, 2009 lease termination resulting in recognition of the deferred gain of $30 million,
which was partially offset by a loss of $10 million associated with the remaining net book value of
leasehold improvements associated with the facility. The Company also recorded $9 million of other
losses and impairments related to asset disposals in connection with various customer accommodation
agreements.
24
Twelve Months Ended December 31, 2008
The Company concluded that significant operating losses resulting from the deterioration of market
conditions and related production volumes in the fourth quarter of 2008 represented an indicator
that the carrying amount of the
Companys long-lived assets may not be recoverable. Based on the results of the Companys
assessment, an impairment charge of approximately $200 million was recorded to reduce the net book
value of Interiors long-lived assets considered to be held for use to their estimated fair value.
Fair values of related assets were based on appraisals, management estimates and discounted cash
flow calculations.
On June 30, 2008, Visteon UK Limited, an indirect, wholly-owned subsidiary of the Company,
transferred certain assets related to its chassis manufacturing operation located in Swansea,
United Kingdom to Visteon Swansea Limited, a company incorporated in England and a wholly-owned
subsidiary of Visteon UK Limited. Effective July 7, 2008, Visteon UK Limited sold the entire share
capital of Visteon Swansea Limited to Linamar UK Holdings Inc., a wholly-owned subsidiary of
Linamar Corporation for nominal cash consideration (together, the Swansea Divestiture). The
Company recorded asset impairment and loss on divestiture of approximately $23 million in
connection with the Swansea Divestiture, including $16 million of losses on the Visteon Swansea
Limited share capital sale and $7 million of asset impairment charges.
During the first quarter of 2008, the Company announced the sale of its North American-based
aftermarket underhood and remanufacturing operations (NA Aftermarket) including facilities
located in Sparta, Tennessee and Reynosa, Mexico (together, the NA Aftermarket Divestiture). The
Company recorded total losses of $46 million on the NA Aftermarket Divestiture, including an asset
impairment charge of $21 million and losses on disposition of $25 million.
The Company also recorded asset impairments of $6 million during 2008 in connection with other
divestiture activities, including the sale of its Interiors operation located in Halewood, UK.
NOTE 8. Inventories
Inventories consist of the following components:
Successor | Predecessor | |||||||
December 31 | ||||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
Raw materials |
$ | 120 | $ | 125 | ||||
Work-in-process |
174 | 159 | ||||||
Finished products |
76 | 78 | ||||||
370 | 362 | |||||||
Valuation reserves |
(6 | ) | (43 | ) | ||||
$ | 364 | $ | 319 | |||||
Effective October 1, 2010, the Company adjusted inventory to fair value in accordance with the
adoption of fresh-start accounting (see Note 5, Fresh-Start Accounting), resulting in an increase
of $26 million, which was subsequently expensed in cost of sales on the Companys statement of
operations for the three-month Successor period ended December 31, 2010.
NOTE 9. Other Assets
Other assets were adjusted to fair value as a result of the adoption of fresh-start accounting as
of October 1, 2010 (see Note 5, Fresh-Start Accounting). Other current assets are summarized as
follows:
Successor | Predecessor | |||||||
December 31 | ||||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
Pledged accounts receivable |
$ | 90 | $ | 19 | ||||
Recoverable taxes |
80 | 86 | ||||||
Deposits |
35 | 55 | ||||||
Deferred tax assets |
33 | 32 | ||||||
Prepaid assets |
16 | 30 | ||||||
Other |
4 | 14 | ||||||
$ | 258 | $ | 236 | |||||
25
\
Other non-current assets are summarized as follows:
Successor | Predecessor | |||||||
December 31 | ||||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
Deferred tax assets |
$ | 13 | $ | 17 | ||||
Debt issue costs |
12 | | ||||||
Notes and other receivables |
6 | 9 | ||||||
Assets held for sale |
| 16 | ||||||
Other |
58 | 42 | ||||||
$ | 89 | $ | 84 | |||||
NOTE 10. Property and Equipment
Property and equipment, net was adjusted to fair value as a result of the adoption of fresh-start
accounting as of October 1, 2010 (see Note 5, Fresh-Start Accounting). Property and equipment,
net consists of the following:
Successor | Predecessor | |||||||
December 31 | ||||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
Land |
$ | 213 | $ | 82 | ||||
Buildings and improvements |
312 | 797 | ||||||
Machinery, equipment and other |
935 | 2,764 | ||||||
Construction in progress |
93 | 75 | ||||||
Total property and equipment |
1,553 | 3,718 | ||||||
Accumulated depreciation |
(55 | ) | (1,860 | ) | ||||
1,498 | 1,858 | |||||||
Product tooling, net of amortization |
84 | 78 | ||||||
Property and equipment, net |
$ | 1,582 | $ | 1,936 | ||||
Property and equipment is depreciated principally using the straight-line method of depreciation
over an estimated useful life. Generally, buildings and improvements are depreciated over a 40-year
estimated useful life and machinery, equipment and other assets are depreciated over estimated
useful lives ranging from 3 to 15 years. Product tooling is amortized using the straight-line
method over the estimated life of the tool, generally not exceeding six years. Depreciation and
amortization expenses are summarized as follows:
Successor | Predecessor | |||||||||||||||
Three Months Ended | Nine Months Ended | Year Ended | ||||||||||||||
December 31 | October 1 | December 31 | ||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
(Dollars in Millions) | ||||||||||||||||
Depreciation |
$ | 55 | $ | 191 | $ | 326 | $ | 380 | ||||||||
Amortization |
7 | 16 | 26 | 36 | ||||||||||||
$ | 62 | $ | 207 | $ | 352 | $ | 416 | |||||||||
In connection with the adoption of fresh-start accounting the Company adjusted the carrying value
of property and equipment to its estimated fair value at October 1, 2010, which decreased
deprecation expense by approximately $6 million during the three-month Successor period ended
December 31, 2010. The Company recorded $53 million and $37 million of accelerated depreciation
expense for the years ended December 31, 2009 and 2008, respectively, representing the shortening
of estimated useful lives of certain assets (primarily machinery and equipment) in connection with
the Companys restructuring activities.
NOTE 11. Non-Consolidated Affiliates
Investments in the net assets of non-consolidated affiliates were $439 million and $294 million at
December 31, 2010 and 2009, respectively. The Company recorded equity in the net income of
non-consolidated affiliates of $41 million in the three-month Successor period ended December 31,
2010, $105 million in the nine-month Predecessor
26
period ended October 1, 2010 and $80 million and
$41 million for the years ended December 31, 2009 and 2008, respectively. The Companys investment
in the net assets and equity in the net income of non-consolidated affiliates is reported in the
consolidated financial statements as Equity in net assets of non-consolidated affiliates on the
consolidated balance sheets and Equity in net income of non-consolidated affiliates on the
consolidated statements of
operations. Included in the Companys retained earnings (accumulated deficit) is undistributed
income of non-consolidated affiliates accounted for under the equity method of approximately $41
million and $143 million at December 31, 2010 and 2009, respectively.
The Companys investments in the net assets of non-consolidated affiliates were adjusted to fair
value as a result of the adoption of fresh-start accounting on October 1, 2010 (see Note 5,
Fresh-Start Accounting). Fair value estimates were primarily based on an income approach
utilizing the discounted dividend model. Additionally, the Company monitors its investments in
affiliates for indicators of other-than-temporary declines in value on an ongoing basis. If the
Company determines that an other-than-temporary decline in value has occurred, an impairment loss
will be recorded, which is measured as the difference between the recorded book value and the fair
value of the investment with fair value generally determined under applicable income approaches
previously described.
The following table presents summarized financial data for the Companys non-consolidated
affiliates. The amounts included in the table below represent 100% of the results of operations of
such non-consolidated affiliates accounted for under the equity method. Yanfeng Visteon Automotive
Trim Systems Co., Ltd (Yanfeng), of which the Company owns a 50% interest, is considered a
significant non-consolidated affiliate and is shown separately below.
Summarized balance sheet data as of December 31 is as follows:
Yanfeng | All Others | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in Millions) | ||||||||||||||||
Current assets |
$ | 1,066 | $ | 667 | $ | 319 | $ | 306 | ||||||||
Other assets |
502 | 412 | 195 | 202 | ||||||||||||
Total assets |
$ | 1,568 | $ | 1,079 | $ | 514 | $ | 508 | ||||||||
Current liabilities |
$ | 884 | $ | 662 | $ | 287 | $ | 275 | ||||||||
Other liabilities |
19 | 11 | 16 | 30 | ||||||||||||
Shareholders equity |
665 | 406 | 211 | 203 | ||||||||||||
Total liabilities and shareholders equity |
$ | 1,568 | $ | 1,079 | $ | 514 | $ | 508 | ||||||||
Summarized statement of operations data for the years ended December 31 is as follows:
Net Sales | Gross Margin | Net Income | ||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||||||||||||||
Yanfeng |
$ | 2,573 | $ | 1,452 | $ | 1,059 | $ | 398 | $ | 217 | $ | 190 | $ | 218 | $ | 118 | $ | 71 | ||||||||||||||||||
All other |
893 | 711 | 805 | 142 | 109 | 119 | 71 | 42 | 14 | |||||||||||||||||||||||||||
$ | 3,466 | $ | 2,163 | $ | 1,864 | $ | 540 | $ | 326 | $ | 309 | $ | 289 | $ | 160 | $ | 85 | |||||||||||||||||||
27
Restricted net assets related to the Companys consolidated subsidiaries were approximately
$117 million and $100 million, respectively as of December 31, 2010 and 2009. Restricted net assets
related to the Companys non-consolidated affiliates were approximately $439 million and $294
million, respectively, as of December 31, 2010 and 2009. Restricted net assets of consolidated
subsidiaries are attributable to the Companys operations in China, where certain regulatory
requirements and governmental restraints result in significant restrictions on the Companys
consolidated subsidiaries ability to transfer funds to the Company.
NOTE 12. Intangible Assets
In connection with the adoption of fresh-start accounting identifiable intangible assets were
recorded at their estimated fair value as of October 1, 2010 (see Note 5, Fresh-Start
Accounting). Intangible assets at December 31, 2010 are as follows:
Weighted | ||||||||||||||||
Gross | Net | Average | ||||||||||||||
Carrying | Accumulated | Carrying | Useful Life | |||||||||||||
Value | Amortization | Value | (years) | |||||||||||||
(Dollars in Millions) | ||||||||||||||||
Definite-lived intangible assets |
||||||||||||||||
Developed technology |
$ | 214 | $ | 7 | $ | 207 | 8 | |||||||||
Customer related |
121 | 3 | 118 | 9 | ||||||||||||
Other |
9 | 1 | 8 | 5 | ||||||||||||
$ | 344 | $ | 11 | $ | 333 | |||||||||||
Goodwill and indefinite-lived
intangible assets |
||||||||||||||||
Goodwill |
$ | 38 | ||||||||||||||
Trade names |
25 | |||||||||||||||
$ | 63 | |||||||||||||||
The Company recorded approximately $11 million of amortization expense for the three-month
Successor period ended December 31, 2010. The Company currently estimates annual amortization
expense to be $43 million in 2011, $42 million in 2012 and $41 million annually from 2013 through
2015. Based on the fresh-start accounting valuation for each reporting unit, the full amount of
Goodwill has been allocated to the Climate reporting unit.
NOTE 13. Other Liabilities
Other liabilities were adjusted to fair value as a result of the adoption of fresh-start accounting
as of October 1, 2010 (see Note 5, Fresh-Start Accounting). Other current liabilities are
summarized as follows:
Successor | Predecessor | |||||||
December 31 | ||||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
Claims settlements |
$ | 50 | $ | | ||||
Accrued reorganization items |
47 | 22 | ||||||
Product warranty and recall reserves |
44 | 40 | ||||||
Non-income taxes payable |
41 | 47 | ||||||
Restructuring reserves |
43 | 39 | ||||||
Income taxes payable |
38 | 27 | ||||||
Accrued interest payable |
11 | 3 | ||||||
Deferred income |
6 | 51 | ||||||
Other accrued liabilities |
77 | 73 | ||||||
$ | 357 | $ | 302 | |||||
28
Other non-current liabilities are summarized as follows:
Successor | Predecessor | |||||||
December 31 | ||||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
Income tax reserves |
$ | 96 | $ | 101 | ||||
Non-income taxes payable |
43 | 62 | ||||||
Product warranty and recall reserves |
31 | 39 | ||||||
Deferred income |
20 | 27 | ||||||
Other accrued liabilities |
31 | 28 | ||||||
$ | 221 | $ | 257 | |||||
NOTE 14. Debt
As of December 31, 2010, the Company had $78 million and $483 million of debt outstanding
classified as short-term debt and long-term debt, respectively. The Companys short and long-term
debt balances consist of the following:
Weighted | ||||||||||||||||||||
Average | ||||||||||||||||||||
Interest Rate | Carrying Value | |||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||
Maturity | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||
Short-term debt |
||||||||||||||||||||
Current portion of long-term debt |
6.1 | % | 6.0 | % | $ | 7 | $ | 65 | ||||||||||||
DIP credit facility |
| 9.5 | % | | 75 | |||||||||||||||
Other short-term |
3.4 | % | 4.1 | % | 71 | 85 | ||||||||||||||
Total short-term debt |
78 | 225 | ||||||||||||||||||
Long-term debt |
||||||||||||||||||||
Term loan |
2017 | 8.0 | % | | 472 | | ||||||||||||||
Other |
2012-2017 | 11.2 | % | 5.0 | % | 11 | 6 | |||||||||||||
Total long-term debt |
483 | 6 | ||||||||||||||||||
Total debt |
$ | 561 | $ | 231 | ||||||||||||||||
Exit Financing
On October 1, 2010, the Company entered into a new term loan credit agreement (the Term Loan), by
and among the Company as borrower, certain of the Companys subsidiaries as guarantors, the lenders
party thereto and Morgan Stanley Senior Funding, Inc., as lead arranger, collateral agent and
administrative agent, pursuant to which the Company borrowed $500 million that is scheduled to
mature October 1, 2017. The Company has elected to borrow at the London Interbank Offered
Rate-based rate (LIBOR Rate) which is subject to a 1.75% floor, and an applicable margin of
6.25%. Upon certain events of default, all outstanding loans and the amount of all other
obligations owing under the Term Loan will automatically start to bear interest at a rate per annum
equal to 2.0% plus the rate otherwise applicable to such loans or other obligations, for so long as
such event of default continues. The Term Loan was issued at a 2% discount, with an additional $16
million of debt issue costs incurred; the discount and costs are being amortized using an effective
yield of 9.3% over the life of the Term Loan. The Term Loans shall be repaid in consecutive
quarterly installments in an amount equal to the aggregate principal amount of Term Loan multiplied
by 0.25%.
During the fourth quarter of 2010, the Company entered into interest rate swaps with a notional
amount of $250 million that effectively convert designated cash flows associated with underlying
interest payments on the Term
29
Loan from a variable interest rate to a fixed interest rate. See Note
21 Financial Instruments for additional information regarding the Companys interest rate swaps.
On October 1, 2010, the Company entered into a new revolving loan credit agreement (the
Revolver), by and among the Company and certain of the Companys subsidiaries, as borrowers, the
lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent,
co-collateral agent, co-syndication agent and Bank of America, N.A., as co-collateral agent, and
Barclays Capital, as co-syndication agent, which provides for a $200 million asset-based revolving
credit facility that is scheduled to mature on October 1, 2015. Up to $75 million of the Revolver
is available for the issuance of letters of credit, and any such issuance of letters of credit will
reduce the amount available for loans under the Revolver. Up to $20 million of the Revolver is
available for swing line advances, and any advances will reduce the amount available for loans
under the Revolver. Advances under the Revolver are limited by a borrowing base as determined in
the agreement.
At the Companys option, the Revolver will bear an interest rate equal to the LIBOR Rate or the
Base Rate. The Base Rate shall be the greater of (i) the rate that the Revolver Administrative
Agent announces from time to time as its prime or base commercial lending rate, as in effect from
time to time, (ii) the Federal Funds Rate plus 50 basis points per annum and (iii) the LIBOR Rate
for a LIBOR period of one-month beginning on such day plus 1.00%, in each case plus the applicable
margin. The applicable margin on loans is subject to a step-down based on availability and ranges
from 2.00% to 2.75% in the case of Base Rate loans and from 3.00% to 3.75% in the case of
LIBOR Rate loans. Issued and outstanding letters of credit are subject to a fee equal to the
applicable margin then in effect for LIBOR Rate loans, a fronting fee equal to 0.25% per annum on
the stated amount of such letter of credit, and customary charges associated with the issuance and
administration of letters of credit. The Company also will pay a commitment fee on undrawn amounts
under the Revolver of between 0.50% and 0.75% per annum (based on availability). Upon any event of
default, all outstanding loans and the amount of all other obligations owing under the Revolver
will automatically start to bear interest at a rate per annum equal to 2.0% plus the rate otherwise
applicable to such loans or other obligations, for so long as such event of default is continuing.
Outstanding borrowings under the Revolver are prepayable, and the commitments under the Revolver
may be permanently reduced (or terminated), without penalty, in increments of $1 million. There are
mandatory prepayments of principal in connection with (i) overadvances, (ii) the incurrence of
certain indebtedness, (iii) certain equity issuances and (iv) certain asset sales or other
dispositions.
As of December 31, 2010, the amount available for borrowing was $150 million, with no borrowings or
letter of credit obligations outstanding under the Revolver. In addition, approximately $9
million in debt issuance costs were incurred during the nine-month period ended October 1, 2010 and
will be amortized pro-rata over the life of the Revolver.
Letter of Credit Agreement
On November 16, 2009, the Company entered into a $40 million Letter of Credit (LOC) Reimbursement
and Security Agreement (the LOC Agreement), with certain subsidiaries of the Company and US Bank
National Association. The agreement has been extended to September 30, 2011 at a reduced facility
size of $15 million with continued requirements to maintain a collateral account equal to 103% of
the aggregated stated amount of the LOCs with reimbursement of any draws. As of December 31, 2010
and 2009, the Company had $15 million and $13 million, respectively, of outstanding letters of
credit issued under this facility and secured by restricted cash.
Other Debt
As of December 31, 2010, the Company had affiliate debt outstanding of $84 million, with $73
million and $11 million classified in short-term and long-term debt, respectively. These balances
are primarily related to the Companys non-U.S. operations and are payable in non-U.S. currencies
including, but not limited to the Euro, Chinese Yuan, and Korean Won. Remaining availability on
outstanding affiliate working capital credit facilities is approximately $340 million. As of
December 31, 2009, the Company had affiliate and capital lease debt outstanding of $156 million,
with $150 million and $6 million in short-term and long-term debt outstanding, respectively.
The Company also participates in an arrangement, through a subsidiary in France, to sell accounts
receivable on an uncommitted basis. The amount of financing available is contingent upon the amount
of receivables less certain reserves. The Company pays a 30 basis point servicing fee on all
receivables sold, as well as a financing fee of 3-month Euribor plus 75 basis points on the
advanced portion. At December 31, 2010 there were no outstanding borrowings under the facility with
$90 million of receivables pledged as security, which are recorded as Other current assets on the
consolidated balance sheet. At December 31, 2009, there were $9 million outstanding borrowings
under the facility classified as short-term debt with $19 million of receivables pledged as
security.
30
The DIP Credit Agreement, a $150 million Senior Secured Super Priority Priming Debtor in Possession
Credit and Guaranty Agreement between certain subsidiaries of the Company, a syndicate of lenders
and Wilmington Trust
FSB, as administrative agent, matured on August 18, 2010, at which time the Company repaid the full
$75 million outstanding balance.
Maturities
Debt obligations, at December 31, 2010, included maturities as follows: 2011 $78 million; 2012
$7 million; 2013 $7 million; 2014 $7 million; 2015 $7 million; thereafter $455
million
Fair Value
The fair value of debt was approximately $566 million at December 31, 2010 and fair value of debt
not subject to compromise at December 31, 2009 was $230 million. Fair value estimates were based on
quoted market prices or current rates for the same or similar issues, or on the current rates
offered to the Company for debt of the same remaining maturities.
NOTE 15. Employee Retirement Benefits
Employee Retirement Plans
In the U.S., the Companys salaried employees earn noncontributory pay related benefits, while the
Companys former hourly employees represented by certain collective bargaining groups earn
noncontributory benefits based on employee service. Certain of the Companys non-U.S. subsidiaries
sponsor separate plans that provide similar types of benefits to their employees. The Companys
defined benefit plans are partially funded with the exception of certain supplemental benefit plans
for executives and certain non-U.S. plans, primarily in Germany, which are unfunded.
Most U.S. salaried employees and certain non-U.S. employees are eligible to participate in defined
contribution plans by contributing a portion of their compensation, which is partially matched by
the Company. Matching contributions were suspended for the U.S. defined contribution plan effective
December 1, 2008. The expense related to matching contributions was approximately $1 million for
the three-month Successor period ended December 31, 2010, $3 million for the nine-month Predecessor
period ended October 1, 2010, $4 million in 2009 and $8 million in 2008.
Postretirement Employee Health Care and Life Insurance Benefits
In the U.S., the Company has a financial obligation for the cost of providing other postretirement
health care and life insurance benefits (OPEB) to its employees under Company-sponsored plans.
These plans generally pay for the cost of health care and life insurance for retirees and
dependents, less retiree contributions and co-pays. In connection with the Chapter 11 Proceedings,
the Company reclassified approximately $300 million of liabilities associated with its U.S. OPEB
plans to Liabilities subject to compromise.
In December of 2009, the Court granted the Debtors motion in part authorizing the termination or
amendment of benefits under certain Company OPEB plans, including health care and life insurance
benefits. In connection with this ruling, the Company eliminated certain of these benefits,
including Company-paid medical, prescription drug, dental and life insurance coverage, effective
April 1, 2010, for current and future U.S. retirees, their spouses, surviving spouses, domestic
partners and dependents, with the exception of participants covered by the current collective
bargaining agreement (CBA) at the North Penn facility. This change resulted in curtailment gains
of $153 million and a reduction in other postretirement employee benefit liabilities and an
increase in other comprehensive income of approximately $273 million establishing a new prior
service cost base during the fourth quarter of 2009.
On February 18, 2010, the Court issued an order confirming the Debtors authority to enter into an
agreement with the International Union United Automobile, Aerospace and Agricultural Implement
Workers of America and its local union 1695, in connection with the closing of the Debtors North
Penn facility located in Lansdale, Pennsylvania (the Closure Agreement). Pursuant to terms of the
Closure Agreement, the North Penn CBA expired in February 2010 and the Company communicated its
intent to eliminate Company-paid medical, prescription drug, dental and life insurance benefits for
participants associated with the North Penn CBA effective June 1, 2010. This change resulted in a
reduction in other postretirement employee benefit liabilities and an increase in other
comprehensive income of approximately $50 million establishing a new prior service cost base.
31
Reductions associated with terminated other postretirement employee benefits discussed above, in
addition to reductions for prior plan amendments and actuarial gains and losses, were amortized as
a net decrease to future postretirement employee benefit expense over the remaining period of
expected benefit. This amortization resulted in a decrease to postretirement employee benefit
expense and other comprehensive income of approximately $312 million during the nine-month
Predecessor period ended October 1, 2010.
On December 29, 2009, the IUE-CWA, the Industrial Division of the Communications Workers of
America, AFL-CIO, CLC, filed a notice of appeal of the Courts order with the District Court for
the District of Delaware (the District Court) on behalf of certain former employees of the
Companys Connersville and Bedford, Indiana facilities. On March 30, 2010, the District Court
affirmed the Courts order in all respects. On April 1, 2010, the IUE filed a notice of appeal, and
subsequently a motion for expedited treatment of the appeal and for a stay pending appeal, with the
United States Court of Appeals for the Third Circuit (the Circuit Court). On April 13, 2010, the
Circuit Court granted the motion to expedite and denied the motion for stay pending appeal.
On July 13, 2010, the Circuit Court reversed the order of the District Court and the Court
permitting the Company to terminate other postretirement employee benefits without complying with
the requirements of Bankruptcy Code Section 1114 and directed the District Court to, among other
things, direct the Court to order the Company to take whatever action is necessary to immediately
restore all terminated or modified benefits to their pre-termination/modification levels. The
Circuit Court also ordered the District Court to direct the Court to consider arguments from the
parties as to whether the Company should be required to reimburse retirees for any costs incurred
due to the termination of their benefits between May 1, 2010 and the date the other postretirement
employee benefits are restored. On July 27, 2010, the Company filed a Petition for Rehearing or
Rehearing En Banc requesting that the Circuit Court grant a rehearing to review the panels
decision which was subsequently denied.
During the second quarter of 2010, the Company recorded an increase in other postretirement
employee benefit expense of $150 million for the reinstatement of these benefits for certain former
employees of the Companys Connersville and Bedford facilities. On August 17, 2010 the Court issued
an order requiring the Company to retroactively restore terminated or modified benefits from April
1, 2010 forward for all plan participants except those subject to the North Penn CBA. Accordingly,
during the third quarter of 2010 the Company recorded $155 million for the reinstatement of such
benefits.
On September 16, 2010, the Court issued an order approving the Memorandum of Agreement between the
IUE-CWA and the Company pursuant to which the parties agreed that $12 million would be paid in full
settlement of the OPEB obligations for the former Connersville and Bedford employees under Section
1114 of the Bankruptcy Code. The Company recorded a reduction in related OPEB liabilities of
approximately $140 million and an increase to other comprehensive income of which $18 million was
recognized in net income during the third quarter of 2010. On October 1, 2010 the first $6 million
installment under this agreement was paid by the Company with the remaining amount paid on January
3, 2011.
In October 2010, the Company notified participants of the remaining U.S. OPEB plans that
Company-paid medical, prescription drug, dental and life insurance coverage would be eliminated
effective November 1, 2010 for current and future U.S. retirees, their spouses, surviving spouses,
domestic partners and dependents. During the fourth quarter of 2010, the Company eliminated related
OPEB liabilities of $146 million, recording benefits of $133 million in cost of sales and $13
million in selling, general and administrative expense on the consolidated statement of operations
for the three-month Successor period ended December 31, 2010. Eligible retirees who retired prior
to November 1, 2010 were provided the opportunity to elect retiree Lifetime COBRA. Upon
retirement, future eligible retirees, their spouses, same-sex domestic partners and eligible
children have access to medical, prescription drug and dental coverage by paying the full group
rate for such coverage.
The
Patient Protection and Affordable Care Act and the Health Care Education and Affordability Reconciliation Act
In March 2010, the Patient Protection and Affordable Care Act and the Health Care Education and
Affordability Reconciliation Act (the Acts) were signed into law. The Acts contain provisions
which could impact the Companys accounting for retiree medical benefits. Accordingly, the Company
completed an assessment of the Acts in connection with the reinstatement of other postretirement
employee benefits for certain former employees of the Companys Connersville and Bedford facilities
in the second quarter of 2010 and all other reinstated plans in the third quarter of 2010 and
increased the related benefit liabilities by approximately $6 million, based upon the Companys
current interpretation of the Acts. These amounts are included in the reinstatement charges
discussed above and may be revised upon issuance of final regulations.
32
In October 2008, the Company communicated changes to certain hourly postretirement employee health
care plans to eliminate Company-sponsored prescription drug benefits for Medicare eligible
retirees, spouses and dependents effective January 1, 2009, to eliminate all benefits for certain
employees who are not currently eligible and to provide additional retirement plan benefits. These
changes resulted in a net reduction in pension and OPEB liabilities of approximately $92 million.
This amount had been amortized as a net reduction of retirement and postretirement employee benefit
expense over the average remaining life expectancy of plan participants until the change announced
in December 2009 at which time the amortization period was shortened. The Company recorded
curtailment gains in the fourth quarter of 2008 of approximately $16 million reflecting the
elimination of future service in these plans.
Ford Sponsored Retirement Benefits
Prior to emergence from bankruptcy, Ford charged Visteon for OPEB provided by Ford to certain
Company salaried employees who retired after May 24, 2005. The Company funded the actual costs of
these benefits as incurred by Ford for the salaried retirees until it entered bankruptcy. OPEB
payables to Ford relating to participation by certain salaried employees were reclassified to
Liabilities subject to compromise in connection with the Chapter 11 Proceedings. The OPEB payable
balance was reduced by $9 million during the third quarter of 2010 in connection with the August
17, 2010 Court approval of the ACH Termination Agreement. Additionally, on the Effective Date and
pursuant to the Release Agreement, Ford released Visteon from the remaining OPEB and pension
payables approximating $100 million and withdrew their claim for recovery of such amounts.
Benefit Expenses and Obligations
For the three-month Successor period ended December 31, 2010, the Companys expense for retirement
benefits is as follows:
Three Months Ended December 31, 2010 | ||||||||||||
Retirement Plans | Health Care and Life | |||||||||||
U.S Plans | Non-U.S Plans | Insurance Benefits | ||||||||||
(Dollars in Millions) | ||||||||||||
Costs Recognized in Income |
||||||||||||
Service cost |
$ | 2 | $ | 2 | $ | | ||||||
Interest cost |
18 | 6 | | |||||||||
Expected return on plan assets |
(19 | ) | (5 | ) | | |||||||
Plan termination income |
| | (146 | ) | ||||||||
Employee retirement benefit expenses |
$ | 1 | $ | 3 | $ | (146 | ) | |||||
Weighted Average Assumptions Used for
Expenses |
||||||||||||
Discount rate for expense |
5.30 | % | 5.40 | % | 4.65 | % | ||||||
Rate of increase in compensation |
3.50 | % | 3.40 | % | N/A | |||||||
Assumed long-term rate of return on assets |
7.70 | % | 5.60 | % | N/A | |||||||
Initial health care cost trend rate |
N/A | N/A | 8.00 | % | ||||||||
Ultimate health care cost trend rate |
N/A | N/A | 5.10 | % | ||||||||
Year ultimate trend rate reached |
N/A | N/A | 2015 |
The Companys obligation for retirement benefits is as follows:
Three Months Ended December 31, 2010 | ||||||||||||
Retirement Plans | Health Care and Life | |||||||||||
U.S Plans | Non-U.S Plans | Insurance Benefits | ||||||||||
(Dollars in Millions) | ||||||||||||
Change in Benefit Obligation |
||||||||||||
Benefit obligation beginning |
$ | 1,407 | $ | 486 | $ | 171 | ||||||
Service cost |
2 | 2 | | |||||||||
Interest cost |
18 | 6 | | |||||||||
Amendments/other |
| | (145 | ) | ||||||||
Actuarial gain |
(44 | ) | (39 | ) | (1 | ) | ||||||
Foreign exchange translation |
| (6 | ) | | ||||||||
Benefits paid |
(23 | ) | (4 | ) | (8 | ) | ||||||
Benefit obligation ending |
$ | 1,360 | $ | 445 | $ | 17 | ||||||
Change in Plan Assets |
||||||||||||
Plan assets beginning |
$ | 1,035 | $ | 330 | $ | | ||||||
Actual return on plan assets |
(14 | ) | 8 | |
33
Three Months Ended December 31, 2010 | ||||||||||||
Retirement Plans | Health Care and Life | |||||||||||
U.S Plans | Non-U.S Plans | Insurance Benefits | ||||||||||
(Dollars in Millions) | ||||||||||||
Sponsor contributions |
| 6 | 8 | |||||||||
Foreign exchange translation |
| (3 | ) | | ||||||||
Benefits paid/other |
(25 | ) | (4 | ) | (8 | ) | ||||||
Plan assets ending |
$ | 996 | $ | 337 | $ | | ||||||
Funded status at December 31, 2010 |
$ | (364 | ) | $ | (108 | ) | $ | (17 | ) | |||
Balance Sheet Classification |
||||||||||||
Other non-current assets |
$ | | $ | 6 | $ | | ||||||
Accrued employee liabilities |
(2 | ) | (3 | ) | (3 | ) | ||||||
Employee benefits |
(362 | ) | (111 | ) | (8 | ) | ||||||
Other current liabilities |
| | (6 | ) | ||||||||
Accumulated other comprehensive
income |
||||||||||||
Actuarial gain |
(9 | ) | (42 | ) | |
34
For the nine-month Predecessor period ended October 1, 2010 and the years ended December 31,
2009 and 2008, the Companys expense for retirement benefits is as follows:
Retirement Plans | Health Care and Life | |||||||||||||||||||||||||||||||||||
U.S Plans | Non-U.S Plans | Insurance Benefits | ||||||||||||||||||||||||||||||||||
Nine Months | Nine Months | Nine Months | ||||||||||||||||||||||||||||||||||
Ended | Year Ended | Ended | Year Ended | Ended | Year Ended | |||||||||||||||||||||||||||||||
October 1 | December 31 | October 1 | December 31 | October 1 | December 31 | |||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||||||||||||||
Costs Recognized in
Income |
||||||||||||||||||||||||||||||||||||
Service cost |
$ | 7 | $ | 13 | $ | 21 | $ | 4 | $ | 7 | $ | 19 | $ | | $ | 1 | $ | 3 | ||||||||||||||||||
Interest cost |
56 | 74 | 73 | 19 | 31 | 70 | 3 | 18 | 31 | |||||||||||||||||||||||||||
Expected return on plan
assets |
(55 | ) | (79 | ) | (83 | ) | (14 | ) | (26 | ) | (57 | ) | | | | |||||||||||||||||||||
Reinstatement of benefits |
| | | | | | 306 | | | |||||||||||||||||||||||||||
Amortization of: |
||||||||||||||||||||||||||||||||||||
Plan amendments |
(2 | ) | (2 | ) | (1 | ) | 1 | 2 | 5 | (374 | ) | (75 | ) | (30 | ) | |||||||||||||||||||||
Losses and other |
2 | 1 | | | | 2 | 43 | 18 | 10 | |||||||||||||||||||||||||||
Special termination
benefits |
1 | 6 | 6 | | | | | | | |||||||||||||||||||||||||||
Curtailments |
(14 | ) | (2 | ) | (1 | ) | | 5 | 2 | | (161 | ) | (79 | ) | ||||||||||||||||||||||
Settlements |
| | | | | 20 | (1 | ) | | | ||||||||||||||||||||||||||
Visteon sponsored plan
net pension /
postretirement benefit
expense |
(5 | ) | 11 | 15 | 10 | 19 | 61 | (23 | ) | (199 | ) | (65 | ) | |||||||||||||||||||||||
Expense for certain
salaried employees whose
pensions are partially
covered by Ford |
1 | 10 | | | | | (15 | ) | (8 | ) | (7 | ) | ||||||||||||||||||||||||
Employee retirement
benefit expenses
excluding restructuring
related expenses |
$ | (4 | ) | $ | 21 | $ | 15 | $ | 10 | $ | 19 | $ | 61 | $ | (38 | ) | $ | (207 | ) | $ | (72 | ) | ||||||||||||||
Retirement benefit
related restructuring
expenses |
||||||||||||||||||||||||||||||||||||
Special termination
benefits |
$ | 2 | $ | 12 | $ | 16 | $ | | $ | 9 | $ | 27 | $ | | $ | | $ | 1 | ||||||||||||||||||
Other |
| 7 | 2 | | | | | | | |||||||||||||||||||||||||||
Total employee
retirement benefit
related restructuring
expenses |
$ | 2 | $ | 19 | $ | 18 | $ | | $ | 9 | $ | 27 | $ | | $ | | $ | 1 | ||||||||||||||||||
Fresh-start accounting
adjustments. |
$ | (138 | ) | $ | | $ | | $ | (107 | ) | $ | | $ | | $ | 128 | $ | | | |||||||||||||||||
Weighted Average
Assumptions Used for
Expenses |
||||||||||||||||||||||||||||||||||||
Discount rate |
5.90 | % | 6.35 | % | 6.30 | % | 6.10 | % | 6.05 | % | 5.70 | % | 5.65 | % | 6.05 | % | 6.30 | % | ||||||||||||||||||
Rate of compensation
increase |
3.50 | % | 3.25 | % | 3.75 | % | 3.50 | % | 3.15 | % | 3.30 | % | N/A | N/A | N/A | |||||||||||||||||||||
Assumed long-term rate
of return on assets |
7.70 | % | 8.10 | % | 8.25 | % | 6.00 | % | 6.70 | % | 6.80 | % | N/A | N/A | N/A | |||||||||||||||||||||
Initial health care cost
trend rate |
N/A | N/A | N/A | N/A | N/A | N/A | 9.00 | % | 8.33 | % | 9.00 | % | ||||||||||||||||||||||||
Ultimate health care
cost trend rate |
N/A | N/A | N/A | N/A | N/A | N/A | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||||||||||||||
Year ultimate health
care cost trend rate
reached |
N/A | N/A | N/A | N/A | N/A | N/A | 2017 | 2014 | 2013 |
35
Curtailments and Settlements
Curtailment and settlement gains and losses are classified in the Companys consolidated statements
of operations as Cost of sales or Selling, general and administrative expenses, as appropriate.
Qualifying curtailment and settlement losses related to the Companys restructuring activities were
reimbursable under the terms of the Amended Escrow Agreement. During the nine-month Predecessor
period ended October 1, 2010 the Company recorded curtailment gains of $14 million in connection
with the termination of the salaried employees formerly leased to ACH and other on-going U.S.
headcount reductions.
During 2009 the Company recorded significant curtailments and settlements of its employee
retirement benefit plans as follows:
| Curtailment gains of $153 million related to the OPEB plans in connection with the elimination of Company-paid medical, prescription drug and life insurance coverage. This plan change eliminated future service for active plan participants, as such the amounts in accumulated other comprehensive income relating to prior plan changes were recognized as curtailment gains. | |
| Curtailment gains of $10 million associated with the U.S. salaried pension and OPEB plans in connection with employee headcount reductions under previously announced restructuring actions. | |
| Curtailment losses of $6 million related to the reduction of future service in the UK pension plans in connection with employee headcount reductions in the UK. These losses were partially offset by a $1 million curtailment gain in Mexico related to employee headcount reductions under previously announced restructuring actions. These curtailments reduced the benefit obligations by $2 million. |
During 2008 the Company recorded significant curtailments and settlements of its employee
retirement benefit plans as follows:
| Curtailment gains of $79 million related to elimination of employee benefits associated with U.S. OPEB plans in connection with employee headcount reductions under previously announced restructuring actions. These curtailments reduced the benefit obligations by $7 million. | |
| Curtailment losses of $7 million related to the reduction of future service in the UK pension plan for employees at the Companys Swansea, UK operation in connection with the Swansea Divestiture. These losses were partially offset by curtailment gains in Germany, Mexico and France related to employee headcount reductions under previously announced restructuring actions. These curtailments reduced the benefit obligations by $7 million in the UK and $4 million across Germany, Mexico and France. | |
| Settlement losses of $20 million related to UK employee pension obligations of approximately $90 million transferred to Ford in October 2008 for employees that transferred from Visteon to Ford during the years 2005 through 2007 in accordance with the ACH Transactions. |
Retirement Benefit Related Restructuring Expenses
In addition to normal employee retirement benefit expenses, the Company recorded $2 million for the
nine-month Predecessor period ending October 1, 2010, $28 million and $46 million for the years
ended December 31, 2009 and 2008, respectively, for retirement benefit related restructuring
charges. Such charges generally relate to special termination benefits, voluntary termination
incentives and pension losses and are the result of various restructuring actions as described in
Note 6 Restructuring Activities. Retirement benefit related restructuring charges are initially
classified as restructuring expenses and are subsequently reclassified to retirement benefit
expenses.
36
The Companys obligation for retirement benefits is as follows:
Retirement Plans | Health Care and Life | |||||||||||||||||||||||
U.S Plans | Non-U.S Plans | Insurance Benefits | ||||||||||||||||||||||
Nine Months | Nine Months | Year Ended | Nine Months | Year Ended | ||||||||||||||||||||
Ended October 1 | Year Ended December 31 | Ended October 1 | December 31 | Ended October 1 | December 31 | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||
Change in Benefit Obligation |
||||||||||||||||||||||||
Benefit obligation beginning |
$ | 1,301 | $ | 1,234 | $ | 435 | $ | 894 | $ | 66 | $ | 325 | ||||||||||||
Service cost |
7 | 13 | 4 | 7 | | 1 | ||||||||||||||||||
Interest cost |
56 | 74 | 19 | 31 | 3 | 18 | ||||||||||||||||||
Participant contributions |
| | | 1 | | 1 | ||||||||||||||||||
Reinstatement of liability |
| | | | 305 | | ||||||||||||||||||
Amendments/other |
(21 | ) | | 1 | | (187 | ) | (273 | ) | |||||||||||||||
Actuarial loss/(gain) |
136 | 36 | 49 | (57 | ) | (4 | ) | 21 | ||||||||||||||||
Special termination benefits |
3 | 18 | | 9 | | | ||||||||||||||||||
Curtailments, net |
(22 | ) | (2 | ) | (1 | ) | (2 | ) | | | ||||||||||||||
Settlements |
(2 | ) | | | (3 | ) | | | ||||||||||||||||
Foreign exchange translation |
| | (10 | ) | 22 | | 1 | |||||||||||||||||
Divestitures |
| | | (443 | ) | | | |||||||||||||||||
Benefits paid |
(51 | ) | (72 | ) | (11 | ) | (24 | ) | (12 | ) | (28 | ) | ||||||||||||
Benefit obligation ending |
$ | 1,407 | $ | 1,301 | $ | 486 | $ | 435 | $ | 171 | $ | 66 | ||||||||||||
Change in Plan Assets |
||||||||||||||||||||||||
Plan assets beginning |
$ | 913 | $ | 908 | $ | 315 | $ | 652 | $ | | $ | | ||||||||||||
Actual return on plan assets |
174 | 62 | 23 | (4 | ) | | | |||||||||||||||||
Sponsor contributions |
1 | 19 | 11 | 26 | 12 | 27 | ||||||||||||||||||
Participant contributions |
| | | 1 | | 1 | ||||||||||||||||||
Foreign exchange translation |
| | (8 | ) | 18 | | | |||||||||||||||||
Settlements |
| | | (3 | ) | | | |||||||||||||||||
Divestitures |
| | | (351 | ) | | | |||||||||||||||||
Benefits paid/other |
(53 | ) | (76 | ) | (11 | ) | (24 | ) | (12 | ) | (28 | ) | ||||||||||||
Plan assets ending |
$ | 1,035 | $ | 913 | $ | 330 | $ | 315 | $ | | $ | | ||||||||||||
Funded status at end of period |
$ | (372 | ) | $ | (388 | ) | $ | (156 | ) | $ | (120 | ) | $ | (171 | ) | $ | (66 | ) | ||||||
Balance Sheet Classification |
||||||||||||||||||||||||
Other non-current assets |
$ | | $ | 1 | $ | 5 | $ | 6 | $ | | $ | | ||||||||||||
Accrued employee liabilities |
(2 | ) | | (3 | ) | (3 | ) | (31 | ) | (17 | ) | |||||||||||||
Employee benefits |
(370 | ) | (358 | ) | (158 | ) | (123 | ) | (140 | ) | (49 | ) | ||||||||||||
Liabilities subject to compromise
(non-qualified plans) |
| (31 | ) | | | | | |||||||||||||||||
Accumulated other comprehensive
income/(loss): |
||||||||||||||||||||||||
Actuarial loss |
| 173 | | 28 | | 42 | ||||||||||||||||||
Prior service (credit)/cost |
| (22 | ) | | 8 | | (311 | ) | ||||||||||||||||
Deferred taxes |
| (1 | ) | | 30 | | | |||||||||||||||||
$ | | $ | 150 | $ | | $ | 66 | $ | | $ | (269 | ) | ||||||||||||
The accumulated benefit obligation for all defined benefit pension plans was $1.74 billion,
$1.82 billion and $1.65 billion at the December 31, 2010, October 1, 2010 and December 31, 2009
measurement dates. The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for employee retirement plans with accumulated benefit obligations in excess of plan
assets were $1.61 billion, $1.56 billion and $1.14 billion, respectively, at December 31, 2010;
$1.88 billion, $1.81 billion, and $1.35 billion, respectively, at October 1, 2010 and $1.54
billion, $1.47 billion and $1.03 billion, respectively, at December 31, 2009.
37
Assumptions used by the Company in determining its benefit obligations as of December 31, 2010,
October 1, 2010 and December 31, 2009 are summarized in the following table.
Retirement Plans | Health Care and | |||||||||||||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Life Insurance Benefits | ||||||||||||||||||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||
2010 | 2010 | 2009 | 2010 | 2010 | 2009 | 2010 | 2010 | 2009 | ||||||||||||||||||||||||||||
Weighted Average Assumptions
|
||||||||||||||||||||||||||||||||||||
Discount rate |
5.55 | % | 5.30 | % | 5.95 | % | 5.95 | % | 5.40 | % | 6.10 | % | 5.00 | % | 4.65 | % | 5.70 | % | ||||||||||||||||||
Expected rate of return
on assets |
7.50 | % | 7.70 | % | 7.70 | % | 5.40 | % | 5.55 | % | 6.00 | % | N/A | N/A | N/A | |||||||||||||||||||||
Rate of increase in
compensation |
3.50 | % | 3.50 | % | 3.50 | % | 3.55 | % | 3.45 | % | 3.50 | % | N/A | N/A | N/A | |||||||||||||||||||||
Initial health care
cost trend rate |
N/A | N/A | N/A | N/A | N/A | N/A | 8.50 | % | 8.00 | % | 8.30 | % | ||||||||||||||||||||||||
Ultimate health care
cost trend rate |
N/A | N/A | N/A | N/A | N/A | N/A | 5.00 | % | 5.10 | % | 5.25 | % | ||||||||||||||||||||||||
Year ultimate health
care cost trend rate
reached |
N/A | N/A | N/A | N/A | N/A | N/A | 2017 | 2015 | 2015 |
Accumulated Other Comprehensive Income
Components of the net change in Accumulated other comprehensive income/(loss) related to the
Companys retirement, health care and life insurance benefit plans on the Companys consolidated
statements of shareholders equity (deficit) for the three months ended December 31, 2010, nine
months ended October 1, 2010 and the year ended December 31, 2009 are as follows:
Retirement Plans | ||||||||||||||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Health Care and Life Insurance Benefits | ||||||||||||||||||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||
2010 | 2010 | 2009 | 2010 | 2010 | 2009 | 2010 | 2010 | 2009 | ||||||||||||||||||||||||||||
(Dollars in Millions) | (Dollars in Millions) | |||||||||||||||||||||||||||||||||||
Actuarial (gain)/loss |
$ | (9 | ) | $ | (5 | ) | $ | 55 | $ | (42 | ) | $ | 41 | $ | (26 | ) | $ | (1 | ) | $ | (4 | ) | $ | 21 | ||||||||||||
Prior service (credit)/cost |
| (21 | ) | | | 1 | | (150 | ) | (187 | ) | (273 | ) | |||||||||||||||||||||||
Fresh-start adjustments |
| (138 | ) | | | (107 | ) | | | 128 | | |||||||||||||||||||||||||
Reclassification to net
income/(loss) |
| 14 | 2 | | (1 | ) | (89 | ) | 151 | 332 | 218 | |||||||||||||||||||||||||
$ | (9 | ) | $ | (150 | ) | $ | 57 | $ | (42 | ) | $ | (66 | ) | $ | (115 | ) | $ | | $ | 269 | $ | (34 | ) | |||||||||||||
Due to the adoption of fresh-start accounting effective October 1, 2010, there are no amounts
included in Accumulated other comprehensive income as of December 31, 2010 that are expected to
be realized in 2011.
Contributions
During January 2009, the Company reached an agreement with the Pension Benefit Guaranty Corporation
(PBGC) pursuant to U.S. federal pension law provisions that permit the PBGC to seek protection
when a plant closing results in termination of employment for more than 20 percent of employees
covered by a pension plan (the PBGC Agreement). In connection with the multi-year improvement
plan the Company closed its Connersville, Indiana and Bedford, Indiana facilities, which resulted
in the separation of all active participants in the respective pension plan. Under the PBGC
Agreement, the Company agreed to accelerate payment of a $10.5 million cash contribution, provide a
$15 million letter of credit and provide for a guarantee by certain affiliates of certain
contingent pension obligations of up to $30 million. During September 2009, the Company did not
make the required contribution to the plan, which triggered a letter of credit draw event under the
PBGC Agreement and resulted in the PBGC drawing the full $15 million.
The Company expects to make contributions to its U.S. retirement plans and OPEB plans of $48
million and $9 million, respectively, during 2011. Contributions to non-U.S. retirement plans are
expected to be $16 million during 2011. The Companys expected 2011 contributions may be revised.
Pursuant to certain agreements initially completed in connection with the ACH Transactions, the
Company was reimbursed by Ford for $22 million of the $54 million contribution required in
connection with the October 2008
38
settlement of UK pension obligations for employees that transferred from Visteon to Ford during the
years 2005 through 2007.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid by the Company plans:
Retirement Health | ||||||||||||
Pension Benefits | and Life | |||||||||||
U.S. | Non-U.S. | Payments | ||||||||||
(Dollars in Millions) | ||||||||||||
2011 |
$ | 75 | $ | 12 | $ | 9 | ||||||
2012 |
70 | 13 | | |||||||||
2013 |
70 | 14 | | |||||||||
2014 |
70 | 17 | | |||||||||
2015 |
69 | 16 | | |||||||||
Years 2016 2020 |
354 | 100 | 1 |
Plan Assets and Investment Strategy
Substantially all of the Companys pension assets are managed by outside investment managers and
held in trust by third-party custodians. The selection and oversight of these outside service
providers is the responsibility of the investment committees and their advisors. The selection of
specific securities is at the discretion of the investment manager and is subject to the provisions
set forth by written investment management agreements and related policy guidelines regarding
permissible investments, risk management practices and the use of derivative securities. Investment
in debt or equity securities related to the Company or any of its affiliates is prohibited.
Derivative securities may be used by investment managers as efficient substitutes for traditional
securities, to reduce portfolio risks or to hedge identifiable economic exposures. The use of
derivative securities to create economic leverage to engage in unrelated speculation is expressly
prohibited.
The primary objective of the pension funds is to pay the plans benefit and expense obligations
when due. Given the relatively long time horizon of these obligations and their sensitivity to
interest rates, the investment strategy is intended to improve the funded status of its U.S. and
non-U.S. plans over time while maintaining a prudent level of risk. Risk is managed primarily by
diversifying each plans target asset allocation across equity, fixed income securities and
alternative investment strategies, and then maintaining the allocation within a specified range of
its target. In addition, diversification across various investment subcategories within each plan
is also maintained within specified ranges. The Companys retirement plan asset allocation at
December 31, 2010 and 2009 and target allocation for 2011 are as follows:
Target Allocation | Percentage of Plan Assets | |||||||||||||||||||||||
U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||||
Successor | Successor | Predecessor | Successor | Predecessor | ||||||||||||||||||||
2011 | 2011 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Equity securities |
40 | % | 18 | % | 41 | % | 40 | % | 14 | % | 11 | % | ||||||||||||
Fixed income |
30 | 71 | 24 | 27 | 78 | 78 | ||||||||||||||||||
Alternative strategies |
30 | 4 | 33 | 33 | 5 | 5 | ||||||||||||||||||
Cash |
| 7 | 2 | | 3 | 6 | ||||||||||||||||||
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||
The expected long-term rate of return for pension assets has been chosen based on various inputs,
including returns projected by various external sources for the different asset classes held by and
to be held by the Companys trusts and its targeted asset allocation. These projections
incorporate both historical returns and forward looking views regarding capital market returns,
inflation and other variables.
Fair Value Measurements
Retirement plan assets are valued at fair value using various inputs and valuation techniques. A
description of the inputs and valuation techniques used to measure the fair value for each class of
plan assets is included in Note 20 Fair Value Measurements.
39
NOTE 16. Stock-Based Compensation
Successor Stock-Based Compensation Plans
The Visteon Corporation 2010 Incentive Plan (the 2010 Incentive Plan), was adopted on the
Effective Date and provides for the grant of up to 5.6 million shares of Successor common stock as
incentive and nonqualified stock options, stock appreciation rights (SARs), performance stock
rights, restricted stock awards (RSAs), restricted stock units (RSUs) and stock and various
other rights based on common stock. Additionally, the Company adopted the Visteon Corporation
Non-Employee Director Stock Unit Plan, which provides for the automatic annual grant of RSUs to
non-employee directors. RSUs awarded under the Non-Employee Director Stock Unit Plan vest
immediately but are not paid out until after the participant terminates service as a non-employee
director of the Company.
During the fourth quarter of 2010, the Company granted 1,246,000 shares of restricted Successor
common stock and 421,000 restricted stock units to management under the 2010 Incentive Plan at a
grant date fair value of $57.93 per share. The grant date fair value was estimated based on the
weighted average trading prices of the Companys common stock for the five business days
immediately following the Effective Date. One-sixth of this grant vested on October 22, 2010. The
remaining vesting schedule includes one-sixth on October 1, 2011, one-third on October 1, 2012 and
one-third on October 1, 2013. During the three-month Successor period ended December 31, 2010, the
Company recorded compensation expense associated with this grant of $29 million.
Unrecognized compensation expense at December 31, 2010 was $52 million for non-vested RSAs based on
estimated grant date fair value. Restrictions on the shares of the Companys common stock
comprising RSAs lapse upon scheduled vesting dates. Unrecognized compensation expense at December
31, 2010 was $19 million for non-vested RSUs based on the period-ending market price of the
Companys common stock. RSUs are generally settled in cash upon scheduled vesting dates and are
recorded as a liability representing only the vested portion of the obligation, with approximately
$1 million and $4 million recorded under the captions Accrued employee liabilities and Other
non-current liabilities at December 31, 2010. Unrecognized compensation expense for RSUs and RSAs
will be recognized on a weighted average basis over the remaining vesting period or approximately
three years.
A summary of activity, including award grants, vesting and forfeitures is provided below.
Weighted Average |
|||||||||||||
RSAs | RSUs | Grant Date Fair Value | |||||||||||
(In Thousands) | |||||||||||||
Non-vested at October 1, 2010 |
| | $ | | |||||||||
Granted |
1,246 | 421 | $ | 57.93 | |||||||||
Vested |
(211 | ) | (64 | ) | $ | 57.93 | |||||||
Forfeited |
| | $ | | |||||||||
Non-vested at December 31, 2010 |
1,035 | 357 | $ | 57.93 | |||||||||
Predecessor Stock-Based Compensation
Pursuant to the Plan, any shares of Predecessor common stock and any options, warrants or rights to
purchase shares of Predecessor common stock or other equity securities outstanding prior to the
Effective Date were cancelled. Prior to cancellation, the Company recorded stock-based compensation
expense for Predecessor stock-based compensation plans of $1 million during the nine-month
Predecessor period ended October 1, 2010. For the years ended December 31, 2009 and 2008, the
Company recorded expense of $1 million and a benefit of $12 million. Various stock-based
compensation awards were granted under Predecessor plans, including stock options, SARs, RSAs and
RSUs.
40
A summary of activity, including award grants, exercises and forfeitures is provided below for
stock options and SARs.
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Stock Options | Exercise Price | SARs | Exercise Price | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Outstanding at December 31, 2007 |
12,928 | $ | 10.80 | 9,965 | $ | 7.19 | ||||||||||
Granted |
100 | $ | 3.63 | 4,266 | $ | 3.64 | ||||||||||
Exercised |
| $ | | | $ | | ||||||||||
Forfeited or expired |
(1,029 | ) | $ | 11.83 | (1,334 | ) | $ | 6.65 | ||||||||
Outstanding at December 31, 2008 |
11,999 | $ | 10.70 | 12,897 | $ | 6.07 | ||||||||||
Granted |
| $ | | | $ | | ||||||||||
Exercised |
| $ | | | $ | | ||||||||||
Forfeited or expired |
(1,493 | ) | $ | 10.64 | (2,355 | ) | $ | 8.27 | ||||||||
Outstanding at December 31, 2009 |
10,506 | $ | 10.70 | 10,542 | $ | 5.60 | ||||||||||
Forfeited, expired or cancelled |
(10,506 | ) | $ | 10.70 | (10,542 | ) | $ | 5.60 | ||||||||
Outstanding at October 1, 2010 |
| $ | | | $ | | ||||||||||
A summary of activity, including award grants, vesting and forfeitures is provided below for RSAs
and RSUs.
Weighted | ||||||||||||
Average | ||||||||||||
Grant Date Fair | ||||||||||||
RSAs | RSUs | Value | ||||||||||
(In Thousands) | ||||||||||||
Non-vested at December 31, 2007 |
92 | 4,573 | $ | 6.42 | ||||||||
Granted |
1,305 | 3,326 | $ | 3.60 | ||||||||
Vested |
(35 | ) | (3,335 | ) | $ | 5.61 | ||||||
Forfeited |
(182 | ) | (418 | ) | $ | 5.18 | ||||||
Non-vested at December 31, 2008 |
1,180 | 4,146 | $ | 4.60 | ||||||||
Granted |
| | $ | | ||||||||
Vested |
(42 | ) | (1,678 | ) | $ | 6.08 | ||||||
Forfeited |
(204 | ) | (357 | ) | $ | 4.49 | ||||||
Non-vested at December 31, 2009 |
934 | 2,111 | $ | 3.80 | ||||||||
Vested |
(15 | ) | (5 | ) | $ | 7.05 | ||||||
Forfeited or cancelled |
(919 | ) | (2,106 | ) | $ | 3.39 | ||||||
Non-vested at October 1, 2010 |
| | $ | | ||||||||
NOTE 17. Income Taxes
Emergence from Chapter 11 Proceedings
Pursuant to the Plan, certain elements of the Companys pre-petition indebtedness were
extinguished. Absent an exception, the discharge of a debt obligation in a bankruptcy proceeding
for an amount less than its adjusted issue price (as defined for tax purposes) creates cancellation
of indebtedness income (CODI) that is excludable from taxable income for U.S. tax purposes.
However, certain income tax attributes are reduced by the amount of CODI in prescribed order as
follows: (a) net operating losses (NOL) for the year of discharge and NOL carryforwards; (b) most
credit carryforwards, including the general business credit and the minimum tax credit; (c) net
capital losses for the year of discharge and capital loss carryforwards; (d) the tax basis of the
debtors assets.
Internal Revenue Code (IRC) Sections 382 and 383 provide an annual limitation with respect to the
ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against
future U.S. taxable income in the event of a change in ownership. Generally, under a special rule
applicable to ownership changes occurring in connection with a Chapter 11 plan of reorganization,
the annual limitation amount is equal to the value of the company as of the date of emergence
multiplied by a long-term tax exempt federal rate. The Company expects to have excludable CODI
that will reduce its tax attributes by approximately $100 million and expects an annual limitation
under IRC Sections 382 and 383 as a result of an ownership change of approximately $115 million.
As a result, the Companys future U.S. taxable income may not be fully offset by its pre-emergence
net operating losses and other tax attributes if such income exceeds the annual limitation, and the
Company may incur a tax liability with
41
respect to such income. In addition, subsequent changes in ownership for purposes of IRC Sections
382 and 383 could further diminish the Companys use of net operating losses and other tax
attributes.
Income tax provision
Income (loss) before income taxes excluding equity in net income of non-consolidated affiliates and
the components of the provision for income taxes are shown below:
Successor | Predecessor | |||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31 | October 1 | Year Ended December 31 | ||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
(Dollars in Millions) | ||||||||||||||||
U.S |
$ | 21 | $ | 425 | $ | (1,250 | ) | $ | (440 | ) | ||||||
Non-U.S |
62 | 597 | 1,434 | (132 | ) | |||||||||||
Total income (loss) before income taxes |
$ | 83 | $ | 1,022 | $ | 184 | $ | (572 | ) | |||||||
Current tax provision |
||||||||||||||||
U.S. federal |
$ | 1 | $ | 5 | $ | 4 | $ | (4 | ) | |||||||
Non-U.S |
28 | 80 | 90 | 96 | ||||||||||||
U.S. state and local |
(1 | ) | 3 | 1 | 1 | |||||||||||
Total current |
28 | 88 | 95 | 93 | ||||||||||||
Deferred tax provision (benefit) |
||||||||||||||||
U.S. federal |
(1 | ) | 2 | 5 | | |||||||||||
Non-U.S |
(8 | ) | 42 | (16 | ) | 22 | ||||||||||
U.S. state and local |
| (1 | ) | (4 | ) | 1 | ||||||||||
Total deferred |
(9 | ) | 43 | (15 | ) | 23 | ||||||||||
Total provision for income taxes |
$ | 19 | $ | 131 | $ | 80 | $ | 116 | ||||||||
A summary of the differences between the provision for income taxes calculated at the U.S.
statutory tax rate of 35% and the consolidated provision for income taxes is shown below:
Successor | Predecessor | |||||||||||||||
Three Months Ended | Nine Months Ended | Year Ended | ||||||||||||||
December 31 | October 1 | December 31 | ||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
(Dollars in Millions) | ||||||||||||||||
Income (loss) before income taxes, excluding
equity in net income of non-consolidated
affiliates, multiplied by the U.S. statutory
rate of 35% |
$ | 29 | $ | 358 | $ | 64 | $ | (200 | ) | |||||||
Effect of: |
||||||||||||||||
Impact of foreign operations, including
withholding taxes |
(4 | ) | (4 | ) | (3 | ) | (5 | ) | ||||||||
State and local income taxes |
(1 | ) | 1 | (22 | ) | (14 | ) | |||||||||
Tax reserve adjustments |
1 | (1 | ) | (52 | ) | 12 | ||||||||||
Impact of U.K. Administration |
| | (444 | ) | | |||||||||||
Change in valuation allowance |
(6 | ) | (753 | ) | 521 | 316 | ||||||||||
Fresh-start accounting adjustments and
reorganization items, net |
| 553 | 22 | | ||||||||||||
Impact of tax law change |
| | 10 | | ||||||||||||
Liquidation of consolidated foreign affiliate |
| | (17 | ) | | |||||||||||
Other |
| (23 | ) | 1 | 7 | |||||||||||
Provision for income taxes |
$ | 19 | $ | 131 | $ | 80 | $ | 116 | ||||||||
The Companys provision for income tax was $19 million for the three-month Successor period ended
December 31, 2010 and was $131 million for the nine-month Predecessor period ended October 1, 2010.
Income tax provisions for both the Successor and the Predecessor periods during 2010 reflect income
tax expense related to those countries where the Company is profitable, accrued withholding taxes,
ongoing assessments related to the recognition and measurement of uncertain tax benefits, the
inability to record a tax benefit for pre-tax losses in the U.S. and certain
42
other jurisdictions, and other non-recurring tax items. The 2010 Predecessor period includes $37
million of deferred tax expense associated with the adoption of fresh-start accounting, (see Note
5, Fresh-Start Accounting). Included in the fresh-start accounting adjustments and reorganization
items are net deferred tax adjustments primarily related to the derecognition of U.S. tax loss and
credit carryforwards as a result of the annual limitation imposed under IRC Sections 382 and 383, a
legal entity restructuring approved as part of the Plan of Reorganization which utilized U.S. tax
loss and credit carryforwards pre-emergence and other matters, all of which impact both the
underlying deferred taxes and the related valuation allowances.
The Companys 2009 income tax provision includes income tax of $80 million related to certain
countries where the Company is profitable, accrued withholding taxes and the inability to record a
tax benefit for pre-tax losses in the U.S. and certain foreign countries to the extent not offset
by other categories of income. The 2009 income tax provision also includes a $52 million benefit
associated with a decrease in unrecognized tax benefits, including interest and penalties, as a
result of closing audits in Portugal related to the 2006 and 2007 tax years which resulted in a
cash settlement of approximately $3 million, completing transfer pricing studies in Asia and
reflecting the expiration of various legal statutes of limitations. Included in the deconsolidation
gain related to the UK Administration is $18 million of tax expense representing the elimination of
disproportionate tax effects in other comprehensive income as all items of other comprehensive
income related to Visteon UK Limited have been derecognized. Additionally, as a result of the UK
Administration, approximately $1.3 billion of income attributed to the UK jurisdiction is not
subject to tax in the UK and further, the Companys UK tax attributes carrying a full valuation
allowance have been effectively transferred to the UK Administrators. In the U.S. jurisdiction,
the tax benefits from the approximately $1.2 billion of losses attributable to the UK
Administration, and the liquidation of the Companys affiliate in Italy, were offset with U.S.
valuation allowances.
The Companys 2008 income tax provision includes income tax expense of $110 million related to
certain countries where the Company is profitable, accrued withholding taxes and the inability to
record a tax benefit for pre-tax losses in the U.S. and certain foreign countries to the extent not
offset by other categories of income. The 2008 income tax provision also includes $12 million for
the net increase in unrecognized tax benefits resulting from positions taken in tax returns filed
during the year, as well as those expected to be taken in future tax returns, including interest
and penalties. Additionally, the Company recorded approximately $6 million of income tax benefit
related to favorable tax law changes in 2008, including U.S. legislation enacted in July 2008 which
allowed the Company to record certain U.S. research tax credits previously subject to limitation as
refundable.
Deferred income taxes and related valuation allowances
Deferred income taxes are provided for temporary differences between amounts of assets and
liabilities for financial reporting purposes and the basis of such assets and liabilities as
measured by tax laws and regulations, as well as net operating loss, tax credit and other
carryforwards. The Company has recorded a deferred tax liability, net of valuation allowances, for
U.S. and non-U.S. income taxes and non-U.S. withholding taxes of approximately $61 million as of
December 31, 2010 on the undistributed earnings of certain consolidated and unconsolidated foreign
affiliates as such earnings are intended to be repatriated in the foreseeable future. The Company
has not provided for deferred income taxes or foreign withholding taxes on the remainder of
undistributed earnings from certain consolidated foreign affiliates because such earnings are
considered to be permanently reinvested. It is not practicable to determine the amount of deferred
tax liability on such earnings as the actual tax liability, if any, is dependent on circumstances
existing when remittance occurs.
Deferred tax assets are required to be reduced by a valuation allowance if, based on all available
evidence, both positive and negative, it is considered more likely than not that some portion or
all of the recorded deferred tax assets will not be realized in future periods. Significant
management judgment is required in determining the Companys valuation allowance. In making this
assessment, management considers evidence including, historical and projected financial
performance, as well as the nature, frequency and severity of recent losses along with any other
pertinent information.
In determining the need for a valuation allowance, the Company also evaluates existing valuation
allowances. Based upon this assessment, it is reasonably possible that the existing valuation
allowance on the approximately $20 million of deferred tax assets associated with the Companys
Visteon Sistemas operations located in Brazil could be eliminated during 2011. Any decrease in the
valuation allowance would result in a reduction in income tax expense in the quarter in which it is
recorded. During the fourth quarter of 2009, the Company concluded, based on the weight of
available evidence which included recent updates to its forecast of taxable earnings, that the
deferred tax assets associated with its operations in Spain required a full valuation allowance
which resulted in a charge to income tax expense of $12 million.
43
The need to maintain valuation allowances against deferred tax assets in the U.S. and other
affected countries will cause variability in the Companys effective tax rate. The Company will
maintain full valuation allowances against deferred tax assets in the U.S. and applicable foreign
countries, which include Germany and France, until sufficient positive evidence exists to reduce or
eliminate them. At December 31, 2010, the Company has recorded net deferred tax assets, net of
valuation allowances, of approximately $28 million in certain foreign jurisdictions, the
realization of which is dependent on generating sufficient taxable income in future periods. While
the Company believes it is more likely than not that these deferred tax assets will be realized,
failure to achieve its taxable income targets which considers, among other sources, future
reversals of existing taxable temporary differences, would likely result in an increase in the
valuation allowance in the applicable period.
The components of deferred income tax assets and liabilities are as follows:
Successor | Predecessor | |||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
Deferred tax assets |
||||||||
Employee benefit plans |
$ | 139 | $ | 275 | ||||
Capitalized expenditures for tax reporting |
135 | 142 | ||||||
Net operating losses and carryforwards |
1,097 | 1,813 | ||||||
All other |
279 | 428 | ||||||
Subtotal |
1,650 | 2,658 | ||||||
Valuation allowance |
(1,463 | ) | (2,238 | ) | ||||
Total deferred tax assets |
$ | 187 | $ | 420 | ||||
Deferred tax liabilities |
||||||||
Depreciation and amortization |
$ | 74 | $ | 127 | ||||
All other |
257 | 404 | ||||||
Total deferred tax liabilities |
331 | 531 | ||||||
Net deferred tax liabilities |
$ | 144 | $ | 111 | ||||
At December 31, 2010, the Company had available non-U.S. net operating loss carryforwards and tax
credit carryforwards of $1.3 billion and $8 million, respectively, which have carryforward periods
ranging from 5 years to indefinite. The Company had available U.S. federal net operating loss
carryforwards of $1.4 billion at December 31, 2010, which will expire at various dates between 2026
and 2030. U.S. foreign tax credit carryforwards are $150 million at December 31, 2010. These
credits will begin to expire in 2017. The Company had available tax-effected U.S. state operating
loss carryforwards of $32 million at December 31, 2010, which will expire at various dates between
2018 and 2030.
As a result of the annual limitation imposed under IRC Sections 382 and 383 on the utilization of
net operating losses, credit carryforwards and certain built-in losses (collectively referred to as
tax attributes) following an ownership change, it was determined that approximately $965 million
of U.S. tax attributes will expire unutilized. The U.S. tax attributes are presented net of these
limitations and uncertain tax positions. In addition, subsequent changes in ownership for purposes
of IRC Sections 382 and 383 could further diminish the Companys use of remaining U.S. tax
attributes. As of the end of 2010, valuation allowances totaling $1.5 billion have been recorded
against the Companys deferred tax assets where recovery of the deferred tax assets is unlikely. Of
this amount, $1.1 billion relates to the Companys deferred tax assets in the U.S. and $416 million
relates to deferred tax assets in certain foreign jurisdictions, including Germany, a pass-through
entity for U.S. tax purposes previously excluded from the non-U.S. amounts.
Unrecognized Tax Benefits
As of December 31, 2010 and 2009, the Companys gross unrecognized tax benefits were $131 million
and $190 million, respectively, of which the amount of unrecognized tax benefits that, if
recognized, would impact the effective tax rate were approximately $74 million and $76 million,
respectively. The gross unrecognized tax benefit differs from that which would impact the
effective tax rate due to uncertain tax positions embedded in other deferred tax attributes
carrying a full valuation allowance. Since the uncertainty is expected to be resolved while a full
valuation allowance is maintained, these uncertain tax positions should not impact the effective
tax rate in current or future periods. The decrease in gross unrecognized tax benefits is primarily
attributable to uncertain tax positions
44
embedded in tax attributes carrying a valuation allowance as a result of the annual limitation
imposed under IRC Sections 382 and 383, as described above.
The Company recognizes interest and penalties with respect to unrecognized tax benefits as a
component of income tax expense. Accrued interest and penalties were $22 million and $25 million as
of December 31, 2010 and 2009, respectively. Estimated interest and penalties related to the
underpayment of income taxes represented a net tax benefit of $3 million during the three-month
Successor period ended December 31, 2010. Estimated interest and penalties represented a net
benefit of $11 million for the twelve months ended December 31, 2009, as benefits associated with
the completion of tax audits, expiration of various legal statutes of limitations and the
completion of transfer pricing studies in Asia, more than offset expenses accruals.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Successor | Predecessor | |||||||||||
Three Months Ended | Nine Months Ended | |||||||||||
December 31 | October 1 | Year Ended December 31 | ||||||||||
2010 | 2010 | 2009 | ||||||||||
(Dollars in Millions) | ||||||||||||
Beginning balance |
$ | 126 | $ | 190 | $ | 238 | ||||||
Tax positions related to current period
Additions |
7 | 13 | 16 | |||||||||
Tax positions related to prior periods
Additions |
3 | 2 | 3 | |||||||||
Reductions |
(1 | ) | (58 | ) | (55 | ) | ||||||
Settlements with tax authorities |
(1 | ) | | (3 | ) | |||||||
Lapses in statute of limitations |
(2 | ) | (18 | ) | (10 | ) | ||||||
Effect of exchange rate changes |
(1 | ) | (3 | ) | 1 | |||||||
Ending balance |
$ | 131 | $ | 126 | $ | 190 | ||||||
The Company and its subsidiaries have operations in every major geographic region of the world and
are subject to income taxes in the U.S. and numerous foreign jurisdictions. Accordingly, the
Company files tax returns and is subject to examination by taxing authorities throughout the world,
including such significant jurisdictions as Korea, India, Portugal, Spain, Czech Republic, Hungary,
Mexico, China, Brazil, Germany and the United States. With certain exceptions, the Company is no
longer subject to U.S. federal tax examinations for years before 2007 or state and local, or
non-U.S. income tax examinations for years before 2002.
It is reasonably possible that the amount of the Companys unrecognized tax benefits may change
within the next twelve months as a result of settlement of ongoing audits, for changes in judgment
as new information becomes available related to positions both already taken and those expected to
be taken in tax returns, primarily related to transfer pricing-related initiatives, or from the
closure of tax statutes. Given the number of years, jurisdictions and positions subject to
examination, the Company is unable to estimate the full range of possible adjustments to the
balance of unrecognized tax benefits. However, the Company believes it is reasonably possible it
will reduce the amount of its existing unrecognized tax benefits impacting the effective tax rate
by $5 to $10 million due to the lapse of statute of limitations. Further, substantially all of the
Companys unrecognized tax benefits relate to uncertain tax positions that are not currently under
review by taxing authorities and therefore, the Company is unable to specify the future periods in
which it may be obligated to settle such amounts.
NOTE 18. Shareholders Equity
On October 1, 2010 and in connection with the Plan, the Company cancelled all outstanding shares of
Predecessor common stock and any options, warrants or rights to purchase shares of such common
stock or other equity securities outstanding prior to the Effective Date. Additionally, the Company
issued shares of Successor common stock on the Effective Date and in accordance with the Plan, as
follows:
| Approximately 45,000,000 shares of Successor common stock to certain investors in a private offering exempt from registration under the Securities Act for proceeds of approximately $1.25 billion; |
45
| Approximately 2,500,000 shares of Successor common stock to holders of pre-petition notes, including 7% Senior Notes due 2014, 8.25% Senior Notes due 2010, and 12.25% Senior Notes due 2016; holders of the 12.25% senior notes also received warrants, which expire ten years from issuance, to purchase up to 2,355,000 shares of Successor common stock at an exercise price of $9.66 per share (Ten Year Warrants); | |
| Approximately 1,000,000 shares of Successor common stock and warrants, which expire five years from issuance, to purchase up to 1,552,774 shares of Successor common stock at an exercise price of $58.80 per share (Five Year Warrants) for Predecessor common stock interests; | |
| Approximately 1,200,000 shares of Successor restricted stock issued to management under a post-emergence share-based incentive compensation program. The Company holds approximately 500,000 shares of Successor common stock in treasury at December 31, 2010 for use in satisfying obligations under employee incentive compensation arrangements. |
Warrants
The Ten Year Warrants may be net share settled and are recorded as permanent equity in the
Companys consolidated balance sheets with 1,587,596 warrants outstanding at December 31, 2010. The
Ten Year Warrants were valued at $15.00 per share on October 1, 2010 using the Black-Scholes
valuation model. Significant assumptions used in determining the fair value of such warrants at
issuance included share price volatility and risk-free rate of return. The volatility assumption
was based on the implied volatility and historical realized volatility for comparable companies.
The risk-free rate assumption was based on U.S. Treasury bond yields.
The Five Year Warrants may be net share settled and are recorded as permanent equity in the
Companys consolidated balance sheets with 1,551,228 warrants outstanding at December 31, 2010. The
Five Year Warrants were valued at $3.62 per share on October 1, 2010 using the Black-Scholes
valuation model. Significant assumptions used in determining the fair value of such warrants at
issuance included share price volatility and risk-free rate of return. The volatility assumption
was based on the implied volatility and historical realized volatility for comparable companies.
The risk-free rate assumption was based on U.S. Treasury bond yields.
If the Company pays or declares a dividend or makes a distribution on common stock payable in
shares of its common stock, the number of shares of common stock or other shares of common stock
for which a Warrant (the Five Year Warrants and Ten Year Warrants, collectively) is exercisable
shall be adjusted so that the holder of each Warrant shall be entitled upon exercise to receive the
number of shares of common stock that such warrant holder would have owned or have been entitled to
receive after the happening of any of the events described above, had such Warrant been exercised
immediately prior to the happening of such event. In addition, if the Company pays to holders of
the Successor common stock an extraordinary dividend (as defined in each Warrant Agreement), then
the Exercise Price shall be decreased, effective immediately after the effective date of such
Extraordinary Dividend, dollar-for-dollar by the fair market value of any securities or other
assets paid or distributed on each share of Successor common stock in respect of such extraordinary
dividend.
Accumulated other comprehensive income
Successor | Predecessor | |||||||
2010 | 2009 | |||||||
(Dollars in Millions) | ||||||||
Foreign currency translation adjustments |
$ | 1 | $ | 89 | ||||
Pension and other postretirement benefit adjustments, net of tax |
51 | 53 | ||||||
Unrealized losses on derivatives |
(2 | ) | | |||||
Total accumulated other comprehensive income |
$ | 50 | $ | 142 | ||||
46
NOTE 19. Earnings Per Share
Basic net earnings (loss) per share of common stock is calculated by dividing reported net income
(loss) attributable to Visteon by the average number of shares of common stock outstanding during
the applicable period.
Successor | Predecessor | |||||||||||||||
Three Months | Nine Months | |||||||||||||||
Ended | Ended | Year Ended | ||||||||||||||
December 31 | October 1 | December 31 | ||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||
(Dollars in Millions, Except Per Share Amounts) | ||||||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) attributable to Visteon |
$ | 86 | $ | 940 | $ | 128 | $ | (681 | ) | |||||||
Denominator: |
||||||||||||||||
Average common stock outstanding |
50.2 | 130.3 | 130.4 | 129.4 | ||||||||||||
Dilutive effect of warrants |
1.5 | | | | ||||||||||||
Diluted shares |
51.7 | 130.3 | 130.4 | 129.4 | ||||||||||||
Basic and Diluted per Share Data: |
||||||||||||||||
Earnings (loss) per share attributable to Visteon: |
||||||||||||||||
Basic |
$ | 1.71 | $ | 7.21 | $ | 0.98 | $ | (5.26 | ) | |||||||
Diluted |
$ | 1.66 | $ | 7.21 | $ | 0.98 | $ | (5.26 | ) |
Successor
Unvested restricted stock is a participating security and is therefore included in the computation
of basic earnings per share under the two-class method. Diluted earnings per share is computed
using the treasury stock method, dividing net income by the average number of shares of common
stock outstanding, including the dilutive effect of the Warrants, using the average share price
during the period. There is no difference in diluted earnings per share between the two-class and
treasury stock method.
Predecessor
The impact of restricted stock is not a consideration in loss years and has been excluded from the
computation of basic earnings per share for the year ended December 31, 2008. Options to purchase
10 million shares of common stock at exercise prices ranging from $3.63 per share to $17.46 per
share and warrants to purchase 25 million shares were outstanding for 2009 but were not included in
the computation of diluted earnings per share as inclusion of such items would be anti-dilutive.
The options were cancelled effective October 1, 2010. In addition, for 2008, potential common stock
of approximately 12 million shares is excluded from the calculation of diluted loss per share
because the effect of including them would have been anti-dilutive.
NOTE 20. Fair Value Measurements
Fair Value Hierarchy
Financial assets and liabilities are categorized, based on the inputs to the valuation technique,
into a three-level fair value hierarchy. 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. |
47
The following tables present the Companys fair value hierarchy for those assets and liabilities
measured at fair value on a recurring basis:
Successor | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
(Dollars in Millions) | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Asset Category | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Retirement plan assets |
$ | 383 | $ | 488 | $ | 462 | $ | 1,333 | ||||||||
Foreign currency instruments |
| 1 | | 1 | ||||||||||||
Total |
$ | 383 | $ | 489 | $ | 462 | $ | 1,334 | ||||||||
Liability Category |
||||||||||||||||
Interest rate swaps |
$ | | $ | 1 | $ | | $ | |
Predecessor | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
(Dollars in Millions) | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Asset Category | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Retirement plan assets |
$ | 376 | $ | 415 | $ | 437 | $ | 1,228 |
Interest Rate Swaps and Foreign Currency Instruments
These financial instruments are valued 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, can be
derived from observable data or are supported by observable levels at which transactions are
executed in the marketplace.
Other Financial Instruments
The carrying amounts of all other financial instruments approximate their fair values because of
the relatively short-term maturity of these instruments.
Items Measured at Fair Value on a Non-recurring Basis
In addition to items that are measured at fair value on a recurring basis, the Company measures
certain assets and liabilities at fair value on a non-recurring basis, which are not included in
the table above. As these non-recurring fair value measurements are generally determined using
unobservable inputs, these fair value measurements are classified within Level 3 of the fair value
hierarchy. For further information on assets and liabilities measured at fair value on a
non-recurring basis refer to Note 5, Fresh-Start Accounting.
Retirement Plan Assets
Retirement plan assets categorized as Level 1 include the following:
| Cash and cash equivalents, which consist of U.S. and foreign currencies held by designated trustees. Foreign currencies held are reported in terms of U.S. dollars based on currency exchange rates readily available in active markets. | |
| Registered investment companies are mutual funds that are registered with the Securities and Exchange Commission. Mutual fund shares are traded actively on public exchanges. The share prices for mutual funds are published at the close of each business day. Mutual funds contain both equity and fixed income securities. | |
| Common and preferred stock include equity securities issued by U.S. and non-U.S. corporations. Common and preferred securities are traded actively on exchanges and price quotes for these shares are readily available. |
48
| Other investments include several miscellaneous assets and liabilities and are primarily comprised of liabilities related to pending trades and collateral settlements. |
Retirement plan assets categorized as Level 2 include the following:
| Treasury and government securities consist of bills, notes, bonds, and other fixed income securities issued directly by a non-U.S. treasury or by government-sponsored enterprises. These assets are valued using observable inputs. | |
| Common trust funds are comprised of shares or units in commingled funds that are not publicly traded. The underlying assets in these funds (equity securities, fixed income securities and commodity-related securities) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. | |
| Liability Driven Investing (LDI) is an investment strategy that utilizes swaps to hedge discount rate volatility. The swaps are collateralized on a daily basis resulting in counterparty exposure that is limited to one days activity. Swaps are a derivative product, utilizing a pricing model to calculate market value. | |
| Corporate debt securities consist of fixed income securities issued by non-U.S. corporations. These assets are valued using a bid evaluation process with bid data provided by independent pricing sources. |
Retirement plan assets categorized as Level 3 include the following:
| Global tactical asset allocation funds (GTAA) are common trust funds comprised of shares or units in commingled funds that are not publicly traded. GTAA managers primarily invest in equity, fixed income and cash instruments, with the ability to change the allocation mix based on market conditions while remaining within their specific strategy guidelines. The underlying assets in these funds may be publicly traded (equities and fixed income) and price quotes may be readily available. Assets may also be invested in various derivative products whose prices cannot be readily determined. | |
| Limited partnership hedge fund of funds (HFF) directly invest in a variety of hedge funds. The investment strategies of the underlying hedge funds are primarily focused on fixed income and equity based investments. There is currently minimal exposure to less liquid assets such as real estate or private equity in the portfolio. However, due to the private nature of the partnership investments, pricing inputs are not readily observable. Asset valuations are developed by the general partners that manage the partnerships. | |
| Insurance contracts are reported at cash surrender value and have no observable inputs. |
The fair values of the Companys U.S. retirement plan assets are as follows:
Successor | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Asset Category | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(Dollars in Millions) | ||||||||||||||||
Registered investment companies |
$ | 140 | $ | | $ | | $ | 140 | ||||||||
Common trust funds |
| 205 | | 205 | ||||||||||||
LDI |
| 208 | | 208 | ||||||||||||
GTAA |
| | 150 | 150 | ||||||||||||
Common and preferred stock |
139 | | | 139 | ||||||||||||
HFF |
| | 119 | 119 | ||||||||||||
Cash and cash equivalents |
26 | | | 26 | ||||||||||||
Insurance contracts |
| | 9 | 9 | ||||||||||||
Total |
$ | 305 | $ | 413 | $ | 278 | $ | 996 | ||||||||
49
Predecessor | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Asset Category | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(Dollars in Millions) | ||||||||||||||||
Registered investment companies |
$ | 196 | $ | | $ | | $ | 196 | ||||||||
Common trust funds |
| 195 | | 195 | ||||||||||||
LDI |
| 151 | | 151 | ||||||||||||
GTAA |
| | 130 | 130 | ||||||||||||
HFF |
| | 113 | 113 | ||||||||||||
Common and preferred stock |
108 | | | 108 | ||||||||||||
Cash and cash equivalents |
12 | | | 12 | ||||||||||||
Insurance contracts |
| | 10 | 10 | ||||||||||||
Other |
(2 | ) | | | (2 | ) | ||||||||||
Total |
$ | 314 | $ | 346 | $ | 253 | $ | 913 | ||||||||
The fair value measurements which used significant unobservable inputs are as follows:
Insurance | ||||||||||||
GTAA | HFF | contracts | ||||||||||
(Dollars in Millions) | ||||||||||||
Predecessor Beginning balance at December 31, 2008 |
$ | 98 | $ | 97 | $ | 9 | ||||||
Actual return on plan assets: |
||||||||||||
Relating to assets still held at the reporting date |
31 | 9 | 2 | |||||||||
Relating to assets sold during the period |
(1 | ) | | | ||||||||
Purchases, sales and settlements |
2 | 7 | (1 | ) | ||||||||
Predecessor Ending balance at December 31, 2009 |
$ | 130 | $ | 113 | $ | 10 | ||||||
Actual return on plan assets: |
||||||||||||
Relating to assets still held at the reporting date |
11 | 3 | 1 | |||||||||
Relating to assets sold during the period |
| | | |||||||||
Purchases, sales and settlements |
| | (1 | ) | ||||||||
Predecessor Ending balance at October 1, 2010 |
$ | 141 | $ | 116 | $ | 10 | ||||||
Actual return on plan assets: |
||||||||||||
Relating to assets still held at the reporting date |
9 | 3 | (1 | ) | ||||||||
Relating to assets sold during the period |
| | | |||||||||
Successor Ending balance at December 31, 2010 |
$ | 150 | $ | 119 | $ | 9 |
The fair values of the Companys Non-U.S. retirement plan assets are as follows:
Successor | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Asset Category | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(Dollars in Millions) | ||||||||||||||||
Insurance contracts |
$ | | $ | | $ | 179 | $ | 179 | ||||||||
Treasury and government securities |
| 51 | | 51 | ||||||||||||
Registered investment companies |
62 | | | 62 | ||||||||||||
Cash and cash equivalents |
13 | | | 13 | ||||||||||||
Corporate debt securities |
| 8 | | 8 | ||||||||||||
Common trust funds |
| 6 | | 6 | ||||||||||||
Limited partnerships (HFF) |
| | 5 | 5 | ||||||||||||
Common and preferred stock |
3 | | | 3 | ||||||||||||
Other |
| 10 | | 10 | ||||||||||||
Total |
$ | 78 | $ | 75 | $ | 184 | $ | 337 | ||||||||
50
Predecessor | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Asset Category | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(Dollars in Millions) | ||||||||||||||||
Insurance contracts |
$ | | $ | | $ | 180 | $ | 180 | ||||||||
Treasury and government securities |
| 56 | | 56 | ||||||||||||
Registered investment companies |
51 | | | 51 | ||||||||||||
Cash and cash equivalents |
9 | | | 9 | ||||||||||||
Corporate debt securities |
| 8 | | 8 | ||||||||||||
Common trust funds |
| 5 | | 5 | ||||||||||||
Limited partnerships (HFF) |
| | 4 | 4 | ||||||||||||
Common and preferred stock |
2 | | | 2 | ||||||||||||
Total |
$ | 62 | $ | 69 | $ | 184 | $ | 315 | ||||||||
Fair value measurements which used significant unobservable inputs are as follows:
Insurance | ||||||||
contracts | HFF | |||||||
(Dollars in Millions) | ||||||||
Predecessor Beginning balance at December 31, 2008 |
$ | 173 | $ | 2 | ||||
Actual return on plan assets: |
||||||||
Relating to assets held at the reporting date |
12 | | ||||||
Purchases, sales and settlements |
(5 | ) | 2 | |||||
Predecessor Ending balance at December 31, 2009 |
$ | 180 | $ | 4 | ||||
Actual return on plan assets: |
||||||||
Relating to assets held at the reporting date |
(1 | ) | | |||||
Purchases, sales and settlements |
(1 | ) | | |||||
Predecessor Ending balance at October 1, 2010 |
$ | 178 | $ | 4 | ||||
Actual return on plan assets: |
||||||||
Relating to assets held at the reporting date |
(1 | ) | | |||||
Purchases, sales and settlements |
2 | 1 | ||||||
Successor Ending balance at December 31, 2010 |
$ | 179 | $ | 5 | ||||
NOTE 21. Financial Instruments
The Company is exposed to various market risks including, but not limited to, changes in foreign
currency exchange rates and market interest rates. The Company manages these risks through the use
of derivative financial instruments. The Companys use of derivative financial instruments is
limited to hedging activities and such instruments are not used for speculative or trading
purposes. The maximum length of time over which the Company hedges the variability in the future
cash flows for forecasted transactions excluding those forecasted transactions related to the
payment of variable interest on existing debt is up to one year from the date of the forecasted
transaction. The maximum length of time over which the Company hedges forecasted transactions
related to the payment of variable interest on existing debt is the term of the underlying debt.
The use of derivative financial instruments creates exposure to credit loss in the event of
nonperformance by the counterparty to the derivative financial instruments. The Company limits this
exposure by entering into agreements directly with a variety of major financial institutions with
high credit standards that are expected to fully satisfy their obligations under the contracts.
Additionally, the Companys ability to utilize derivatives to manage risks is dependent on credit
and market conditions.
Accounting for Derivative Financial Instruments
51
Derivative financial instruments are recorded as assets or liabilities in the consolidated balance
sheets at fair value. The fair values of derivatives used to hedge the Companys risks fluctuate
over time, generally in relation to the fair values or cash flows of the underlying hedged
transactions or exposures. The accounting for changes in fair value of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging relationship and,
further, on the type of hedging relationship.
At inception, the Company formally designates and documents the financial instrument as a hedge of
a specific underlying exposure, as well as the risk management objectives and strategies for
undertaking the hedge transaction, including designation of the instrument as a fair value hedge, a
cash flow hedge or a hedge of a net investment in a foreign operation. Additionally, at inception
and at least quarterly thereafter, the Company formally assesses whether the financial instruments
that are used in hedging transactions are effective at offsetting changes in either the fair value
or cash flows of the related underlying exposure.
For a designated cash flow hedge, the effective portion of the change in the fair value of the
derivative instrument is recorded in Accumulated other comprehensive income in the consolidated
balance sheet. When the underlying hedged transaction is realized, the gain or loss included in
Accumulated other comprehensive income is recorded in earnings and reflected in the consolidated
statement of operations on the same line as the gain or loss on the hedged item attributable to the
hedged risk. Any ineffective portion of a financial instruments change in fair value is
immediately recognized in operating results. For a designated fair value hedge, both the effective
and ineffective portions of the change in the fair value of the derivative instrument are recorded
in earnings and reflected in the consolidated statement of operations on the same line as the gain
or loss on the hedged item attributable to the hedged risk. For a designated net investment hedge,
the effective portion of the change in the fair value of the derivative instrument is recorded as a
cumulative translation adjustment in Accumulated other comprehensive income in the consolidated
balance sheet. Cash flows associated with designated hedges are reported in the same category as
the underlying hedged item. Derivatives not designated as a hedge are adjusted to fair value
through operating results. Cash flows associated with non-designated derivatives are reported in
Net cash provided from (used by) operating activities in the Companys consolidated statements of
cash flows.
Foreign Currency Exchange Rate Risk
The Companys 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. Where possible, the Company utilizes derivative financial instruments,
including forward and option contracts, to protect the Companys cash flow from changes in exchange
rates. Foreign currency exposures are reviewed monthly and any natural offsets are considered prior
to entering into a derivative financial instrument. The Companys primary foreign currency
exposures include the Euro, Korean Won, Czech Koruna, Hungarian Forint and Mexican Peso. Where
possible, the Company utilizes a strategy of partial coverage for transactions in these currencies.
As of December 31, 2010 and 2009, the Company had forward contracts to hedge changes in foreign
currency exchange rates with notional amounts of approximately $529 million and $289 million,
respectively. Fair value estimates of these contracts are based on quoted market prices. A portion
of these instruments have been designated as cash flow hedges with the effective portion of the
gain or loss reported in the Accumulated other comprehensive income component of Shareholders
equity (deficit) in the Companys consolidated balance sheet. The ineffective portion of these
instruments is recorded as cost of sales in the Companys consolidated statement of operations.
Interest Rate Risk
The Company is subject to interest rate risk principally in relation to variable-rate debt. The
Company uses derivative financial instruments to manage exposure to fluctuations in interest rates
in connection with its risk management policies. During the fourth quarter of 2010, the Company
entered into interest rate swaps with a notional amount of $250 million that effectively convert
designated cash flows associated with underlying interest payments on the Term Loan from a variable
interest rate to a fixed interest rate. The instruments have been designated as cash flow hedges
with the effective portion of the gain or loss reported in the Accumulated other comprehensive
income component of Shareholders equity (deficit) in the Companys consolidated balance sheet.
The ineffective portion of these swaps is assessed based on the hypothetical derivative method and
is recorded as interest expense in the Companys consolidated statement of operations.
During 2009, the Company terminated interest rate swaps with a notional amount of $100 million
related to a portion of the $1 billion seven-year term loan due 2013. These interest rate swaps had
been designated as cash flow hedges and were settled for a loss of $10 million, which was recorded
as an adjustment to Accumulated other comprehensive
52
income. As of the Petition Date, the underlying interest payments were no longer probable of
occurring therefore, this loss was recorded as interest expense. Additionally, interest rate swaps
with a notional amount of $100 million related to a portion of the $1 billion seven-year term loan
due 2013 were terminated by the counterparty. These interest rate swaps had been designated as cash
flow hedges and as the underlying interest payments were not probable of occurring, a loss of
approximately $3 million was recorded as interest expense.
During 2009, the Company entered into an agreement to terminate interest rate swaps with a notional
amount of $225 million related to a portion of the 7.00% notes due March 10, 2014. These interest
rate swaps had been designated as fair value hedges and during the three months ended June 30, 2009
were settled for a gain of $18 million, which was recorded as a valuation adjustment of the
underlying debt. Additionally, interest rate swaps with a notional amount of $125 million related
to a portion of the 8.25% notes due August 1, 2010 were terminated by the counterparty. These
interest rate swaps had been designated as fair value hedges, resulting in a loss of approximately
$3 million, which was recorded as a valuation adjustment of the underlying debt.
Financial Statement Presentation
The Company presents its derivative positions and any related material collateral under master
netting agreements on a net basis. Derivative financial instruments designated as hedging
instruments are included in the Companys consolidated balance sheets at December 31, 2010 and 2009
as follows (dollars in millions):
Assets | Liabilities | |||||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||
Risk Hedged | Classification | 2010 | 2009 | Classification | 2010 | 2009 | ||||||||||||||||
Foreign currency |
Other current assets | $ | 2 | $ | 2 | Other current assets | $ | 1 | $ | 2 | ||||||||||||
Foreign currency |
Other current liabilities | 3 | | Other current liabilities | 3 | | ||||||||||||||||
Interest rates |
Other non-current assets | | | Other non-current liabilities | 1 | | ||||||||||||||||
$ | 5 | $ | 2 | $ | 5 | $ | 2 | |||||||||||||||
The impact of derivative financial instruments on the Companys financial statements, as recorded
in Cost of sales and Interest expense for the three-month Successor period ended December 31, 2010,
the ninemonth Predecessor period ended October 1, 2010 and for the year ended December 31, 2009
is as follows:
Amount of Gain (Loss) | ||||||||||||||||||||||||||||||||||||
Reclassified from | ||||||||||||||||||||||||||||||||||||
Recorded in AOCI | AOCI into Income | Recorded in Income | ||||||||||||||||||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||
2010 | 2010 | 2009 | 2010 | 2010 | 2009 | 2010 | 2010 | 2009 | ||||||||||||||||||||||||||||
Foreign currency
risk Cost of
sales |
||||||||||||||||||||||||||||||||||||
Cash flow hedges |
$ | (1 | ) | $ | | $ | (3 | ) | $ | 1 | $ | 6 | $ | 2 | $ | | $ | | $ | | ||||||||||||||||
Non-designated cash
flow hedges |
| | | | | | 3 | (1 | ) | 2 | ||||||||||||||||||||||||||
$ | (1 | ) | $ | | $ | (3 | ) | $ | 1 | $ | 6 | $ | 2 | $ | 3 | $ | (1 | ) | $ | 2 | ||||||||||||||||
Interest rate risk
Interest expense |
||||||||||||||||||||||||||||||||||||
Fair value hedges |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | 2 | ||||||||||||||||||
Cash flow hedges |
(1 | ) | | 7 | | | (15 | ) | | | | |||||||||||||||||||||||||
$ | (1 | ) | $ | | $ | 7 | $ | | $ | | $ | (15 | ) | $ | | $ | | $ | 2 | |||||||||||||||||
Concentrations of Credit Risk
Financial instruments, including cash equivalents, marketable securities, derivative contracts and
accounts receivable, expose the Company to counterparty credit risk for non-performance. The
Companys counterparties for cash equivalents, marketable securities and derivative contracts are
banks and financial institutions that meet the Companys requirement of high credit standing. The
Companys counterparties for derivative contracts are substantial investment and commercial banks
with significant experience using such derivatives. The Company manages its credit risk through
policies requiring minimum credit standing and limiting credit exposure to any one counterparty and
through monitoring counterparty credit risks. The Companys concentration of credit risk related to
derivative contracts at December 31, 2010 was not significant.
53
With the exception of the customers below, the Companys credit risk with any individual customer
does not exceed ten percent of total accounts receivable at December 31, 2010 and 2009,
respectively.
Successor | Predecessor | |||||||
2010 | 2009 | |||||||
Ford and affiliates |
22 | % | 22 | % | ||||
Hyundai Motor Company |
17 | % | 17 | % | ||||
Hyundai Mobis Company |
14 | % | 14 | % | ||||
PSA Peugeot Citroën |
6 | % | 10 | % |
Management periodically performs credit evaluations of its customers and generally does not require
collateral.
NOTE 22. Commitments and Contingencies
Purchase Obligations
In December 2010, the Company entered into a stipulation agreement obligating the Company to
purchase certain professional services totaling $14 million on or before February 29, 2012. This
agreement is contingent on Court approval and was subsequently re-negotiated whereby the obligation
was reduced to $13 million.
In January 2003, the Company commenced a 10-year outsourcing agreement with International Business
Machines (IBM) pursuant to which the Company outsources most of its information technology needs
on a global basis, including mainframe support services, data centers, customer support centers,
application development and maintenance, data network management, desktop support, disaster
recovery and web hosting (IBM Outsourcing Agreement). During 2006, the IBM Outsourcing Agreement
was modified to change the service delivery model and related service charges. Expenses incurred
under the IBM Outsourcing Agreement were approximately $4 million during the threemonth Successor
period ended December 31, 2010, $18 million during the ninemonth Predecessor period ended October
1, 2010, $80 million during 2009 and $100 million during 2008.
Effective February 18, 2010, the date of the Court order, the Debtors entered into a settlement
agreement with IBM (the Settlement Agreement), assumed the IBM Outsourcing Agreement, as amended
and restated pursuant to the Settlement Agreement and agreed to the payment of cure amounts
totaling approximately $11 million in connection therewith. The service charges under the IBM
Outsourcing Agreement as amended and restated pursuant to the Settlement Agreement are expected to
aggregate approximately $37 million during the remaining term of the agreement, subject to changes
based on the Companys actual consumption of services to meet its then current business needs. The
outsourcing agreement may also be terminated for the Companys business convenience under the
agreement for a scheduled termination fee.
Operating Leases
At December 31, 2010, the Company had the following minimum rental commitments under non-cancelable
operating leases: 2011 $29 million; 2012 $23 million; 2013 $17 million; 2014 $12
million; 2015 $6 million; thereafter $12 million. Rent expense was $11 million for the
three-month Successor period ended December 31, 2010, $33 million for the nine-month Predecessor
period ended October 1, 2010, $64 million for 2009 and $81 million for 2008.
Guarantees
The Company has guaranteed approximately $30 million for lease payments related to its
subsidiaries. In connection with the January 2009 PBGC Agreement, the Company agreed to provide a
guarantee by certain affiliates of certain contingent pension obligations of up to $30 million.
Litigation and Claims
On May 28, 2009, the Debtors filed voluntary petitions in the Court seeking reorganization relief
under the provisions of chapter 11 of the Bankruptcy Code. The Debtors chapter 11 cases have been
assigned to the Honorable Christopher S. Sontchi and are being jointly administered as Case No.
09-11786. The Debtors continued to operate their business as debtors-in-possession under the
jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code
and the orders of the Court until their emergence on October 1, 2010.
54
Refer to Note 4, Voluntary Reorganization under Chapter 11 of the United States Bankruptcy Code,
for details on the chapter 11 cases.
On August 31, 2010, the Bankruptcy Court entered an order confirming the Plan (the Confirmation
Order). On September 10, 2010, Mark Taub and Andrew Shirley, holders of pre-confirmation shares of
common stock of Visteon (the Appellants), filed a notice of appeal of the Confirmation Order with
the United States District Court for the District of Delaware (the District Court), seeking to
overturn the Confirmation Order and/or other equitable relief. On November 14, 2010, the
Bankruptcy Court approved Visteons settlement with the Appellants, pursuant to which the
Appellants agreed, among other things, to withdraw their appeal with prejudice in exchange for
payment of $2.25 million from Visteon. On December 22, 2010, the Appellants and Visteon filed a
stipulation with the District Court dismissing the Appellants appeal with prejudice.
In December of 2009, the Court granted the Debtors motion in part authorizing them to terminate or
amend certain other postretirement employee benefits, including health care and life insurance. On
December 29, 2009, the IUE-CWA, the Industrial Division of the Communications Workers of America,
AFL-CIO, CLC, filed a notice of appeal of the Courts order with the District Court. On March 30,
2010, the District Court affirmed the Courts order in all respects. On April 1, 2010, the IUE
filed a notice of appeal, and subsequently a motion for expedited treatment of the appeal and for a
stay pending appeal, with the Circuit Court. On April 13, 2010, the Circuit Court granted the
motion to expedite and denied the motion for stay pending appeal. On July 13, 2010, the Circuit
Court reversed the order of the District Court and the Court and directed the District Court to,
among other things, direct the Court to order the Company to take whatever action is necessary to
immediately restore all terminated or modified benefits to their pre-termination/modification
levels. On July 27, 2010, the Company filed a Petition for Rehearing or Rehearing En Banc
requesting that the Circuit Court grant a rehearing to review the panels decision, which was
denied. On August 17, 2010 and August 20, 2010, on remand, the Court ruled that the Company should
restore certain other postretirement employee benefits to the appellant-retirees as well as
salaried retirees and certain retirees of the International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America (UAW). On September 1, 2010, the Company filed a Notice
of Appeal of these rulings in respect of the decision to include non-appealing retirees, and on
September 15, 2010 the UAW filed a Notice of Cross-Appeal. The Company subsequently reached an
agreement with the original appellants in late-September, which resulted in the Company not
restoring other postretirement employee benefits of such retirees. The UAW has filed a complaint
with the United States District Court for the Eastern District of Michigan seeking, among other
things, a declaratory judgment to prohibit the Company from terminating certain other
postretirement employee benefits for UAW retirees after the Effective Date.
On March 31, 2009, Visteon UK Limited, a company organized under the laws of England and Wales and
an indirect, wholly-owned subsidiary of the Company, filed for administration under the United
Kingdom Insolvency Act of 1986 with the High Court of Justice, Chancery division in London,
England. The UK Administration does not include the Company or any of the Companys other
subsidiaries. The UK Administration is discussed in Note 1, Description of the Business.
In June of 2009, the UK Pensions Regulator advised the Administrators of the UK Debtor that it was
investigating whether there were grounds for regulatory intervention under various provisions of
the UK Pensions Act 2004 in relation to an alleged funding deficiency in respect of the UK Debtor
pension plan. That investigation is ongoing and the Debtors have been cooperating with the UK
Pensions Regulator. In October of 2009, the trustee of the UK Debtor pension plan filed proofs of
claim against each of the Debtors asserting contingent and unliquidated claims pursuant to the UK
Pensions Act 2004 and the UK Pensions Act 1995 for liabilities related to a funding deficiency of
the UK Debtor pension plan of approximately $555 million as of March 31, 2009. The trustee of the
Visteon Engineering Services Limited (VES) pension plan also submitted proofs of claim against
each of the Debtors asserting contingent and unliquidated claims pursuant to the UK Pensions Act
2004 and the UK Pensions Act 1995 for liabilities related to an alleged funding deficiency of the
VES pension plan of approximately $118 million as of March 31, 2009. On May 11, 2010, the UK Debtor
Pension Trustees Limited, the creditors committee, and the Debtors entered in a stipulation
whereby the UK Debtor Pension Trustees Limited agreed to withdraw all claims asserted against the
Debtors with prejudice, which the Court approved on May 12, 2010. The trustee of the VES pension
plan also agreed to withdraw all claims against each of the Debtors. The Company disputes that any
basis exists for the UK Pensions Regulator to seek contribution or financial support from any of
the affiliated entities outside the UK with respect to their claims, however, no assurance can be
given that a successful claim for contribution or financial support would not have a material
adverse effect on the business, result of operations or financial condition of the Company and/or
its affiliates.
Several current and former employees of Visteon Deutschland GmbH (Visteon Germany) filed civil
actions against Visteon Germany in various German courts beginning in August 2007 seeking damages
for the alleged violation of German pension laws that prohibit the use of pension benefit formulas
that differ for salaried and hourly
55
employees without adequate justification. Several of these actions have been joined as pilot
cases. In a written decision issued in April 2010, the Federal Labor Court issued a declaratory
judgment in favor of the plaintiffs in the pilot cases. To date, more than 400 current and former
employees have filed similar actions, and an additional 900 current and former employees are
similarly situated. The Company has reserved approximately $20 million relating to these claims
based on the Companys best estimate as to the number and value of the claims that will be made in
connection with the pension plan. However, the Companys estimate is subject to many uncertainties
which could result in Visteon Germany incurring amounts in excess of the reserved amount of up to
approximately $10 million.
Product Warranty and Recall
Amounts accrued for product warranty and recall claims are based on managements best estimates of
the amounts that will ultimately be required to settle such items. The Companys 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 reconciliation of changes in the product warranty and
recall claims liability for the selected periods:
Successor | Predecessor | ||||||||||||||
Three Months | Nine Months | Year Ended | |||||||||||||
Ended | Ended | ||||||||||||||
December 31 | October 1 | December 31 | |||||||||||||
2010 | 2010 | 2009 | |||||||||||||
(Dollars in Millions) | |||||||||||||||
Beginning balance |
$ | 76 | $ | 79 | $ | 100 | |||||||||
Accruals for products shipped |
7 | 19 | 28 | ||||||||||||
Changes in estimates |
(2 | ) | (4 | ) | (10 | ) | |||||||||
Settlements |
(6 | ) | (18 | ) | (39 | ) | |||||||||
Ending balance |
$ | 75 | $ | 76 | $ | 79 | |||||||||
Environmental Matters
The Company is subject to the requirements of federal, state, local and foreign environmental and
occupational safety and health laws and regulations and ordinances. These include laws regulating
air emissions, water discharge and waste management. The Company is also subject to environmental
laws requiring the investigation and cleanup of environmental contamination at properties it
presently owns or operates and at third-party disposal or treatment facilities to which these sites
send or arranged to send hazardous waste. The Company is aware of contamination at some of its
properties. These sites are in various stages of investigation and cleanup. The Company currently
is, has been, and in the future may become the subject of formal or informal enforcement actions or
procedures.
Costs related to environmental assessments and remediation efforts at operating facilities,
previously owned or operated facilities, or other waste site locations are accrued when it is
probable that a liability has been incurred and the amount of that liability can be reasonably
estimated. Estimated costs are recorded at undiscounted amounts, based on experience and
assessments, and are regularly evaluated. The liabilities are recorded in Other current liabilities
and Other non-current liabilities in the consolidated balance sheets. At December 31, 2010, the
Company had recorded a reserve of approximately $1 million for environmental matters. However,
estimating liabilities for environmental investigation and cleanup is complex and dependent upon a
number of factors beyond the Companys control and which may change dramatically. Accordingly,
although the Company believes its reserve is adequate based on current information, the Company
cannot provide any assurance that its ultimate environmental investigation and cleanup costs and
liabilities will not exceed the amount of its current reserve.
Other Contingent Matters
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 Companys products; governmental regulations relating to safety; employment-related
matters; customer, supplier and other contractual relationships; intellectual property rights;
product warranties; product recalls; and environmental matters. Some of the foregoing matters may
involve compensatory, punitive or antitrust or other treble damage claims in very large
56
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 paragraph where losses are deemed probable and reasonably estimable.
It is possible, however, that some of the matters discussed in the foregoing paragraph 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 at December 31, 2010 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 Companys financial condition, results of operations or cash flows,
although such an outcome is possible.
Under section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stayed
most actions against a debtor, including most actions to collect pre-petition indebtedness or to
exercise control over the property of the debtors estate. Substantially all pre-petition
liabilities and claims relating to rejected executory contracts and unexpired leases have been
settled under the Debtors plan of reorganization, however, the ultimate amounts to be paid in
settlement of each those claims will continue to be subject to the uncertain outcome of litigation,
negotiations and Court decisions for a period of time after the Effective Date.
NOTE 23. Segment Information
Segments are defined as components of an enterprise for which discrete financial information is
available that is evaluated regularly by the chief operating decision-maker, or a decision-making
group, in deciding the allocation of resources and in assessing performance. The Companys chief
operating decision making group, comprised of the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), evaluates the performance of the Companys segments primarily based on
net sales, before elimination of inter-company shipments, gross margin and operating assets. Gross
margin is defined as total sales less costs to manufacture and product development and engineering
expenses. Operating assets include inventories and property and equipment utilized in the
manufacture of the segments products.
In April 2011, the Company announced a new operating structure for use by the CODM Group in
managing the business based on specific global product lines rather than reporting at a broader
global product group level as was historically utilized by the CODM Group. Under the historical
global product group reporting, the results of each of the Companys facilities were grouped for
reporting purposes into segments based on the predominant product line offering of the respective
facility, as separate product line results within each facility were not historically available.
During the second quarter of 2011 the Company completed the process of realigning systems and
reporting structures to facilitate financial reporting under the revised organizational structure
such that the results for each product line within each facility can be separately identified. The
information reviewed by the CODM Group has been updated to reflect the new structure. The financial
results included below have been recast for all periods to reflect the updated structure.
The Companys new operating structure is organized by global product lines, including: Climate,
Electronics, Interiors and Lighting. These global product lines have financial and operating
responsibility over the design, development and manufacture of the Companys product portfolio.
Global customer groups are responsible for the business development of the Companys product
portfolio and overall customer relationships. Certain functions such as procurement, information
technology and other administrative activities are managed on a global basis with regional
deployment.
The Companys reportable segments are as follows:
| Climate The Companys Climate product line includes climate air handling modules, powertrain cooling modules, heat exchangers, compressors, fluid transport and engine induction systems. Climate accounted for approximately 49%, 48%, 43%, and 38% of the Companys total product sales, excluding intra-product line eliminations, for the three-month Successor period ended December 31, 2010, the ninemonth Predecessor period ended October 1, 2010 and the years ended December 31, 2009 and 2008, respectively. | |
| Electronics The Companys Electronics product line includes audio systems, infotainment systems, driver information systems, powertrain and feature control modules, climate controls, and electronic control modules. Electronics accounted for approximately 17%, 17%, 18%, and 20% of the Companys total product sales, excluding intra-product line eliminations, for the three-month Successor period ended December 31, 2010, the |
57
ninemonth Predecessor period ended October 1, 2010 and the years ended December 31, 2009 and 2008, respectively. |
| Interiors The Companys Interiors product line includes instrument panels, cockpit modules, door trim and floor consoles. Interiors accounted for approximately 28%, 29%, 33%, and 33% of the Companys total product sales, excluding intra-product line eliminations, for the three-month Successor period ended December 31, 2010, the nine-month Predecessor period ended October 1, 2010 and the years ended December 31, 2009 and 2008, respectively. | |
| Lighting The Companys Lighting product line includes headlamps, rear combination lamps, center high-mounted stop lamps, fog lamps and electronic control modules. Lighting accounted for approximately 6% of the Companys total product sales, excluding intra-product line eliminations, in the three-month Successor period ended December 31, 2010, the nine-month Predecessor period ended October 1, 2010 and the years ended December 31, 2009 and 2008. | |
| Services The Companys Services operations provide various transition services in support of divestiture transactions, principally related to the ACH Transactions. The Company supplied leased personnel and transition services as required by certain agreements entered into by the Company with ACH as a part of the ACH Transactions and as amended in 2008. As of August 31, 2010, the Company ceased providing substantially all transition and other services or leasing employees to ACH. Services to ACH were provided at a rate approximately equal to the Companys cost. |
The accounting policies for the reportable segments are the same as those described in the Note 3
Significant Accounting Policies to the Companys consolidated financial statements. Key financial
measures reviewed by the Companys chief operating decision makers are as follows (dollars in
millions):
Net Sales | Gross Margin | |||||||||||||||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||
Three | Three | |||||||||||||||||||||||||||||||
Months | Nine Months | Months | Nine Months | |||||||||||||||||||||||||||||
Ended | Ended | Year Ended | Ended | Ended | Year Ended | |||||||||||||||||||||||||||
December 31 | October 1 | December 31 | December 31 | October 1 | December 31 | |||||||||||||||||||||||||||
2010 | 2010 | 2009 | 2008 | 2010 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||
Climate |
$ | 954 | $ | 2,660 | $ | 2,835 | $ | 3,582 | $ | 115 | $ | 326 | $ | 370 | $ | 295 | ||||||||||||||||
Electronics |
326 | 935 | 1,208 | 1,871 | 90 | 137 | 124 | 154 | ||||||||||||||||||||||||
Interiors |
554 | 1,641 | 2,137 | 3,064 | 37 | 90 | 114 | 22 | ||||||||||||||||||||||||
Lighting |
111 | 345 | 361 | 577 | 2 | 10 | (15 | ) | (38 | ) | ||||||||||||||||||||||
Other |
| | | 271 | | | | 23 | ||||||||||||||||||||||||
Eliminations |
(59 | ) | (144 | ) | (121 | ) | (288 | ) | | | | | ||||||||||||||||||||
Total Products |
1,886 | 5,437 | 6,420 | 9,077 | 244 | 563 | 593 | 456 | ||||||||||||||||||||||||
Services |
1 | 142 | 265 | 467 | | 2 | 4 | 3 | ||||||||||||||||||||||||
Total consolidated |
$ | 1,887 | $ | 5,579 | $ | 6,685 | $ | 9,544 | $ | 244 | $ | 565 | $ | 597 | $ | 459 | ||||||||||||||||
The above amounts include product sales of $430 million during the threemonth Successor
period ended December 31, 2010, $1.4 billion during the nine-month Predecessor period ended October
1, 2010 and $1.8 billion during 2009 to Ford Motor Company and $591 million during the threemonth
Successor period ended December 31, 2010, $1.5 billion during the ninemonth Predecessor period
ended October 1, 2010 and $1.7 billion during 2009 to Hyundai Kia Automotive Group.
58
Segment Operating Assets
Inventories, net | Property and Equipment, net | |||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in Millions) | ||||||||||||||||
Climate |
$ | 214 | $ | 167 | $ | 974 | $ | 899 | ||||||||
Electronics |
73 | 60 | 159 | 189 | ||||||||||||
Interiors |
50 | 58 | 212 | 299 | ||||||||||||
Lighting |
25 | 28 | 109 | 203 | ||||||||||||
Other |
2 | 6 | | | ||||||||||||
Total Products |
364 | 319 | 1,454 | 1,590 | ||||||||||||
Corporate |
| | 128 | 346 | ||||||||||||
Total consolidated |
$ | 364 | $ | 319 | $ | 1,582 | $ | 1,936 | ||||||||
Segment Expenditures
Depreciation and Amortization | Capital Expenditures | |||||||||||||||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||
Three | Nine | Three | Nine | |||||||||||||||||||||||||||||
Months | Months | Months | Months | |||||||||||||||||||||||||||||
Ended | Ended | Year Ended | Ended | Ended | Year Ended | |||||||||||||||||||||||||||
December 31 | October 1 | December 31 | December 31 | October 1 | December 31 | |||||||||||||||||||||||||||
2010 | 2010 | 2009 | 2008 | 2010 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||||||||||
Climate |
$ | 46 | $ | 102 | $ | 137 | $ | 151 | $ | 56 | $ | 60 | $ | 74 | $ | 140 | ||||||||||||||||
Electronics |
8 | 20 | 44 | 76 | 11 | 12 | 19 | 24 | ||||||||||||||||||||||||
Interiors |
8 | 27 | 49 | 70 | 14 | 20 | 34 | 68 | ||||||||||||||||||||||||
Lighting |
4 | 22 | 45 | 32 | 7 | 17 | 16 | 32 | ||||||||||||||||||||||||
Other |
| | | 7 | | | | 1 | ||||||||||||||||||||||||
Total Products |
66 | 171 | 275 | 336 | 88 | 109 | 143 | 265 | ||||||||||||||||||||||||
Corporate |
7 | 36 | 77 | 80 | 4 | 8 | 8 | 29 | ||||||||||||||||||||||||
Total consolidated |
$ | 73 | $ | 207 | $ | 352 | $ | 416 | $ | 92 | $ | 117 | $ | 151 | $ | 294 | ||||||||||||||||
Certain adjustments are necessary to reconcile segment financial information to the Companys
consolidated amounts. Corporate reconciling items are related to the Companys technical centers,
corporate headquarters and other administrative and support functions.
Segment information for the year ended December 31, 2008 has been recast to reflect the remaining Other product group operations in the Companys Climate, Electronics and Interiors product groups. These operations have been reclassified consistent with the Companys current management reporting structure. All other facilities associated with the Companys Other product group have been either divested or closed.
59
Financial Information by Geographic Region
Net Sales | ||||||||||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||||
Nine | ||||||||||||||||||||||||
Three Months | Months | |||||||||||||||||||||||
Ended | Ended | Year Ended | Property and Equipment, net | |||||||||||||||||||||
December 31 | October 1 | December 31 | Successor | Predecessor | ||||||||||||||||||||
2010 | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||
Geographic region: |
||||||||||||||||||||||||
United States |
$ | 271 | $ | 1,155 | $ | 1,710 | $ | 2,667 | $ | 240 | $ | 549 | ||||||||||||
Mexico |
13 | 36 | 27 | 75 | 27 | 53 | ||||||||||||||||||
Canada |
21 | 61 | 46 | 66 | 31 | 19 | ||||||||||||||||||
Intra-region eliminations |
(10 | ) | (40 | ) | (29 | ) | (71 | ) | | | ||||||||||||||
North America |
295 | 1,212 | 1,754 | 2,737 | 298 | 621 | ||||||||||||||||||
Germany |
40 | 129 | 158 | 274 | 26 | 40 | ||||||||||||||||||
France |
177 | 512 | 609 | 799 | 101 | 148 | ||||||||||||||||||
United Kingdom |
| | 34 | 401 | 4 | 7 | ||||||||||||||||||
Portugal |
91 | 304 | 441 | 606 | 80 | 107 | ||||||||||||||||||
Spain |
115 | 311 | 287 | 657 | 45 | 68 | ||||||||||||||||||
Czech Republic |
131 | 387 | 449 | 632 | 121 | 222 | ||||||||||||||||||
Hungary |
82 | 258 | 315 | 469 | 65 | 71 | ||||||||||||||||||
Other Europe |
125 | 292 | 293 | 250 | 63 | 76 | ||||||||||||||||||
Intra-region eliminations |
(29 | ) | (81 | ) | (93 | ) | (159 | ) | | | ||||||||||||||
Europe |
732 | 2,112 | 2,493 | 3,929 | 505 | 739 | ||||||||||||||||||
Korea |
583 | 1,520 | 1,589 | 2,077 | 476 | 324 | ||||||||||||||||||
China |
125 | 325 | 380 | 282 | 96 | 80 | ||||||||||||||||||
India |
85 | 225 | 213 | 238 | 96 | 60 | ||||||||||||||||||
Japan |
62 | 152 | 138 | 224 | 14 | 16 | ||||||||||||||||||
Other Asia |
71 | 177 | 142 | 223 | 33 | 32 | ||||||||||||||||||
Intra-region eliminations |
(66 | ) | (166 | ) | (158 | ) | (162 | ) | | | ||||||||||||||
Asia |
860 | 2,233 | 2,304 | 2,882 | 715 | 512 | ||||||||||||||||||
South America |
123 | 386 | 427 | 474 | 64 | 64 | ||||||||||||||||||
Inter-region eliminations |
(123 | ) | (364 | ) | (293 | ) | (478 | ) | | | ||||||||||||||
$ | 1,887 | $ | 5,579 | $ | 6,685 | $ | 9,544 | $ | 1,582 | $ | 1,936 | |||||||||||||
60