NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Description of Business
Visteon Corporation (the "Company" or "Visteon") is a global automotive supplier that designs, engineers and manufactures innovative electronics products for nearly every original equipment vehicle manufacturer ("OEM") worldwide including Ford, Nissan, Renault, Mazda, BMW, General Motors and Honda. Visteon is headquartered in Van Buren Township, Michigan and has an international network of manufacturing operations, technical centers and joint venture operations, supported by approximately
10,000
employees, dedicated to the design, development, manufacture and support of its product offerings and its global customers. The Company's manufacturing and engineering footprint is principally located outside of the U.S., with a heavy concentration in low-cost geographic regions. Visteon delivers value for its customers and stockholders through its technology-focused core vehicle cockpit electronics business. The Company's cockpit electronics product portfolio includes audio systems, information displays, instrument clusters, head up displays, infotainment systems, and telematics solutions. The Company's vehicle cockpit electronics business is comprised of and reported under the Electronics segment. In addition to the Electronics segment, the Company has residual operations in South America and Europe previously associated with the former Interiors and Climate businesses, not subject to discontinued operations classification, that comprise Other. A summary of transactions impacting the Company's businesses is provided below.
Exit of Climate Business
On June 9, 2015, Visteon Corporation and its wholly owned subsidiary, VIHI, LLC (collectively, “Visteon”) completed the sale to Hahn & Co. Auto Holdings Co., Ltd. and Hankook Tire Co., Ltd. (together, the “Purchasers”) of all of its shares of Halla Visteon Climate Control Corporation, a Korean corporation (“HVCC”), for approximately $
3.4 billion
, or KRW
52,000
per share, after adjusting for the 2014 dividend paid by HVCC to Visteon (the “Climate Transaction”), pursuant to and in accordance with the Share Purchase Agreement, dated as of December 17, 2014, among Visteon and the Purchasers. See Note 4 "Discontinued Operations" for additional disclosures. The Company received net cash proceeds of approximately
$2.7 billion
and recognized a pretax gain of approximately
$2.3 billion
in connection with the closing of the Climate Transaction in the second quarter 2015. The results of operations for the Climate business have been classified as income (loss) from discontinued operations, net of tax in the consolidated statements of comprehensive income for the three and nine month periods ended September 30, 2015.
On July 18, 2016, the Company reached an agreement to sell its South Africa climate operations, with 2015 annual sales of
$9 million
as reported in Other in the Company’s segment footnote. The sale is expected to close during 2016 for proceeds of approximately
$2 million
. Assets and liabilities associated with these operations met the "held for sale" criteria at
September 30, 2016
and are classified as "Other current assets" or "Other current liabilities" in the consolidated balance sheets. The Company recorded a charge during the third quarter of 2016 associated with this agreement of approximately
$11 million
related to foreign currency translation amounts recorded in accumulated other comprehensive loss.
Exit of Interiors Business
During 2014, the Company divested the majority of its global Interiors business (the "Interiors Divestiture"). Subsequently, Visteon completed the sale of its Interiors operations in Thailand on February 2, 2015. Remaining operations subject to the Interiors Divestiture are located in Argentina and Brazil and are expected to close during 2016. Assets and liabilities associated with these operations continue to meet the "held for sale" criteria at
September 30, 2016
and are classified as "Other current assets" or "Other current liabilities" in the consolidated balance sheets. The Company expects to record losses in connection with the Argentina and Brazil portions of the Interiors Divestiture in future periods upon closing, which are estimated to be approximately
$20 million
.
See Note 4 "Discontinued Operations" for additional disclosures.
On December 1, 2015, Visteon completed the sale and transfer of its equity ownership in Visteon Deutschland GmbH, which operated the Berlin, Germany interiors plant ("Germany Interiors Divestiture"). The Company contributed cash, of approximately
$141 million
, assets of
$27 million
, and liabilities of
$198 million
including pension related liabilities. The Company will make a final contribution payment of approximately
$33 million
in the fourth quarter of 2016 which is included in the Company's consolidated balance sheet as "Other current liabilities" as of September 30, 2016.
NOTE 2. Summary of Significant Accounting Policies
The unaudited consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These interim consolidated financial statements include all adjustments
(consisting of normal recurring adjustments, except as otherwise disclosed) that management believes are necessary for a fair presentation of the results of operations, financial position and cash flows of the Company for the interim periods presented. Interim results are not necessarily indicative of full-year results.
Principles of Consolidation:
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 exercises significant influence but does not exercise control are accounted for using the equity method. All other investments in non-consolidated affiliates are accounted for using the cost method.
The Company determines whether joint ventures in which it has invested is a Variable Interest Entity (“VIE”) at the start of each new venture and when a reconsideration event has occurred. An enterprise must consolidate a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company determined that Yanfeng Visteon Electronics (China) Investment Co., Ltd. ("YFVIC"), is a VIE. The Company holds a variable interest in YFVIC primarily related to its ownership interests and subordinated financial support. The Company and Yanfeng Automotive Trim Systems Co., Ltd. (an unrelated party) each own
50%
of YFVIC. YFVIC is not consolidated since the Company is not the primary beneficiary.
At September 30, 2016, the Company’s investment in YFVIC is
$24 million
. In addition, at September 30, 2016, the Company has receivables due from YFVIC, including trade receivables and other advances of
$25 million
, subordinated loans receivable of
$22 million
and payables due to YFVIC of
$15 million
. At December 31, 2015, the Company’s investment in YFVIC was
$23 million
and it had receivables due from YFVIC, including trade receivables and other advances of
$36 million
, a subordinated loan receivable of
$10 million
and payables due to YFVIC of
$17 million
. At September 30, 2016, the Company’s maximum exposure to loss in YFVIC is
$94 million
, which includes assets described above and a
$23 million
loan guarantee. During the nine months ended September 30, 2016, Visteon loaned YFVIC and affiliates approximately
$12 million
, expected to be repaid within five years.
During the third quarter of 2016, the Company agreed to sell its
50%
interest in an equity investment for approximately
$7 million
. The Company has recorded a loss in the investment of
$5 million
during the three and nine months ended September 30, 2016 related to this transaction, classified as "Gain on sale of non-consolidated affiliates, net" in the Company's consolidated statements of comprehensive income.
On July 22, 2016, the Company sold a cost method investment to a third party for proceeds of approximately
$11 million
. The Company recorded a pre-tax gain of
$6 million
during the three and nine months ended September 30, 2016, classified as "Gain on sale of non-consolidated affiliates, net" in the Company's consolidated statements of comprehensive income.
In June 2015, the Company completed the sale of its
12.5%
ownership interest in Yangfeng Visteon Jinqiao Automotive Trim Systems Co., Ltd. ("Jinqiao"), a Chinese automotive supplier for proceeds of approximately
$91 million
and recorded a pre-tax gain of
$62 million
during the nine months ended September 30, 2015, classified as "Gain on sale of non-consolidated affiliates, net" in the Company's consolidated statements of comprehensive income.
Use of Estimates:
The preparation of the financial statements in conformity with U.S. 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 Company's consolidated financial statements.
Reclassifications:
Certain prior period amounts have been reclassified to conform to the current period presentation.
Other Expense, Net:
Other expense, net includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Foreign currency translation charge
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
Loss on asset contribution
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Transformation initiatives
|
—
|
|
|
5
|
|
|
3
|
|
|
23
|
|
Transaction hedging and exchange losses (gains)
|
—
|
|
|
—
|
|
|
1
|
|
|
(19
|
)
|
Integration costs
|
—
|
|
|
2
|
|
|
1
|
|
|
11
|
|
Recoverable taxes
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
$
|
13
|
|
|
$
|
7
|
|
|
$
|
17
|
|
|
$
|
15
|
|
During the three and nine months ended September 30, 2016, the Company recorded a charge of approximately
$11 million
related to foreign currency translation amounts recorded in accumulated other comprehensive loss associated with the agreement to sell the Company's South Africa climate operations. In connection with the closure of the Climate facility in Argentina, the Company entered an agreement to contribute land and building with a net book value of
$2 million
to the local municipality.
Transformation initiatives include information technology separation costs and financial and advisory services incurred in connection with the execution of the Company's comprehensive value creation plan and certain severance costs associated with the acquisition of substantially of the global automotive electronics business of Johnson Controls Inc. (the "Electronics Acquisition") and the Climate Transaction. Transaction hedging and exchange gains for the nine months ended September 30, 2015 of
$19 million
, relate to Climate Transaction proceeds hedging and exchange impacts.
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. As of
September 30, 2016
the Company's cash balances are invested in a diversified portfolio of cash and cash equivalents including money market funds, commercial paper rated A2/P2 and above with maturity under three months, time deposits and other short-term cash investments, which mature under three months with highly rated banking institutions. The cost of such funds approximates fair value based on the nature of the investment.
Short-term Investments:
Short-term investments of
$47 million
as of December 31, 2015 included corporate bonds, asset backed securities, and commercial paper with maturities between three and twelve months held as part of the Company's separately managed accounts. The cost of these Level 1 investments approximated fair value. These investments were liquidated during the first quarter of 2016.
Restricted Cash:
Restricted cash represents amounts designated for uses other than current operations and includes
$3 million
related to the Letter of Credit Facility, and
$1 million
related to cash collateral for other corporate purposes at
September 30, 2016
.
Investments in Affiliates:
The Company recorded equity in net income of affiliates of less than
$1 million
and
$3 million
for the three month periods ended September 30, 2016 and 2015 respectively. For the nine month periods ended September 30, 2016 and 2015, the Company recorded
$3 million
and
$8 million
, respectively. Investments in affiliates were
$47 million
and
$56 million
at
September 30, 2016
and
December 31, 2015
, respectively. At
September 30, 2016
and December 31, 2015, investments in affiliates accounted for under the equity method totaled
$42 million
and
$45 million
, respectively, while investments in affiliates accounted for under the cost method were
$5 million
at
September 30, 2016
and $
11 million
at
December 31, 2015
. 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 such a decline has occurred, an impairment loss is recorded, which is measured as the difference between carrying value and fair value.
Product Warranty and Recall:
Amounts accrued for product warranty and recall claims are based on management’s best estimates of the amounts that will ultimately be required to settle such items. The Company’s estimates for product warranty and recall obligations are developed with support from its sales, engineering, quality and legal functions and include due consideration of contractual arrangements, past experience, current claims and related information, production changes, industry and regulatory developments and various other considerations. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued or beyond what the Company may recover from its suppliers. During the nine months ended September 30, 2016, the Company recorded $7 million
for specific cause actions representing customer actions related to defective supplier parts and related software. Additional amounts of $6 million for such customer actions are expected to be recovered from contractually responsible parties, and are therefore, included in the Company's consolidated balance sheets as "Accounts receivable, net" and "Other current liabilities" without an impact to the Company's consolidated statements of comprehensive income. The following table provides a reconciliation of changes in the product warranty and recall claims liability:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Beginning balance
|
$
|
38
|
|
|
$
|
20
|
|
Accruals for products shipped
|
12
|
|
|
11
|
|
Changes in estimates
|
4
|
|
|
(1
|
)
|
Specific cause actions
|
7
|
|
|
9
|
|
Recoverable warranty/recalls
|
6
|
|
|
5
|
|
Foreign currency
|
1
|
|
|
(3
|
)
|
Settlements
|
(13
|
)
|
|
(12
|
)
|
Ending balance
|
$
|
55
|
|
|
$
|
29
|
|
Recently Issued Accounting Pronouncements:
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-9, "Revenue from Contracts with Customers", which is the new comprehensive revenue recognition standard that will supersede existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. This ASU allows for both retrospective and prospective methods of adoption. In July 2015, the FASB approved a one-year deferral of the effective date of the standard. As such, the new standard will become effective for annual and interim periods beginning after December 15, 2017 with early adoption on the original effective date permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements and anticipates changes to the revenue recognition of customer owned tooling and engineering recoveries. The Company expects to adopt this standard during the first quarter 2018.
In April 2015, the FASB issued ASU No. 2015-3, "Simplifying the Presentation of Debt Issuance Cost". The ASU requires debt issuance costs associated with a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company adopted the guidance on a retrospective basis during the three months ending March 31, 2016 and accordingly, previously issued debt issuance costs in the amount of
$1 million
as of December 31, 2015 have been reclassified as a reduction of the corresponding debt liability.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)": The amendments supersede current lease requirements in Topic 840 which require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718)": Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, these amendments are not expected to significantly impact net income, earnings per share, and the statement of cash flows. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)": Classification of certain cash receipts and cash payments. The ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU will be applied using a retrospective
transition method to each period presented. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
NOTE 3. Business Acquisition
On July 8, 2016 Visteon acquired AllGo Embedded Systems Private Limited, a leading developer of embedded multimedia system solutions to global vehicle manufacturers, for a purchase price of
$17 million
("AllGo Purchase") including
$2 million
of contingent consideration to be paid over the next year if certain technology milestones are achieved. In addition, the purchase agreement includes contingent payments of
$5 million
if key employees remain employed through July 2019. The AllGo Purchase is expected to add greater scale and depth to the Company's infotainment software capabilities. The operating results for the business acquired have been included in the Electronics segment from the date of acquisition. During the nine months ended September 30, 2016, the Company incurred acquisition-related costs of approximately
$1 million
. These amounts were recorded as incurred and have been classified as "Other expenses,net" within the Company's consolidated statements of comprehensive income.
The AllGo purchase was accounted for as a business combination, with the purchase price allocated on a preliminary basis as of July 2016. The preliminary purchase price allocation, which is subject to change and may be subsequently adjusted to reflect final valuation results, is shown below:
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
|
|
|
Purchase price
|
|
$
|
17
|
|
|
|
|
Assets Acquired:
|
|
|
Accounts receivable
|
|
$
|
1
|
|
Intangible assets
|
|
7
|
|
Goodwill
|
|
12
|
|
Total assets acquired
|
|
$
|
20
|
|
|
|
|
Liabilities Assumed:
|
|
|
Deferred tax liabilities
|
|
3
|
|
Total liabilities assumed
|
|
$
|
3
|
|
Assets acquired and liabilities assumed were recorded at estimated fair values based on management's estimates, available information, and reasonable and supportable assumptions. Additionally, the Company utilized a third-party to assist with certain estimates of fair values.
Fair values for intangible assets were based on the income approach including excess earnings and relief from royalty methods. These fair value measurements are classified within level 3 of the fair value hierarchy. The preliminary purchase price allocations may be subsequently adjusted to reflect final valuation results.
The pro forma effects of the AllGo acquisitions does not materially impact the Company's reported results for any period presented, and as a result no pro forma financial statements are presented.
NOTE 4. Discontinued Operations
The operations subject to the Interiors Divestiture and Climate Transaction met conditions required to qualify for discontinued operations reporting. Accordingly, the results of operations for Interiors operations subject to the Interiors Divestiture have been reclassified to income (loss) from discontinued operations, net of tax in the consolidated statements of comprehensive income for the three and nine month periods ended September 30, 2016 and
2015
. The nine month period ended September 30, 2015 also included the results of operations for the Climate transaction, sold during the second quarter of 2015.
Discontinued operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Sales
|
$
|
14
|
|
|
$
|
16
|
|
|
$
|
34
|
|
|
$
|
2,184
|
|
Cost of sales
|
20
|
|
|
21
|
|
|
48
|
|
|
2,021
|
|
Gross margin
|
(6
|
)
|
|
(5
|
)
|
|
(14
|
)
|
|
163
|
|
Selling, general and administrative expenses
|
2
|
|
|
1
|
|
|
4
|
|
|
76
|
|
Loss (gain) on Climate Transaction
|
—
|
|
|
—
|
|
|
2
|
|
|
(2,332
|
)
|
Loss and impairment on Interiors Divestiture
|
—
|
|
|
1
|
|
|
2
|
|
|
17
|
|
Restructuring expense
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Equity in net income of non-consolidated affiliates
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Other expense, net
|
1
|
|
|
3
|
|
|
2
|
|
|
8
|
|
(Loss) income from discontinued operations before income taxes
|
(9
|
)
|
|
(10
|
)
|
|
(24
|
)
|
|
2,396
|
|
(Benefit) provision for income taxes
|
(16
|
)
|
|
1
|
|
|
(9
|
)
|
|
202
|
|
Income (loss) from discontinued operations, net of tax
|
7
|
|
|
(11
|
)
|
|
(15
|
)
|
|
2,194
|
|
Net income attributable to non-controlling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Net income (loss) from discontinued operations attributable to Visteon
|
$
|
7
|
|
|
$
|
(11
|
)
|
|
$
|
(15
|
)
|
|
$
|
2,170
|
|
During the nine months ended September 30, 2016, the Company recorded
$8 million
of income tax expense associated with adverse currency impacts in connection with the Korean capital gains withholding tax recovered during the first quarter of 2016. During the third quarter of 2016, the Company recorded a
$17 million
income tax benefit to reflect change in estimates associated with the filing of the Company’s U.S. tax returns that resulted in a reduction in U.S. income tax related to the 2015 Climate Transaction.
During the nine month periods ended September 30, 2015, the Company received
$3.4 billion
of gross proceeds and recorded a
$2.3 billion
in pre-tax gain associated with the Climate Transaction. The gain is summarized below (dollars in millions):
|
|
|
|
|
|
|
|
|
Gross proceeds
|
(1)
|
$
|
3,423
|
|
Korea withholding tax
|
(2)
|
(377
|
)
|
Professional fees
|
(3)
|
(20
|
)
|
Korea security transaction tax
|
(4)
|
(17
|
)
|
Divested cash balances
|
(5)
|
(345
|
)
|
Net cash provided from investing activities
|
|
2,664
|
|
Net assets divested, excluding cash balances
|
(5)
|
(557
|
)
|
Information technology separation and service obligations
|
(6)
|
(53
|
)
|
Employee related charges
|
(7)
|
(45
|
)
|
Electronics business repurchase obligation
|
(8)
|
(50
|
)
|
Professional fees
|
(3)
|
(4
|
)
|
Korea withholding tax recoverable
|
(2)
|
377
|
|
Net gain on Climate Transaction
|
|
$
|
2,332
|
|
(1) Gross proceeds of
$3,423 million
were received in connection with the Climate Transaction, translated at a spot rate of
1121.5
KRW to USD on June 9, 2015. Impacts of related hedging activities and exchange on proceeds conversion into USD are included in the Company's consolidated statements of comprehensive income as "Other expense, net" for the three and nine month periods ended September 30, 2015.
(2) In connection with the transaction, the Company recorded a tax recoverable of
$377 million
for Korean capital gains tax withheld by the Purchasers and paid to the Korean government. This amount reduced proceeds classified as net cash provided from investing activities within the Company's consolidated statements of cash flows for the nine months ended September
30, 2015. In January 2016, the Company recovered the entire amount of the Korean capital gains withholding tax, adjusted for currency and exchange impacts, of $
356 million
.
(3) Professional fees of
$24 million
, representing fees paid to financial advisors, were based on a percentage of the gross proceeds, partially offset by previously paid retainer fees of
$4 million
, for a net payment of
$20 million
reducing proceeds classified as net cash provided from investing activities within the Company's consolidated statements of cash flows for the nine months ended September 30, 2015.
(4) Security transaction taxes of
$17 million
were remitted to the Korean government as of the transaction close, reducing proceeds classified as net cash provided from investing activities within the Company's consolidated statements of cash flows for the nine months ended September 30, 2015.
(5) Net assets of
$902 million
, including assets, liabilities, accumulated other comprehensive income and non-controlling interests, were divested in connection with the Climate Transaction. Divested assets included
$345 million
of cash balances, reflected as a reduction of transaction proceeds classified as net cash provided from investing activities within the Company's consolidated statements of cash flows for the nine months ended September 30, 2015.
(6) In connection with the Climate Transaction, the Company has entered an agreement pursuant to which Visteon will provide information technology ongoing and separation services for HVCC to fully operate as an independent entity with estimated costs of approximately
$53 million
. The information technology liability is included in the Company's consolidated balance sheets as "Other current liabilities" as of September 30, 2016 and December 31, 2015.
(7) Employee related charges of
$45 million
include bonus payments, the Company's assumption of incentive plan liabilities, and impacts of employment change in control provisions. Bonus payments of
$30 million
are classified in the Company's net cash provided from operating activities within the Company's consolidated statements of cash flows for the nine months ended September 30, 2015. Amounts remaining to be paid are included in the Company's consolidated balance sheets as "Accrued employee liabilities" as of September 30, 2016 and December 31, 2015.
(8) In connection with the Climate Transaction, the Company has entered an agreement to purchase certain electronics operations located in India, expected to close in 2016. The Company has recorded a repurchase obligation of
$50 million
, representing the estimated purchase price of the subject business. The Company continues to consolidate the business, with net assets of approximately
$22 million
as of September 30, 2016, based on the Company’s continued controlling financial interest. The Company’s controlling financial interest was evaluated based on continued operating control and obligation to fund losses or benefit from earnings. The business is included in a legal entity currently owned by HVCC and therefore the Electronics business assets are not available for general corporate purposes. The repurchase obligation is included in the Company’s consolidated balance sheets as “Other current liabilities” as of September 30, 2016 and December 31, 2015.
As of
September 30, 2016
and December 31, 2015, held for sale balances include assets and liabilities associated with operations subject to the Interiors Divestiture located in Argentina and Brazil and climate operations pending sale in South Africa.
Held for sale balances, classified as "Other current assets" and "Other current liabilities" on the consolidated balance sheets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
ASSETS HELD FOR SALE
|
Cash and equivalents
|
$
|
2
|
|
|
$
|
1
|
|
Accounts receivable, net
|
13
|
|
|
9
|
|
Inventories, net
|
6
|
|
|
4
|
|
Other current assets
|
2
|
|
|
3
|
|
Total current assets held for sale
|
23
|
|
|
17
|
|
|
|
|
|
Total assets held for sale
|
$
|
23
|
|
|
$
|
17
|
|
|
|
|
|
LIABILITIES HELD FOR SALE
|
Accounts payable
|
$
|
9
|
|
|
$
|
6
|
|
Employee benefits
|
3
|
|
|
2
|
|
Other current liabilities
|
1
|
|
|
1
|
|
Total current liabilities held for sale
|
13
|
|
|
9
|
|
|
|
|
|
Total liabilities held for sale
|
$
|
13
|
|
|
$
|
9
|
|
The Company has combined cash flows from discontinued operations with cash flows from continuing operations within the operating, investing and financing categories within the consolidated statements of cash flows. Cash and non-cash items for certain operating and investing activities related to discontinued operations for the nine months ended
September 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Depreciation and amortization
|
$
|
—
|
|
|
$
|
85
|
|
Asset impairments and losses on divestiture
|
$
|
2
|
|
|
$
|
16
|
|
Capital expenditures
|
$
|
2
|
|
|
$
|
81
|
|
NOTE 5. Restructuring Activities
During the three and nine months ended
September 30, 2016
, the Company recorded
$5 million
and
$22 million
of restructuring expenses, net of reversals. Given the economically-sensitive and highly competitive nature of the automotive electronics 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.
Electronics
During the first quarter of 2016, the Company announced a restructuring program to transform the Company's engineering organization and supporting functional areas to focus on execution and technology. The organization will be comprised of regional engineering, product management and advanced technologies, and global centers of competence. During the three and nine months ended
September 30, 2016
, the Company has recorded approximately
$1 million
and
$13 million
, respectively, of restructuring
expenses under this program, associated with approximately
100
employees, of which
$7 million
remains accrued as of
September 30, 2016
.
The Company expects to record additional restructuring costs related to this program as the underlying plan is finalized.
In connection with the Electronics Acquisition the Company commenced a restructuring program designed to achieve annual cost savings through transaction synergies. During the three and nine months ended September 30, 2015, the Company recorded
$2 million
and
$14 million
, respectively, of severance and termination benefits under this program associated with approximately
400
employees. As of
September 30, 2016
,
$4 million
remains accrued for this program and charges are considered substantially complete.
The Company previously announced a restructuring program designed to reduce fixed costs and to improve operational efficiency by addressing certain under-performing operations. In connection with that program, the Company announced plans to realign its corporate and administrative functions directly to their corresponding operational beneficiary. The Company recorded
$1 million
and
$4 million
for restructuring expenses during the three and nine months ended September 30, 2015, respectively, primarily related to severance and termination benefits. As of September 30, 2016, this program is considered substantially complete.
Other
During the three and
nine
months ended
September 30, 2016
, the Company recorded
$4 million
and
$11 million
, respectively, of restructuring expenses, related to severance and termination benefits, in connection with the
wind-down of certain operations in South America, of which
$11 million
remains accrued as of September 30, 2016. The Company expects to record additional restructuring costs related to this program as the underlying plan is finalized.
As of
September 30, 2016
, the Company retained approximately
$2 million
of restructuring reserves as part of the Interiors Divestiture associated with a previously announced program for the fundamental reorganization of operations at a facility in Brazil.
Restructuring Reserves
Restructuring reserve balances of
$33 million
and
$38 million
at
September 30, 2016
and
December 31, 2015
, respectively, are classified as "Other current liabilities" on the consolidated balance sheets. The Company anticipates that the activities associated with the current restructuring reserve balance will be substantially complete by the end of 2017. The Company’s consolidated restructuring reserves and related activity are summarized below, including amounts associated with discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronics
|
|
Other
|
|
Total
|
|
(Dollars in Millions)
|
December 31, 2015
|
$
|
33
|
|
|
$
|
5
|
|
|
$
|
38
|
|
Expense
|
11
|
|
|
—
|
|
|
11
|
|
Utilization
|
(13
|
)
|
|
—
|
|
|
(13
|
)
|
Reversals
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Foreign currency
|
1
|
|
|
—
|
|
|
1
|
|
March 31, 2016
|
31
|
|
|
5
|
|
|
36
|
|
Expense
|
1
|
|
|
7
|
|
|
8
|
|
Utilization
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
Reversals
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Foreign currency
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
June 30, 2016
|
25
|
|
|
12
|
|
|
37
|
|
Expense
|
1
|
|
|
4
|
|
|
5
|
|
Utilization
|
(7
|
)
|
|
(2
|
)
|
|
(9
|
)
|
September 30, 2016
|
$
|
19
|
|
|
$
|
14
|
|
|
$
|
33
|
|
Utilization represents payments for severance and other employee termination benefits and special termination benefits reclassified to pension and other postretirement employee benefit liabilities, where such payments are made from the Company’s benefit plans.
NOTE 6. Inventories
Inventories consist of the following components:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Raw materials
|
$
|
97
|
|
|
$
|
90
|
|
Work-in-process
|
44
|
|
|
53
|
|
Finished products
|
35
|
|
|
44
|
|
|
$
|
176
|
|
|
$
|
187
|
|
NOTE 7. Other Assets
Other current assets are comprised of the following components:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Recoverable taxes
|
$
|
75
|
|
|
$
|
425
|
|
Prepaid assets and deposits
|
36
|
|
|
28
|
|
Joint venture receivables
|
33
|
|
|
44
|
|
Assets held for sale
|
23
|
|
|
17
|
|
Notes receivable
|
17
|
|
|
21
|
|
Contractually reimbursable engineering costs
|
8
|
|
|
34
|
|
Foreign currency hedges
|
2
|
|
|
6
|
|
Other
|
6
|
|
|
6
|
|
|
$
|
200
|
|
|
$
|
581
|
|
Recoverable taxes as of December 31, 2015 included Korean capital gains tax withheld by the Purchasers and paid to the Korean government in connection with the Climate Transaction of
$364 million
adjusted for currency and interest impacts. In January 2016, the Company recovered the entire amount of the Korean capital gains withholding tax, adjusted for currency impacts, of
$356 million
.
Other non-current assets are comprised of the following components:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Deferred tax assets
|
$
|
35
|
|
|
$
|
34
|
|
Recoverable taxes
|
34
|
|
|
21
|
|
Long term notes receivable
|
26
|
|
|
13
|
|
Contractually reimbursable engineering costs
|
9
|
|
|
4
|
|
Other
|
16
|
|
|
16
|
|
|
$
|
120
|
|
|
$
|
88
|
|
Current and non-current contractually reimbursable engineering costs of
$8 million
and
$9 million
, respectively, at
September 30, 2016
and
$34 million
and
$4 million
, respectively, at
December 31, 2015
, are related to pre-production design and development costs incurred pursuant to long-term supply arrangements that are contractually guaranteed for reimbursement by customers. The Company expects to receive cash reimbursement payments of approximately
$3 million
during the remainder of 2016,
$6 million
in 2017, and
$8 million
in 2018 and thereafter.
NOTE 8. Property and Equipment, net
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Land
|
$
|
18
|
|
|
$
|
15
|
|
Buildings and improvements
|
69
|
|
|
64
|
|
Machinery, equipment and other
|
411
|
|
|
353
|
|
Construction in progress
|
35
|
|
|
75
|
|
|
533
|
|
|
507
|
|
Accumulated depreciation
|
(208
|
)
|
|
(170
|
)
|
|
325
|
|
|
337
|
|
Product tooling, net of amortization
|
17
|
|
|
14
|
|
|
$
|
342
|
|
|
$
|
351
|
|
Property and equipment is depreciated principally using the straight-line method of depreciation over the related asset's estimated useful life. Generally, buildings and improvements are depreciated over a
40
-year estimated useful life, leasehold improvements are depreciated on a straight-line basis over the initial lease term period, and machinery, equipment and other 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 for property and equipment, excluding discontinued operations, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Depreciation
|
$
|
16
|
|
|
$
|
17
|
|
|
$
|
49
|
|
|
$
|
49
|
|
Amortization
|
1
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
51
|
|
|
$
|
51
|
|
NOTE 9. Intangible Assets, net
Intangible assets, net at
September 30, 2016
and
December 31, 2015
, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Estimated Weighted Average Useful Life (years)
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
|
|
(Dollars in Millions)
|
Definite-Lived:
|
|
|
Developed technology
|
7
|
|
$
|
41
|
|
|
$
|
24
|
|
|
$
|
17
|
|
|
$
|
39
|
|
|
$
|
20
|
|
|
$
|
19
|
|
Customer related
|
10
|
|
87
|
|
|
24
|
|
|
63
|
|
|
84
|
|
|
17
|
|
|
67
|
|
Other
|
32
|
|
8
|
|
|
1
|
|
|
7
|
|
|
8
|
|
|
1
|
|
|
7
|
|
Subtotal
|
|
|
136
|
|
|
49
|
|
|
87
|
|
|
131
|
|
|
38
|
|
|
93
|
|
Indefinite-Lived:
|
|
|
Goodwill
|
|
|
50
|
|
|
—
|
|
|
50
|
|
|
40
|
|
|
—
|
|
|
40
|
|
Total
|
|
|
$
|
186
|
|
|
$
|
49
|
|
|
$
|
137
|
|
|
$
|
171
|
|
|
$
|
38
|
|
|
$
|
133
|
|
In connection with the AllGo Purchase, the Company recorded intangible assets including patented and unpatented technology of
$2 million
and customer related assets of
$5 million
. These definite lived intangible assets are being amortized using the straight-
line method over their estimated useful lives of
10
years for patented technology,
12
years for unpatented technology and
7
to
12
years for customer related assets. Additionally, the Company recorded goodwill of
$12 million
for the excess of the purchase price over the net of the fair values of the identifiable assets and liabilities acquired.
The Company recorded approximately
$4 million
and
$11 million
of amortization expense related to definite-lived intangible assets for the three and nine months ended
September 30, 2016
. The Company currently estimates annual amortization expense to be
$14 million
for
2016
,
$12 million
each year from
2017
through
2019
, and
$11 million
for
2020
. Indefinite-lived intangible assets are not amortized but are tested for impairment at least annually, or earlier when events and circumstances indicate that it is more likely than not that such assets have been impaired.
A roll-forward of the carrying amounts of intangible assets is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangibles
|
|
Indefinite-lived intangibles
|
|
|
|
Developed Technology
|
|
Customer Related
|
|
Other
|
|
Goodwill
|
|
Total
|
|
(Dollars in Millions)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
$
|
19
|
|
|
$
|
67
|
|
|
$
|
7
|
|
|
$
|
40
|
|
|
$
|
133
|
|
Additions
|
2
|
|
|
5
|
|
|
—
|
|
|
12
|
|
|
19
|
|
Foreign currency
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
(4
|
)
|
Amortization
|
(4
|
)
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
September 30, 2016
|
$
|
17
|
|
|
$
|
63
|
|
|
$
|
7
|
|
|
$
|
50
|
|
|
$
|
137
|
|
Additions represent the fair value of intangibles associated with the AllGo Purchase, disclosed in Note 3 "Business Acquisition."
NOTE 10. Other Liabilities
Other current liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Electronics operations repurchase commitment
|
$
|
50
|
|
|
$
|
50
|
|
Product warranty and recall accruals
|
40
|
|
|
26
|
|
Restructuring reserves
|
33
|
|
|
38
|
|
Contribution payable
|
33
|
|
|
33
|
|
Rent and royalties
|
30
|
|
|
33
|
|
Joint venture payables
|
17
|
|
|
18
|
|
Liabilities held for sale
|
13
|
|
|
9
|
|
Dividends payable
|
12
|
|
|
6
|
|
Foreign currency translation loss
|
11
|
|
|
—
|
|
Deferred income
|
10
|
|
|
11
|
|
Information technology separation and service obligations
|
7
|
|
|
37
|
|
Non-income taxes payable
|
6
|
|
|
20
|
|
Foreign currency hedges
|
5
|
|
|
1
|
|
Income taxes payable
|
4
|
|
|
63
|
|
Other
|
22
|
|
|
25
|
|
|
$
|
293
|
|
|
$
|
370
|
|
In connection with the Climate Transaction, the Company entered into an agreement to purchase certain electronics operations located in India, expected to close in 2016. The Company has recorded a repurchase commitment of
$50 million
during 2015, representing the estimated purchase price of the subject business.
In connection with the Germany Interiors Divestiture, the Company will make a final contribution payment of approximately
$33 million
by December 2016.
As of September 30, 2016 and December 31, 2015 liabilities held for sale of
$13 million
and
$9 million
, respectively, represent liabilities associated with operations subject to the Interiors Divestiture located in Argentina and Brazil. See Note 4 "Discontinued Operations" for additional disclosures.
On July 18, 2016, the Company reached an agreement to sell its South Africa climate operations. The sale is expected to close during 2016 for proceeds of approximately
$2 million
. The Company recorded a charge of approximately
$11 million
related to foreign currency translation amounts recorded in accumulated other comprehensive loss, and classified as "Other liabilities" until the transaction close date.
Information technology separation and service obligations were established in connection with the Climate Transaction and Interiors Divestiture, representing ongoing and separation services for the divested businesses to operate as independent entities. As of
September 30, 2016
and
December 31, 2015
remaining obligations totaled
$7 million
and
$37 million
, respectively.
Other non-current liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Income tax reserves
|
$
|
22
|
|
|
$
|
25
|
|
Deferred income
|
16
|
|
|
15
|
|
Product warranty and recall accruals
|
15
|
|
|
12
|
|
Non-income tax reserves
|
10
|
|
|
10
|
|
Other
|
19
|
|
|
13
|
|
|
$
|
82
|
|
|
$
|
75
|
|
NOTE 11. Debt
The Company’s short and long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Short-Term Debt:
|
|
|
|
Current portion of long-term debt
|
$
|
1
|
|
|
$
|
3
|
|
Short-term borrowings
|
23
|
|
|
34
|
|
|
$
|
24
|
|
|
$
|
37
|
|
Long-Term Debt:
|
|
|
|
Term debt facility
|
$
|
345
|
|
|
$
|
345
|
|
Other
|
2
|
|
|
1
|
|
|
$
|
347
|
|
|
$
|
346
|
|
As of December 31, 2015 previously issued debt issuance costs were reclassified as a reduction of the corresponding debt liability in accordance with ASU No. 2015-3, "Simplifying the Presentation of Debt Issuance Cost". These costs approximated
$1 million
as of September 30, 2016 and December 31, 2015.
Short-Term Debt
Short-term borrowings are primarily related to the Company's non-U.S. consolidated joint ventures and are payable in USD, Chinese Yuan, Indian Rupee and Thai Baht. The Company had international affiliate short-term borrowings of $
23 million
and
$34 million
as of
September 30, 2016
and
December 31, 2015
respectively. Availability under outstanding affiliate credit facilities as of
September 30, 2016
is approximately
$34 million
.
Long-Term Debt
The Credit Agreement, dated as of
April 9, 2014
and as amended by Waiver and Amendment No. 1 dated as of
March 25, 2015
(the “Credit Agreement”), by and among the Company, as borrower, each lender from time to time party thereto, each letter of credit issuer from time to time party thereto and Citibank, N.A., as administrative agent, provides for (i) an aggregate principal of
$350 million
(the “Term Facility”) and (ii) a
$200 million
revolving credit facility (the “Revolving Facility”). The Term Facility matures on
April 9, 2021
and the Revolving Facility matures on
April 9, 2019
. The Credit Agreement requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, including financial covenants and contains customary events of default. The Company was in compliance with such covenants as of
September 30, 2016
.
Other Long-Term Debt
The Company had
$2 million
and
$1 million
of other long-term debt outstanding as of
September 30, 2016
and
December 31, 2015
, respectively, primarily related to information technology software leases.
NOTE 12. Employee Benefit Plans
Defined Benefit Plans
The Company's net periodic benefit costs for all defined benefit plans for the three month periods ended
September 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Costs Recognized in Income:
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
7
|
|
|
8
|
|
|
3
|
|
|
6
|
|
Expected return on plan assets
|
(10
|
)
|
|
(11
|
)
|
|
(3
|
)
|
|
(4
|
)
|
Amortization of losses and other
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Net pension (income) expense
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
|
$
|
1
|
|
|
$
|
4
|
|
The Company's net periodic benefit costs for all defined benefit plans for the nine month periods ended September 30, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Costs Recognized in Income:
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
14
|
|
Interest cost
|
21
|
|
|
25
|
|
|
9
|
|
|
18
|
|
Expected return on plan assets
|
(31
|
)
|
|
(32
|
)
|
|
(9
|
)
|
|
(15
|
)
|
Settlements and curtailments
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Amortization of losses and other
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Net pension (income) expense
|
$
|
(10
|
)
|
|
$
|
(7
|
)
|
|
$
|
3
|
|
|
$
|
23
|
|
During the nine months ended
September 30, 2016
, cash contributions to the Company's U.S. and non-U.S. defined benefit pension plan were
$9 million
. The Company expects to make cash contributions to its defined benefit pension plans of
$13 million
in
2016
. The Company’s expected
2016
contributions may be revised.
On April 28, 2016, the Company purchased a non-participating annuity contract for all participants of the Canada non-represented plan. The annuity purchase covered
52
participants and resulted in the use of
$5 million
of plan assets for pension benefit obligation settlements of approximately
$5 million
. In connection with the annuity purchase, the Company recorded a settlement loss of approximately
$1 million
during the three months ended June 30, 2016.
2016 Discount Rate for Estimated Service and Interest Cost:
Through December 31, 2015, the Company recognized service and interest cost components of pension expense using a single weighted average discount method representing the constant annual
rate required to discount all future benefit payments related to past service. During the fourth quarter of 2015, the Company changed the method used to estimate service and interest components of net periodic benefit cost for pension benefits for its U.S. and certain non-U.S. plans. The Company has elected to utilize a disaggregated discount rate approach resulting in different
amounts of interest cost compared to the traditional single weighted-average discount rate approach because of different weightings given to each subset of payments.
This change does not affect the measurement of the total benefit obligation, but resulted in a decrease in the service and interest components of benefit cost beginning in 2016. Based on current economic conditions, the Company estimates that service cost and interest cost for the affected plans will be reduced by approximately
$7 million
in 2016 as a result of the change in method. The Company has accounted for this as a change in accounting estimate that is inseparable from a change in accounting principle, and accordingly has accounted for it on a prospective basis.
Defined Contribution Plans
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. For the U.S. defined contribution plan, the Company matches
100%
of contributions on the first
6%
of pay contributed. The expense related to matching contributions was approximately
$2 million
and
$2 million
for the three months ended
September 30, 2016
and
2015
, respectively. The expense related to matching contributions was approximately
$6 million
and
$8 million
for the nine months ended September 30, 2016 and 2015, respectively.
NOTE 13. Income Taxes
During the
three and nine
month periods ended
September 30, 2016
, the Company recorded a provision for income tax on continuing operations of
$5 million
and
$27 million
, respectively, which includes income tax expense in countries where the Company is profitable, withholding taxes, changes in uncertain tax benefits, and the inability to record a tax benefit for pretax losses and/or recognize tax expense for pretax income in certain jurisdictions (including the U.S.) due to valuation allowances. Pretax losses from continuing operations in jurisdictions where valuation allowances are maintained and no income tax benefits are recognized totaled
$38 million
and
$31 million
, for the
nine
months ended
September 30, 2016
and
2015
, respectively, resulting in an increase in the Company's effective tax rate in those years. As described further below, the Company's estimated annual effective tax rate is updated each quarter and was favorably impacted by incorporating certain transfer pricing adjustments between the U.S. and Japan consistent with the anticipated transfer pricing methodology expected to be agreed upon pursuant to the Company's impending bilateral advance pricing agreement ("APA") submission between those two countries.
The Company provides for U.S. and non-U.S. income taxes and non-U.S. withholding taxes on the projected future repatriations of the earnings from its non-U.S. operations that are not considered permanently reinvested at each tier of the legal entity structure.
During the
nine
month period ended
September 30, 2016
and
2015
, the Company recognized expense primarily related to non-U.S. withholding taxes, of
$3 million
and
$4 million
, respectively, reflecting the Company's forecasts which contemplate numerous financial and operational considerations that impact future repatriations.
The Company's provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against income before income taxes, excluding equity in net income of non-consolidated affiliates for the period. Effective tax rates vary from period to period as separate calculations are performed for those countries where the Company's operations are profitable and whose results continue to be tax-effected and for those countries where full deferred tax valuation allowances exist and are maintained. In determining the estimated annual effective tax rate, the Company analyzes various factors, including forecasts of projected annual earnings, taxing jurisdictions in which the pretax income and/or pretax losses will be generated, the ability to use tax credits and net operating loss carryforwards, and available tax planning strategies. The Company’s estimated annual effective tax rate is updated each quarter and may be significantly impacted by changes to the mix of forecasted earnings by tax jurisdiction. The tax impact of adjustments to the estimated annual effective tax rate are recorded in the period such estimates are revised. The Company is also required to record the tax impact of certain other non-recurring tax items, including changes in judgments about valuation allowances and uncertain tax positions, and changes in tax laws or rates, in the interim period in which they occur, rather than included in the estimated annual effective tax rate.
The need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s quarterly and annual effective tax rates. Full valuation allowances against deferred tax assets in the U.S. and applicable foreign countries will be maintained until sufficient positive evidence exists to reduce or eliminate them. The factors considered by management in its determination of the probability of the realization of the deferred tax assets include, but are not limited to, recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If, based upon the weight of available evidence, it is
more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. In regards to the full valuation allowance recorded against the U.S. net deferred tax assets, significant judgment is applied in determining whether a carryback opportunity related to the 2015 tax year provides an incremental source of taxable income to support partial realization of the U.S. net deferred tax assets, which includes estimating the amount of future tax losses that would be available to carryback.
Unrecognized Tax Benefits
Gross unrecognized tax benefits at
September 30, 2016
and
December 31, 2015
, including amounts attributable to discontinued operations, were
$33 million
and
$37 million
, respectively. Of these amounts approximately
$18 million
and
$29 million
at September 30, 2016 and December 31, 2015, respectively, represent the amount of unrecognized benefits that, if recognized, would impact the effective tax rate. 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 Company records interest and penalties related to uncertain tax positions as a component of income tax expense and related amounts accrued at
September 30, 2016
and
December 31, 2015
were
$4 million
and
$3 million
, respectively.
The
$4 million
net decrease in gross unrecognized tax benefits reflects
$7 million
in decreases primarily related to settling tax assessments from the Korean tax authorities related to underpayment of withholding taxes, and favorable developments in connection with an ongoing audit in Hungary. These decreases were partially offset by increases for audit developments in Mexico and anticipated transfer pricing-related exposures worldwide totaling
$3 million
.
The
$11 million
net decrease in the unrecognized tax benefits, that, if recognized, would impact the effective tax rate, reflects the
$7 million
settlement and
$1 million
net increase for ongoing audit developments described above, and
$5 million
in decreases related primarily to change in estimates associated with the filing of the Company’s U.S. tax returns that resulted in a reduction in U.S. income tax after utilizing available tax attributes related to the 2015 Climate Transaction.
With few exceptions, the Company is no longer subject to U.S. federal tax examinations for years before 2012 or state and local, or non-U.S. income tax examinations for years before 2003 although U.S. net operating losses carried forward into open tax years technically remain open to adjustment. Although it is not possible to predict the timing of the resolution of all ongoing tax audits with accuracy, it is reasonably possible that certain tax proceedings in Europe, Asia, Mexico and the U.S. could conclude within the next twelve months and result in a significant increase or decrease in the balance of gross unrecognized tax benefits. 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. The long-term portion of uncertain income tax positions (including interest) in the amount of
$22 million
is included in Other non-current liabilities on the consolidated balance sheet.
A reconciliation of the beginning and ending amount of unrecognized tax benefits including amounts attributable to discontinued operations is as follows:
|
|
|
|
|
|
Nine Months Ended
September 30, 2016
|
|
(Dollars in Millions)
|
Beginning balance
|
$
|
37
|
|
Tax positions related to current period:
|
|
Additions
|
2
|
|
Tax positions related to prior periods:
|
|
Additions
|
1
|
|
Settlements with tax authorities
|
(7
|
)
|
Ending balance
|
$
|
33
|
|
During 2012, Brazil tax authorities issued tax assessment notices to Visteon Sistemas Automotivos (“Sistemas”) related to the sale of its chassis business to a third party, which required a deposit in the amount of
$15 million
during 2013 necessary to open a judicial proceeding against the government in order to suspend the debt and allow Sistemas to operate regularly before the tax authorities after attempts to reopen an appeal of the administrative decision failed. Adjusted for currency impacts and accrued
interest, the deposit amount is approximately
$15 million
, as of September 30, 2016. The Company believes that the risk of a negative outcome is remote once the matter is fully litigated at the highest judicial level. These appeal payments, as well as income tax refund claims associated with other jurisdictions, total
$16 million
as of September 30, 2016, and are included in Other non-current assets on the consolidated balance sheet.
NOTE 14. Stockholders’ Equity and Non-controlling Interests
Changes in equity for the three months ended
September 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Visteon
|
|
NCI
|
|
Total
|
|
Visteon
|
|
NCI
|
|
Total
|
|
(Dollars in Millions)
|
Three Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
616
|
|
|
$
|
148
|
|
|
$
|
764
|
|
|
$
|
2,688
|
|
|
$
|
162
|
|
|
$
|
2,850
|
|
Net income from continuing operations
|
21
|
|
|
4
|
|
|
25
|
|
|
16
|
|
|
5
|
|
|
21
|
|
Net income (loss) from discontinued operations
|
7
|
|
|
—
|
|
|
7
|
|
|
(11
|
)
|
|
—
|
|
|
(11
|
)
|
Net income
|
28
|
|
|
4
|
|
|
32
|
|
|
5
|
|
|
5
|
|
|
10
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
3
|
|
|
—
|
|
|
3
|
|
|
(23
|
)
|
|
(4
|
)
|
|
(27
|
)
|
Benefit plans
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Unrealized hedging gain (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
Total other comprehensive income (loss)
|
3
|
|
|
—
|
|
|
3
|
|
|
(24
|
)
|
|
(4
|
)
|
|
(28
|
)
|
Stock-based compensation, net
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Warrant exercises
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
15
|
|
Dividends to non-controlling interests
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
$
|
648
|
|
|
$
|
146
|
|
|
$
|
794
|
|
|
$
|
2,685
|
|
|
$
|
163
|
|
|
$
|
2,848
|
|
Changes in equity for the nine months ended
September 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Visteon
|
|
NCI
|
|
Total
|
|
Visteon
|
|
NCI
|
|
Total
|
|
(Dollars in Millions)
|
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,057
|
|
|
$
|
142
|
|
|
$
|
1,199
|
|
|
$
|
865
|
|
|
$
|
956
|
|
|
$
|
1,821
|
|
Net income from continuing operations
|
88
|
|
|
12
|
|
|
100
|
|
|
93
|
|
|
17
|
|
|
110
|
|
Net (loss) income from discontinued operations
|
(15
|
)
|
|
—
|
|
|
(15
|
)
|
|
2,170
|
|
|
24
|
|
|
2,194
|
|
Net income
|
73
|
|
|
12
|
|
|
85
|
|
|
2,263
|
|
|
41
|
|
|
2,304
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
26
|
|
|
(2
|
)
|
|
24
|
|
|
(23
|
)
|
|
(16
|
)
|
|
(39
|
)
|
Benefit plans
|
1
|
|
|
—
|
|
|
1
|
|
|
35
|
|
|
1
|
|
|
36
|
|
Unrealized hedging gain (loss)
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
|
2
|
|
|
2
|
|
|
4
|
|
Total other comprehensive income (loss)
|
23
|
|
|
(2
|
)
|
|
21
|
|
|
14
|
|
|
(13
|
)
|
|
1
|
|
Stock-based compensation, net
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
|
13
|
|
|
—
|
|
|
13
|
|
Warrant exercises
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
—
|
|
|
30
|
|
Share repurchase
|
(500
|
)
|
|
—
|
|
|
(500
|
)
|
|
(500
|
)
|
|
—
|
|
|
(500
|
)
|
Business divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(785
|
)
|
|
(785
|
)
|
Dividends to non-controlling interests
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
—
|
|
|
(36
|
)
|
|
(36
|
)
|
Ending balance
|
$
|
648
|
|
|
$
|
146
|
|
|
$
|
794
|
|
|
$
|
2,685
|
|
|
$
|
163
|
|
|
$
|
2,848
|
|
Share Repurchase Program
On June 16, 2015, the Company announced an accelerated stock buyback ("ASB") program with a third-party financial institution to purchase shares of common stock for an aggregate purchase price of
$500 million
, as the first of announced shareholder return actions. Under the program, the Company paid the financial institution
$500 million
and received an initial delivery of
3,712,297
shares of common stock using a reference price of
$107.75
. The program concluded in December 2015 and the Company received an additional
1,058,965
shares. The final settlement price for all shares delivered under this 2015 ASB program was
$104.79
.
During the fourth quarter of 2015, the Company entered into an agreement with a third party financial institution to purchase up to
$150 million
of Visteon common stock in accordance with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934 ("10b5-1 Share Repurchase Program"). During the period of the program, which concluded on March 1, 2016, the Company paid approximately
$105 million
to repurchase
1,607,849
shares at an average price of
$65.05
.
On March 1, 2016, the Company entered into another ASB program with a third-party financial institution to purchase shares of common stock for an aggregate purchase price of
$395 million
. Under the program, the Company paid the financial institution
$395 million
and received an initial delivery of
4,370,678
shares of common stock using a reference price of
$72.30
. The program was concluded in October 2016 and the Company received additional
1,211,979
shares. In total, the Company purchased
5,582,657
shares at an average price of
$70.75
under this ASB program.
The Company anticipates that additional repurchases of common stock, if any, would occur from time to time in open market transactions or in privately negotiated transactions depending on market and economic conditions, share price, trading volume, alternative uses of capital and other factors.
Distribution
On
December 9, 2015
, the Company declared a special distribution of
$43.40
per share of its common stock outstanding as of
January 15, 2016
, or approximately
$1.75 billion
in the aggregate. On
January 22, 2016
approximately
$1.74 billion
was paid, the remaining
$15 million
will be paid over a two-year period upon vesting and settlement of restricted stock units and performance-based share units previously granted to the Company's employees. These amounts were classified as "Distribution payable" on the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015. The special cash distribution was funded from Climate Transaction proceeds.
Non-Controlling Interests
Non-controlling interests in the Visteon Corporation economic entity are as follows:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Yanfeng Visteon Automotive Electronics Co., Ltd.
|
$
|
106
|
|
|
$
|
100
|
|
Shanghai Visteon Automotive Electronics, Co., Ltd.
|
38
|
|
|
41
|
|
Other
|
2
|
|
|
1
|
|
|
$
|
146
|
|
|
$
|
142
|
|
Accumulated Other Comprehensive (Loss) Income
Changes in Accumulated other comprehensive (loss) income (“AOCI”) and reclassifications out of AOCI by component include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Changes in AOCI:
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(170
|
)
|
|
$
|
(261
|
)
|
|
$
|
(190
|
)
|
|
$
|
(299
|
)
|
Other comprehensive income (loss) before reclassification, net of tax
|
2
|
|
|
(25
|
)
|
|
24
|
|
|
(67
|
)
|
Amounts reclassified from AOCI
|
1
|
|
|
1
|
|
|
(1
|
)
|
|
(3
|
)
|
Climate divestiture
|
—
|
|
|
—
|
|
|
—
|
|
|
84
|
|
Ending balance
|
$
|
(167
|
)
|
|
$
|
(285
|
)
|
|
$
|
(167
|
)
|
|
$
|
(285
|
)
|
|
|
|
|
|
|
|
|
Changes in AOCI by Component:
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(132
|
)
|
|
$
|
(138
|
)
|
|
$
|
(155
|
)
|
|
$
|
(138
|
)
|
Other comprehensive income before reclassification, net of tax (a)
|
3
|
|
|
(23
|
)
|
|
26
|
|
|
(86
|
)
|
Climate divestiture (b)
|
—
|
|
|
—
|
|
|
—
|
|
|
63
|
|
Ending balance
|
(129
|
)
|
|
(161
|
)
|
|
(129
|
)
|
|
(161
|
)
|
Benefit plans
|
|
|
|
|
|
|
|
Beginning balance
|
(35
|
)
|
|
(123
|
)
|
|
(36
|
)
|
|
(156
|
)
|
Other comprehensive income before reclassification, net of tax (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Amounts reclassified from AOCI (c)
|
—
|
|
|
2
|
|
|
1
|
|
|
7
|
|
Climate divestiture (b)
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Ending balance
|
(35
|
)
|
|
(121
|
)
|
|
(35
|
)
|
|
(121
|
)
|
Unrealized hedging (loss) gain
|
|
|
|
|
|
|
|
Beginning balance
|
(3
|
)
|
|
—
|
|
|
1
|
|
|
(5
|
)
|
Other comprehensive income (loss) before reclassification, net of tax (d)
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
11
|
|
Amounts reclassified from AOCI
|
1
|
|
|
(1
|
)
|
|
(2
|
)
|
|
(10
|
)
|
Climate divestiture (b)
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Ending balance
|
(3
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Total AOCI
|
$
|
(167
|
)
|
|
$
|
(285
|
)
|
|
$
|
(167
|
)
|
|
$
|
(285
|
)
|
(a) There were no income tax effects for the three and nine month periods ending September 30, 2016 and 2015, due to the recording of valuation allowance.
(b) Amounts are included in Income (loss) from discontinued operations, net of tax, on the consolidated statements of comprehensive income.
(c) Amount included in the computation of net periodic pension cost. (See Note 12, "Employee Benefit Plans" for additional details.)
(d) Net tax tax benefit of
$1 million
are related to unrealized hedging (loss) gain for both the three months ended
September 30, 2016
and
2015
. Net tax benefit of
$0 million
and net tax expense of
$2 million
are related to unrealized hedging gain for the nine months ended September 30, 2016 and 2015, respectively.
Stock Warrants
During the three and
nine
months ended September 30, 2015, the Company received payments of
$15 million
and
$30 million
related to approximately
266,000
and
569,000
warrants, respectively, converted to shares of common stock at an exercise price of
$58.80
per share.
NOTE 15. Earnings Per Share
Basic earnings per share is calculated by dividing net income attributable to Visteon by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common and potential dilutive common shares outstanding. Performance based share units are considered contingently issuable shares, and are included in the computation of diluted earnings per share based on the number of shares that would be issuable if the reporting date were the end of the contingency period and if the result would be dilutive.
The table below provides details underlying the calculations of basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In Millions, Except Per Share Amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Net income from continuing operations attributable to Visteon
|
$
|
21
|
|
|
$
|
16
|
|
|
$
|
88
|
|
|
$
|
93
|
|
Income (loss) from discontinued operations, net of tax
|
7
|
|
|
(11
|
)
|
|
(15
|
)
|
|
2,170
|
|
Net income attributable to Visteon
|
$
|
28
|
|
|
$
|
5
|
|
|
$
|
73
|
|
|
$
|
2,263
|
|
Denominator:
|
|
|
|
|
|
|
|
Average common stock outstanding - basic
|
34.0
|
|
|
40.5
|
|
|
35.6
|
|
|
42.9
|
|
Dilutive effect of performance based share units and other
|
0.4
|
|
|
0.9
|
|
|
0.4
|
|
|
1.0
|
|
Diluted shares
|
34.4
|
|
|
41.4
|
|
|
36.0
|
|
|
43.9
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Per Share Data:
|
|
|
|
|
|
|
|
Basic earnings (loss) per share attributable to Visteon:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.62
|
|
|
$
|
0.39
|
|
|
$
|
2.47
|
|
|
$
|
2.17
|
|
Discontinued operations
|
0.21
|
|
|
(0.27
|
)
|
|
(0.42
|
)
|
|
50.58
|
|
|
$
|
0.83
|
|
|
$
|
0.12
|
|
|
$
|
2.05
|
|
|
$
|
52.75
|
|
Diluted earnings (loss) per share attributable to Visteon:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.61
|
|
|
$
|
0.38
|
|
|
$
|
2.44
|
|
|
$
|
2.12
|
|
Discontinued operations
|
0.20
|
|
|
(0.26
|
)
|
|
(0.41
|
)
|
|
49.43
|
|
|
$
|
0.81
|
|
|
$
|
0.12
|
|
|
$
|
2.03
|
|
|
$
|
51.55
|
|
NOTE 16. Fair Value Measurements and 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, in part, through the use of derivative financial instruments. The maximum length of time over which the Company hedges the variability in the future cash flows for forecast transactions excluding those forecast transactions related to the payment of variable interest on existing debt is up to eighteen months from the date of the forecast transaction. The maximum length of time over which the Company hedges forecast 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 counter-party to the derivative financial instruments.
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs.
|
|
•
|
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
|
|
|
•
|
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
|
|
|
•
|
Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
|
Fair Value of Debt
The Company's fair value of debt was approximately
$377 million
and
$385 million
at
September 30, 2016
and
December 31, 2015
, respectively. Fair value estimates were based on the current rates offered to the Company for debt of the same remaining maturities. Accordingly, the Company's debt fair value disclosures are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.
Financial Instruments
The Company presents its derivative positions and any related material collateral under master netting arrangements that provide for the net settlement of contracts, by counterparty, in the event of default or termination. Derivative financial instruments designated and non-designated as hedging instruments are included in the Company’s consolidated balance sheets. There is no cash collateral on any of these derivatives.
Foreign Exchange Risk:
The Company’s net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, subsidiary dividends and investments in subsidiaries. The Company utilizes derivative financial instruments, including forward and option contracts, to protect the Company’s cash flow from changes in exchange rates. Foreign currency exposures are reviewed periodically and any natural offsets are considered prior to entering into a derivative financial instrument. The Company’s current primary hedged foreign currency exposures include the Euro, Japanese Yen and Mexican Peso. Where possible, the Company utilizes a strategy of partial coverage for transactions in these currencies.
Foreign currency hedge instruments are measured at fair value on a recurring basis under an income approach using industry-standard models that consider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying and non-performance risk. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Accordingly, the Company's foreign currency instruments are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.
As of
September 30, 2016
and
December 31, 2015
, the Company had derivative instruments that consisted primarily of option and forward contracts to hedge changes in foreign currency exchange rates with notional amounts of approximately
$145 million
and
$147 million
, respectively. Fair value estimates of these contracts are based on quoted market prices and other observable inputs. As of
September 30, 2016
and
December 31, 2015
, respectively, approximately
$111 million
and
$114 million
of the instruments have been designated as cash flow hedges with the effective portion of the gain or loss reported in the "Accumulated other comprehensive loss" component of Stockholders’ equity in the Company’s consolidated balance sheet. There was no ineffectiveness associated with such derivatives as of
September 30, 2016
and the fair value of these derivatives was an asset of
$2 million
. The difference between the gross and net value of these derivatives is not material.
During 2015, the Company entered into currency exchange derivatives with a notional amount of
$150 million
to manage foreign currency exposure on certain non-U.S. denominated foreign entities. These derivatives have been designated as hedges of the Company's net investments in European affiliates with the effective portion of the gain or loss reported in the "Accumulated other comprehensive loss" component of Stockholder's equity in the Company's consolidated balance sheet. There was no ineffectiveness associated with such derivatives as of
September 30, 2016
and the fair value of these derivatives was a liability of
$2 million
.
In December 2014, the Company entered into a foreign currency option contract with a notional amount of
$2,229 million
to manage foreign currency exposure on anticipated KRW denominated proceeds in connection with the Climate Transaction. During the nine months ended September 30, 2015, the Company entered into offsetting foreign currency option contracts and non-deliverable forwards with notional amounts of
$2,229 million
each to lower related premium expenses. Final settlement of these hedges occurred during the second quarter of 2015 in connection with the closing of the Climate Transaction. The Company recorded a gain of
$3 million
for the nine months ended September 30, 2015, reflecting the change in the fair value of the foreign currency option and forward contracts, which was classified as "Other expense, net" in the Company’s consolidated statements of comprehensive income.
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 2015, the Company entered into interest rate swaps with a notional amount of
$150 million
that effectively convert designated cash flows associated with underlying interest payments on the Term Facility from a variable interest rate to a fixed interest rate, the maturities of these swaps will not exceed the underlying Term Facility. The instruments have been designated as cash flow hedges with the effective portion of the gain or loss reported in "Accumulated other comprehensive loss" component of Stockholders' equity in the Company's consolidated balance sheets and such gains and losses will be reclassified at the time the underlying hedged transactions are realized. The ineffective portion of these swaps is assessed based on the hypothetical derivative method and is recorded as interest expense in the Company's consolidated statements of comprehensive income. As of
September 30, 2016
there was no ineffectiveness associated with these derivatives and the fair value was a liability of
$3 million
.
The interest rate swaps 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, and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Accordingly, the Company's interest rate swaps are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.
Financial Statement Presentation
Gains and losses on derivative financial instruments for the three and nine months ended
September 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded (Loss) Income into AOCI, net of tax
|
|
Reclassified from AOCI into (Income) Loss
|
|
Recorded in (Income) Loss
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Dollars in Millions)
|
Three Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency risk - Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net investment hedges
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-designated cash flow hedges
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(1
|
)
|
Interest rate risk - Interest expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
2
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency risk - Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
(3
|
)
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net investment hedges
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-designated cash flow hedges
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(4
|
)
|
Interest rate risk - Interest expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
(2
|
)
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency risk - Other expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
KRW option and forward contracts
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
5
|
|
|
|
$
|
(5
|
)
|
|
$
|
9
|
|
|
$
|
(2
|
)
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
|
$
|
1
|
|
Concentrations of Credit Risk
Financial instruments including cash equivalents, derivative contracts, and accounts receivable, expose the Company to counter-party credit risk for non-performance. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s requirement of high credit standing. The Company’s counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counter-party and through monitoring counter-party credit risks.
The Company's credit risk with any individual customer does not exceed ten percent of total accounts receivables except for Ford and its affiliates which represents
19%
and
18%
at
September 30, 2016
and
December 31, 2015
, respectively, Mazda which represents
10%
of the Company's accounts receivables at
September 30, 2016
and
December 31, 2015
, and Nissan/Renault which represents
12%
and
11%
of the Company's accounts receivables at
September 30, 2016
and
December 31, 2015
, respectively.
NOTE 17. Commitments and Contingencies
Litigation and Claims
In 2003, the Local Development Finance Authority of the Charter Township of Van Buren, Michigan (the “Township”) issued approximately
$28 million
in bonds finally maturing in 2032, the proceeds of which were used at least in part to assist in the
development of the Company’s U.S. headquarters located in the Township. During January 2010, the Company and the Township entered into a settlement agreement (the “Settlement Agreement”) that, among other things, reduced the taxable value of the headquarters property to current market value and facilitated certain claims of the Township in the Company’s chapter 11 proceedings. The Settlement Agreement also provided that the Company would continue to negotiate in good faith with the Township in the event that property tax payments was inadequate to permit the Township to meet its payment obligations with respect to the bonds. In September 2013, the Township notified the Company in writing that it is estimating a shortfall in tax revenues of between
$25 million
and
$36 million
, which could render it unable to satisfy its payment obligations under the bonds. On May 12, 2015, the Township commenced a proceeding against the Company in the U. S. Bankruptcy Court for the District of Delaware in connection with the foregoing. Upon the Company’s motion to dismiss, the Township dismissed the proceeding before the Delaware Bankruptcy Court and re-commenced the proceeding against the Company in the Michigan Wayne County Circuit Court for the State of Michigan on July 2, 2015. The Township sought damages or, alternatively, declaratory judgment that, among other things, the Company is responsible under the Settlement Agreement for payment of any shortfall in the bond debt service payments. On February 2, 2016 the Wayne County Circuit Court dismissed the Township’s lawsuit without prejudice on the basis that the Township’s claims were not ripe for adjudication and the Township has appealed this decision to the Michigan Court of Appeals. The Company disputes the factual and legal assertions made by the Township and intends to vigorously defend the matter. The Company is not able to estimate the possible loss or range of loss in connection with this matter.
The Company is currently involved in disputes with its former President and Chief Executive Officer, Timothy D. Leuliette. Mr. Leuliette filed an arbitration demand against the Company with the American Arbitration Association, alleging claims relating to the cessation of his employment. The Company subsequently filed a complaint against Mr. Leuliette in the U.S. District Court for the Eastern District of Michigan, seeking to enjoin the arbitration and asserting additional claims. The federal litigation is currently stayed pending a ruling in the arbitration. The Company disputes the factual and legal assertions made by Mr. Leuliette, has asserted counterclaims against him in the arbitration, and, although there can be no assurances, the Company does not currently believe that the resolution of these disputes will have a material adverse impact on its results of operations or financial condition.
In November 2013, the Company and HVCC, jointly filed an Initial Notice of Voluntary Self-Disclosure statement with the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) regarding certain sales of automotive HVAC components by a minority-owned, Chinese joint venture of HVCC into Iran. The Company updated that notice in December 2013, and subsequently filed a voluntary self-disclosure regarding these sales with OFAC in March 2014. In May 2014, the Company voluntarily filed a supplementary self-disclosure identifying additional sales of automotive HVAC components by the Chinese joint venture, as well as similar sales involving an HVCC subsidiary in China, totaling approximately
$12 million
, and filed a final voluntary-self disclosure with OFAC on October 17, 2014. OFAC is currently reviewing the results of the Company’s investigation. Following that review, OFAC may conclude that the disclosed sales resulted in violations of U.S. economic sanctions laws and warrant the imposition of civil penalties, such as fines, limitations on the Company's ability to export products from the United States, and/or referral for further investigation by the U.S. Department of Justice. Any such fines or restrictions may be material to the Company’s financial results in the period in which they are imposed, but at this time is not able to estimate the possible loss or range of loss in connection with this matter. Additionally, disclosure of this conduct and any fines or other action relating to this conduct could harm the Company’s reputation and have a material adverse effect on our business, operating results and financial condition. The Company cannot predict when OFAC will conclude its own review of our voluntary self-disclosures or whether it may impose any of the potential penalties described above.
The Company's operations in Brazil are subject to highly complex labor, tax, customs and other laws. While the Company believes that it is in compliance with such laws, it is periodically engaged in litigation regarding the application of these laws. As of
September 30, 2016
, the Company maintained accruals of approximately
$11 million
for claims aggregating approximately
$82 million
. The amounts accrued represent claims that are deemed probable of loss and are reasonably estimable based on the Company's assessment of the claims and prior experience with similar matters.
While the Company believes its accruals for litigation and claims are adequate, the final amounts required to resolve such matters could differ materially from recorded estimates and the Company's results of operations and cash flows could be materially affected.
Guarantees and Commitments
The Company provided a
$23 million
loan guarantee to YFVIC, a
50%
owned joint venture, in connection with the October 2014 YFVIC acquisition of a
49%
direct ownership interest in YFVE. The guarantee contains standard non-payment provisions to cover the borrowers in event of non-payment of principal, accrued interest, and other fees for its
five
year tenor.
As part of the agreements of the Climate Transaction and Interiors Divestiture, the Company continues to provide lease guarantees to divested Climate and Interiors entities. As of September 30, 2016, the Company has approximately
$9 million
and
$8 million
outstanding guarantees respectively, related to divested Climate and Interiors entities. These guarantees will generally cease upon expiration of current lease agreements.
As part of the Interiors Divestiture the Company agreed to provide a
$56 million
revolving credit facility in connection with the Master Closing, representing the shortfall to the targeted amount of
$90 million
in external financing. The seller-backed facility was reduced as buyer credit facilities ramped up and the seller-backed facility will be reduced further if the buyer adds working capital facilities in Russia and Thailand. Draws under the seller-backed facility are only available to the extent buyer external credit facilities are fully drawn and any draws on the seller-backed facility generally must be repaid prior amounts outstanding on any external credit facilities. The seller-backed facility matures on November 1, 2017, at an interest rate of Libor plus
5%
and a default rate of interest for any interest and/or principal payment defaults. As of April 6, 2016, this revolving credit facility to the buyer was reduced to
$35 million
as additional receivable financing became available to the buyer. As of September 30, 2016, there were no draws on this facility. In connection with the divestiture of the remaining Interiors operations, the buyer has the option to request replacement of the existing revolving credit facility with a three year term loan, between
$5 million
and
$10 million
. On October 10, 2016, the buyer provided notice of intent to exercise the option and enter into a three year term loan for the maximum amount of
$10 million
upon closing, anticipated in 2016.
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
September 30, 2016
, and
December 31, 2015
, the Company had recorded a reserve of less than
$1 million
for environmental matters. However, estimating liabilities for environmental investigation and cleanup is complex and dependent upon a number of factors beyond the Company’s 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 Company’s products; governmental regulations relating to safety; employment-related matters; customer, supplier and other contractual relationships; intellectual property rights; product warranties; product recalls; and environmental matters. Some of the foregoing matters may involve compensatory, punitive or antitrust or other treble damage claims in very large amounts, or demands for recall campaigns, environmental remediation programs, sanctions, or other relief which, if granted, would require very large expenditures. The Company enters into agreements that contain indemnification provisions in the normal course of business for which the risks are considered nominal and impracticable to estimate.
Contingencies are subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Reserves have been established by the Company for matters discussed in the immediately foregoing 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
September 30, 2016
and that are in excess of established reserves. The Company does not reasonably expect, except as otherwise described herein, based on its analysis, that any adverse outcome from such matters would have a material effect on the Company’s financial condition, results of operations or cash flows, although such an outcome is possible.
NOTE 18. Segment Information
Financial results for the Company's reportable segments have been prepared using a management approach, which is consistent with the basis and manner in which financial information is evaluated by the Company's chief operating decision-making group in allocating resources and in assessing performance. The Company’s chief operating decision making group, comprised of the Chief Executive Officer and Chief Financial Officer, evaluates the performance of the Company’s segments primarily based on net sales, before elimination of inter-company shipments, Adjusted EBITDA (non-GAAP financial measure) and operating assets.
The Company’s current reportable segments are as follows:
|
|
•
|
Electronics - The Company's Electronics segment provides vehicle cockpit electronics products to customers, including audio systems, information displays, instrument clusters, head up displays, infotainment systems, and telematics solutions.
|
|
|
•
|
Other - Other includes entities in South America and South Africa previously associated with the Climate business but not subject to the Climate Transaction. On July 18, 2016, the Company reached an agreement to sell its South Africa climate operations, with 2015 annual sales of $9 million. The sale is expected to close during 2016. During 2015, other also included the Berlin, Germany operations previously associated with the Interiors business and sold during the fourth quarter of 2015.
|
Segment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Electronics
|
$
|
749
|
|
|
$
|
771
|
|
|
$
|
2,304
|
|
|
$
|
2,332
|
|
Other
|
21
|
|
|
37
|
|
|
41
|
|
|
123
|
|
Eliminations
|
—
|
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
Total consolidated sales
|
$
|
770
|
|
|
$
|
808
|
|
|
$
|
2,345
|
|
|
$
|
2,436
|
|
Segment Adjusted EBITDA
The Company defines Adjusted EBITDA as net income attributable to the Company adjusted to eliminate the impact of depreciation and amortization, restructuring expense, net interest expense, loss on debt extinguishment, equity in net income of non-consolidated affiliates, loss on divestiture, gain on non-consolidated affiliate transactions, other net expense, provision for income taxes, discontinued operations, net income attributable to non-controlling interests, non-cash stock-based compensation expense, pension settlement gains and other non-operating gains and losses.
Adjusted EBITDA is presented as a supplemental measure of the Company's financial performance that management believes is useful to investors because the excluded items may vary significantly in timing or amounts and/or may obscure trends useful in evaluating and comparing the Company's operating activities across reporting periods. Not all companies use identical calculations
and, accordingly, the Company's presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of
other companies.
Adjusted EBITDA is not a recognized term under accounting principles generally accepted in the United States and does not purport to be a substitute for net income as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. Adjusted EBITDA has limitations as an analytical tool and is not intended to be a measure of cash flow available for management's discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. In addition, the Company uses Adjusted EBITDA (i) as a factor in incentive compensation decisions, (ii) to evaluate the effectiveness of the Company's business strategies and (iii) because the Company's credit agreements use measures similar to Adjusted EBITDA to measure compliance with certain covenants. Adjusted EBITDA, as determined and measured by the Company should not be compared to similarly titled measures reported by other companies.
Segment Adjusted EBITDA is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Electronics
|
$
|
75
|
|
|
$
|
67
|
|
|
$
|
248
|
|
|
$
|
211
|
|
Other
|
—
|
|
|
(2
|
)
|
|
(7
|
)
|
|
(8
|
)
|
Adjusted EBITDA
|
$
|
75
|
|
|
$
|
65
|
|
|
$
|
241
|
|
|
$
|
203
|
|
During the first quarter of 2016, the Company changed its corporate cost allocation methodology for management reporting purposes. Accordingly, costs associated with the Company's corporate headquarters and other administrative support functions for the three and nine months ended September 30, 2015, have been reclassified to the Electronics operating segment, representing ongoing business costs.
The reconciliation of Adjusted EBITDA to net income attributable to Visteon is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Adjusted EBITDA
|
$
|
75
|
|
|
$
|
65
|
|
|
$
|
241
|
|
|
$
|
203
|
|
Depreciation and amortization
|
21
|
|
|
20
|
|
|
62
|
|
|
62
|
|
Restructuring expense
|
5
|
|
|
3
|
|
|
22
|
|
|
18
|
|
Interest expense, net
|
5
|
|
|
2
|
|
|
10
|
|
|
13
|
|
Loss on debt extinguishment
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Equity in net loss (income) of non-consolidated affiliates
|
—
|
|
|
3
|
|
|
(3
|
)
|
|
(8
|
)
|
Gain on sale of non-consolidated affiliates, net
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(62
|
)
|
Other expense, net
|
13
|
|
|
7
|
|
|
17
|
|
|
15
|
|
Provision for income taxes
|
5
|
|
|
10
|
|
|
27
|
|
|
43
|
|
(Income) loss from discontinued operations, net of tax
|
(7
|
)
|
|
11
|
|
|
15
|
|
|
(2,194
|
)
|
Net income attributable to non-controlling interests
|
4
|
|
|
5
|
|
|
12
|
|
|
41
|
|
Non-cash, stock-based compensation expense
|
2
|
|
|
2
|
|
|
6
|
|
|
7
|
|
Other
|
—
|
|
|
(3
|
)
|
|
1
|
|
|
—
|
|
Net income attributable to Visteon Corporation
|
$
|
28
|
|
|
$
|
5
|
|
|
$
|
73
|
|
|
$
|
2,263
|
|
Segment Total Assets:
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
September 30
|
|
December 31
|
|
2016
|
|
2015
|
|
(Dollars in Millions)
|
Electronics
|
$
|
2,337
|
|
|
$
|
4,649
|
|
Other
|
36
|
|
|
32
|
|
Total consolidated assets
|
$
|
2,373
|
|
|
$
|
4,681
|
|