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EXCEL - IDEA: XBRL DOCUMENT - VISTEON CORPFinancial_Report.xls
EX-32.2 - EXHIBIT 32.2 - VISTEON CORPex-3222014q310xq.htm
EX-31.1 - EXHIBIT 31.1 - VISTEON CORPex-3112014q310xq.htm
EX-32.1 - EXHIBIT 32.1 - VISTEON CORPex-3212014q310xq.htm
EX-31.2 - EXHIBIT 31.2 - VISTEON CORPex-3122014q310xq.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
________________
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014,
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 001-15827
VISTEON CORPORATION
(Exact name of registrant as specified in its charter)
State of Delaware
38-3519512
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One Village Center Drive, Van Buren Township, Michigan
48111
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (800)-VISTEON
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No__
Indicate by check mark whether the registrant: has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No __
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ü  Accelerated filer  __   Non-accelerated filer __   Smaller reporting company  __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No ü
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ü No__
As of October 31, 2014, the registrant had outstanding 44,299,689 shares of common stock.
Exhibit index located on page number 60.


1




Index




2



Part I
Financial Information

Item 1.
Consolidated Financial Statements

VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2014
 
2013
 
2014
 
2013
Sales
$
1,970

 
$
1,484

 
$
5,470

 
$
4,680

Cost of sales
1,778

 
1,349

 
4,905

 
4,232

Gross margin
192

 
135

 
565

 
448

Selling, general and administrative expenses
107

 
73

 
272

 
223

Restructuring expenses
9

 
10

 
23

 
31

Interest expense
9

 
12

 
27

 
35

Interest income
3

 
3

 
7

 
8

Equity in net income of affiliates
2

 
48

 
15

 
134

Loss on debt extinguishment

 

 
23

 

Other expenses
20

 
6

 
40

 
14

Income from continuing operations before income taxes
52

 
85

 
202

 
287

Provision for income taxes
22

 
23

 
94

 
59

Net income from continuing operations
30

 
62

 
108

 
228

(Loss) income from discontinued operations, net of tax
(29
)
 
(2
)
 
(200
)
 
2

Net income (loss)
1

 
60

 
(92
)
 
230

Net income attributable to non-controlling interests
22

 
17

 
65

 
53

Net (loss) income attributable to Visteon Corporation
$
(21
)
 
$
43

 
$
(157
)
 
$
177

 
 
 
 
 
 
 
 
Basic (loss) earnings per share
 
 
 
 
 
 
 
    Continuing operations
$
0.18

 
$
0.91

 
$
0.69

 
$
3.51

    Discontinued operations
(0.66
)
 
(0.04
)
 
(4.09
)
 

Basic (loss) earnings per share attributable to Visteon Corporation
$
(0.48
)
 
$
0.87

 
$
(3.40
)
 
$
3.51

 
 
 
 
 
 
 
 
Diluted (loss) earnings per share
 
 
 
 
 
 
 
    Continuing operations
$
0.18

 
$
0.89

 
$
0.67

 
$
3.44

    Discontinued operations
(0.64
)
 
(0.04
)
 
(3.98
)
 

Diluted (loss) earnings per share attributable to Visteon Corporation
$
(0.46
)
 
$
0.85

 
$
(3.31
)
 
$
3.44

 
 
 
 
 
 
 
 
Comprehensive (loss) income:
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(105
)
 
$
115

 
$
(185
)
 
$
205

Comprehensive (loss) income attributable to Visteon Corporation
$
(112
)
 
$
82

 
$
(236
)
 
$
161


See accompanying notes to the consolidated financial statements.

3



VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
 
September 30
 
December 31
 
2014
 
2013
ASSETS
Cash and equivalents
$
936

 
$
1,677

Restricted cash
12

 
25

Accounts receivable, net
1,270

 
1,227

Inventories, net
562

 
472

Assets held for sale
350

 

Other current assets
345

 
352

Total current assets
3,475

 
3,753

 
 
 
 
Property and equipment, net
1,403

 
1,414

Intangible assets, net
431

 
447

Investments in affiliates
167

 
228

Other non-current assets
217

 
185

Total assets
$
5,693

 
$
6,027

 
 
 
 
LIABILITIES AND EQUITY
Short-term debt, including current portion of long-term debt
$
141

 
$
106

Accounts payable
1,118

 
1,207

Accrued employee liabilities
179

 
202

Liabilities held for sale
285

 

Other current liabilities
248

 
287

Total current liabilities
1,971

 
1,802

 
 
 
 
Long-term debt
840

 
624

Employee benefits
428

 
440

Deferred tax liabilities
129

 
137

Other non-current liabilities
148

 
151

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock (par value $0.01, 50 million shares authorized, none outstanding at September 30, 2014 and December 31, 2013)

 

Common stock (par value $0.01, 250 million shares authorized, 54 million and 54 million shares issued, 44 million and 48 million shares outstanding at September 30, 2014 and December 31, 2013, respectively)
1

 
1

Stock warrants
4

 
6

Additional paid-in capital
1,243

 
1,291

Retained earnings
799

 
956

Accumulated other comprehensive loss
(91
)
 
(12
)
Treasury stock
(749
)
 
(322
)
Total Visteon Corporation stockholders’ equity
1,207

 
1,920

Non-controlling interests
970

 
953

Total equity
2,177

 
2,873

Total liabilities and equity
$
5,693

 
$
6,027


See accompanying notes to the consolidated financial statements.

4



VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 1 
(Dollars in Millions)
(Unaudited)
 
Nine Months Ended September 30
 
2014
 
2013
Operating Activities
 
 
 
Net (loss) income
$
(92
)
 
$
230

Adjustments to reconcile net (loss) income to net cash provided from operating activities:
 
 
 
Impairment of long-lived assets
188

 

Depreciation and amortization
205

 
200

Loss on debt extinguishment
23

 

Equity in net income of affiliates, net of dividends remitted
7

 
(111
)
Pension settlement gain
(25
)
 

Stock-based compensation
7

 
14

Other non-cash items
12

 
(2
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
5

 
22

Inventories
(33
)
 
(74
)
Accounts payable
(58
)
 
33

Accrued income taxes
14

 
(56
)
Other assets and other liabilities
(73
)
 
(77
)
Net cash provided from operating activities
180

 
179

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(209
)
 
(164
)
Acquisition of businesses, net of cash acquired
(308
)
 

Proceeds from asset sales and business divestitures
64

 
39

Other
(8
)
 

Net cash used by investing activities
(461
)
 
(125
)
 
 
 
 
Financing Activities
 
 
 
Short-term debt, net
42

 
42

Proceeds from issuance of debt, net of issuance costs
618

 
204

Repurchase of long-term notes
(419
)
 

Principal payments on debt
(16
)
 
(5
)
Repurchase of common stock
(500
)
 
(250
)
Dividends paid to non-controlling interests
(84
)
 
(22
)
Other
15

 
5

Net cash used by financing activities
(344
)
 
(26
)
Effect of exchange rate changes on cash and equivalents
(17
)
 
(16
)
Net (decrease) increase in cash and equivalents
(642
)
 
12

Cash and equivalents at beginning of period
1,677

 
825

Cash and equivalents at end of period
$
1,035

 
$
837


1 The Company has combined cash flows from discontinued operations with cash flows from continuing operations within the operating, investing and financing categories. As such, cash and equivalents above include amounts reflected in assets held for sale on the Consolidated Balance Sheets.

See accompanying notes to the consolidated financial statements.

5



VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation

Description of Business: Visteon Corporation (the “Company” or “Visteon”) is a global supplier of automotive systems, modules and components to global automotive original equipment manufacturers (“OEMs”). Headquartered in Van Buren Township, Michigan, Visteon has a workforce of approximately 29,000 employees and a network of manufacturing operations, technical centers and joint ventures in every major geographic region of the world with its operations organized by global product lines including Climate, Electronics and Interiors.
During the three-month period ended September 30, 2014, the Company continued to progress it Shareholder Value Creation Plan initially announced in September 2012. On July 1, 2014, Visteon completed the acquisition of the automotive electronics business of Johnson Controls Inc. This acquisition is expected to enhance Visteon's competitive position in the fast-growing vehicle cockpit electronics segment by strengthening its global scale, manufacturing and engineering footprint, product portfolio and customer penetration. Net sales for the acquired business were approximately $1.3 billion for the annual period ended September 30, 2013. On a combined basis the Company's Electronics business is expected to have approximately $3 billion in annual revenue. Additional details are provided in Note 2 "Business Acquisitions." On November 1, 2014 the Company closed on the sale of a majority of its Interiors business subject to a May 1, 2014 master purchase agreement as amended and as more fully described in Note 3 "Interiors Divestiture".

Interim Financial Statements: 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 ("SEC"). 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.

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.

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 affiliates are accounted for using the cost method.

Restricted Cash: Restricted cash represents amounts designated for uses other than current operations and includes $10 million of collateral for the Letter of Credit Facility with US Bank National Association, and $2 million related to cash collateral for other corporate purposes at September 30, 2014.

Recent Accounting Pronouncements: In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-8, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". This ASU changes the requirements for reporting discontinued operations to disposals of components of an entity that represent strategic shifts that have a major effect on an entity’s operations and financial results. The standard also expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not qualify for discontinued operations reporting. The guidance is effective for interim and annual periods beginning after December 15, 2014, and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements and did not early adopt this standard for purposes of the discontinued operations disclosed in Note 3 "Interiors Divestiture".

In May 2014, the FASB issued ASU No. 2014-9, "Revenue from Contracts with Customers", which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This new guidance

6



is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

NOTE 2. Business Acquisitions

Electronics Acquisition

On July 1, 2014, the Company completed the acquisition of substantially all of the global automotive electronics business of Johnson Controls Inc. (the "Electronics Acquisition") for an aggregate purchase price of $295 million, including $31 million of cash and equivalents at the acquired business. The purchase price was funded with cash on hand and remains subject to adjustments as provided in the Purchase Agreement. The operating results for the business acquired have been included in the Electronics segment from the date of acquisition. Through the three and nine months ended September 30, 2014, the Company incurred acquisition-related costs of approximately $4 million and $9 million, respectively. These amounts were recorded as incurred and have been classified as Other expenses within the Consolidated Statements of Comprehensive (Loss) Income.

The Electronics Acquisition was accounted for as a business combination, with the purchase price allocated on a preliminary basis as of July 2014. The preliminary purchase price and related allocation are shown below.
Purchase price
 
$
295

Cash acquired
 
(31
)
        Purchase price net of cash acquired
 
$
264

 
 
 
Assets Acquired:
 
 
Accounts receivable
 
$
212

Inventories
 
101

Property and equipment
 
125

Contractually reimbursable engineering costs
 
77

Intangible assets
 
16

Other assets acquired
 
28

        Total assets acquired
 
$
559

Liabilities Assumed:
 
 
Accounts payable
 
$
176

Other liabilities assumed
 
80

        Total liabilities assumed
 
$
256

Non-controlling interests
 
39

        Total purchase price allocation
 
$
264


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 value estimates for property and equipment were based on appraised values utilizing cost and market approaches.
Fair value estimates for contractually reimbursable engineering costs were based on discounted cash flows, which is an income model.
Fair values for intangible assets were based on a combination of market and income approaches, including the relief from royalty method.

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 and purchase price adjustments.




7



Included in the Company's results of operation for three months ended September 30, 2014 are sales of $329 million and gross margin of $47 million related to the Electronics Acquisition. Additionally, pro forma financial information is presented in the following table for the three months ended September 30, 2013 and nine month periods ended September 30, 2014 and 2013 as if the Electronics Acquisition had occurred on January 1, 2013. The pro forma financial information is unaudited and is provided for informational purposes only and does not purport to be indicative of the results which would have actually been attained had the acquisition occurred on January 1, 2013 or that may be attained in the future. 
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2013
 
2014
 
2013
 
(Dollars in Millions, Unaudited)
Sales
$
1,793

 
$
6,167

 
$
5,632

Gross margin
$
170

 
$
633

 
$
548


Climate Acquisitions

In August 2014, Halla Visteon Climate Control Corporation ("HVCC") acquired the automotive thermal and emissions business of Cooper-Standard Automotive Inc., a subsidiary of Cooper-Standard Holdings Inc. (the "Thermal Acquisition"), for cash of $46 million. The Thermal Acquisition is expected to expand the thermal energy management product portfolio of HVCC and further diversify its customer base.

Net sales for the acquired business were approximately $66 million for the annual period ended December 31, 2013. The operating results for the business acquired have been included in the Climate segment from the date of acquisition. Through both three and nine months ended September 30, 2014, the Company incurred acquisition-related costs of approximately $1 million. These amounts were recorded as incurred and have been classified as Other expenses within the Consolidated Statements of Comprehensive (Loss) Income.

The Thermal Acquisition was accounted for as a business combination, with the purchase price allocated on a preliminary basis as of August 2014.
Purchase price
 
$
46

 
 
 
Property and equipment
 
$
30

Intangible assets
 
8

Goodwill
 
8

        Total purchase price allocation
 
$
46


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 the estimation of fair values. Fair value estimates for property and equipment were based on appraised values utilizing cost and market approaches. Fair values for intangible assets were based on a combination of market and income approaches. 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.

On September 1, 2014, HVCC completed the acquisition of a controlling 51% equity interest in Japan Climate Systems - Nanjing ("JCS-Nanjing") for $7 million. The Company commenced consolidation of JCS-Nanjing from the September 1, 2014 acquisition date. This acquisition was accounted for as a business combination, with the purchase price allocated on a preliminary basis as of September 2014. In connection with the preliminary purchase price allocation, HVCC recorded goodwill of $2 million. The preliminary purchase price allocations may be subsequently adjusted to reflect final valuation results.

The pro forma effects of these Climate acquisitions would not materially impact the Company's reported results for any period presented, and as a result no pro forma financial statements are presented.


8



NOTE 3. Interiors Divestiture

On May 1, 2014, the Company entered into a Master Purchase Agreement as amended (the “Purchase Agreement”) pursuant to which,Visteon will reorganize substantially all of its global Interiors business under a newly-formed holding company (the “Reorganization”) and will sell all of the equity of that holding company (the “Interiors Divestiture”) in exchange for the assumption of certain liabilities related to the Company's Interiors business and the payment of nominal cash consideration. Visteon agreed to contribute up to $95 million (the "Cash Contribution") to the Interiors business and the Purchase Agreement includes net working capital adjustments whereby the Cash Contribution will be effectively adjusted based on the actual net working capital levels as of the closing date. Visteon also agreed to support the buyer in establishing external credit facilities. To the extent that $90 million of external credit facilities are not available to the Interiors business by the date of closing, Visteon is required to provide a seller-backed revolving credit facility in the amount of any shortfall. Draws under any such seller-backed facility will only be available if certain of the external credit facilities are fully drawn, and any draws on the seller-backed facility generally must be repaid prior to the repayment of the external credit facilities. The seller-backed facility will have a maturity of three years and will have a default rate of interest for any interest and/or principal payment defaults.

On November 1, 2014, the Company closed on the majority of the Interiors Divestiture (the "Master Closing") and completed the largest phase of the Interiors Divestiture to Reydel Automotive Holdings B.V., an affiliate of Cerberus Capital Management, L.P. In connection with the Master Closing, the Company made a cash payment of approximately $120 million, which included the $95 million Cash Contribution and adjustments primarily for working capital subject to further adjustments. The Company also agreed to provide a $56 million revolving credit facility in connection with the Master Closing, which is the shortfall to the agreed $90 million target in external financing arrangements. As transaction related customer purchase order changes are effected over the next several months, increasing the backing of the buyer implemented factoring facility, the seller backed facility is expected to be substantially reduced. The seller-backed facility obligation can also be reduced if the buyer adds working capital facilities in Russia and Thailand. Draws under this seller-backed facility will only be available if certain of the external credit facilities are fully drawn, and any draws on the seller-backed facility generally must be repaid prior to the repayment of the external credit facilities. The seller-backed facility has a maturity of three years and will have an interest rate of Libor plus 5%.

Additionally, as part of the Reorganization, Visteon will separate the portion of its Interiors business conducted through its facilities in Chennai and Pune, India into a new legal entity, which will be transferred to the holding company and sold to the buyer as part of the Interiors Divestiture. Due to the time required to effect such separation under Indian law, the consummation of the Indian portion of the Interiors Divestiture will occur subsequent to the Master Closing but is expected before December 31, 2014. The Thailand, Argentina and Brazil portions of the Interiors Divestiture will also occur subsequent to the Master Closing and are expected to close during the first quarter of 2015. The remaining transactions are subject to various conditions, including regulatory and antitrust approvals, receipt of other third party consents and approvals and other customary closing conditions, and may be subject to further cash impacts based on purchase price adjustments at the time of closing. The Company expects to record additional losses in connection with the Interiors Divestiture in future periods upon closing. The losses are estimated to range from $150 million to $200 million, of which the majority is likely to be recorded during the three months ending December 31, 2014 associated with the Master Closing.

The Company determined that assets and liabilities subject to the Interiors Divestiture met the "held for sale" criteria during the quarterly period ended June 30, 2014. As the fair value of the assets and liabilities subject to the Interiors Divestiture was less than the carrying value, the long-lived assets were written down in their entirety, which resulted in an impairment loss of $15 million and $188 million in the three and nine month periods ended September 30, 2014, respectively. Additionally, the held for sale Interiors assets and liabilities were reclassified in the Consolidated Balance Sheets to Assets held for sale or Liabilities held for sale, respectively, as the sale of such assets and liabilities is expected to close within one year. Assets and liabilities held for sale are summarized as follows:
Assets Held for Sale
 
September 30 2014
 
Liabilities Held for Sale
 
September 30 2014
 
 
(Dollars in Millions)
 
 
 
(Dollars in Millions)
Cash and equivalents
 
$
99

 
Short-term debt
 
$
12

Restricted cash
 
13

 
Accounts payable
 
182

Accounts receivable, net
 
156

 
Accrued employee liabilities
 
39

Inventories, net
 
27

 
Employee benefits
 
16

Other assets
 
55

 
Other liabilities
 
36

Total assets held for sale
 
$
350

 
Total liabilities held for sale
 
$
285



9



The short-term debt held for sale includes an arrangement through a subsidiary in France to sell accounts receivable with recourse on an uncommitted basis. The Company is required to fund any amounts outstanding under this facility as of the transaction close date. On November 1, 2014, in connection with the Master Closing, the Company funded the outstanding balance under this facility which was approximately $1 million.

Interiors Discontinued Operations

The operations subject to the Interiors Divestiture met conditions required to qualify for discontinued operations reporting as of June 30, 2014. Accordingly, the results of operations for Interiors business subject to the Interiors Divestiture have been reclassified to (Loss) income from discontinued operations, net of tax in the Consolidated Statements of Comprehensive (Loss) Income for the three and nine-month periods ended September 30, 2014 and September 30, 2013. While the Interiors Divestiture represents the substantial majority of the Company's Interiors operations, other operations previously reported within the Company's Interiors reporting segment were excluded from the scope of the Interiors Divestiture. These other operations have been classified within the Other reporting segment. Due to certain liabilities and capital requirements of the remaining business, Visteon may be required to contribute cash to such business in connection with any disposition and such amounts could be material.

Discontinued operations are summarized as follows:
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Sales
$
208

 
$
249

 
$
730

 
$
801

Cost of sales
201

 
241

 
678

 
767

Gross margin
7

 
8

 
52

 
34

Selling, general and administrative expenses
13

 
14

 
40

 
41

Long-lived asset impairment
15

 

 
188

 

Other expenses
8

 
(1
)
 
22

 
9

Loss from discontinued operations before income taxes
(29
)
 
(5
)
 
(198
)
 
(16
)
(Benefit from) provision for income taxes

 
(3
)
 
2

 
(18
)
(Loss) income from discontinued operations, net of tax
(29
)
 
(2
)
 
(200
)
 
2

Net (loss) income attributable to non-controlling interests

 

 
(11
)
 
2

Net loss from discontinued operations attributable to Visteon
$
(29
)
 
$
(2
)
 
$
(189
)
 
$


NOTE 4. Yanfeng Transactions
 
On August 12, 2013, Visteon entered into a Master Agreement (the “Master Agreement”) with Huayu Automotive Systems Company Limited (“HASCO”), Yanfeng Visteon Automotive Trim Systems Co., Ltd. (“Yanfeng”) and Yanfeng Visteon Automotive Electronics Co., Ltd. (“YFVE”), pursuant to which, among other things, Visteon and HASCO agreed to modify their existing interests in automobile interiors and electronics joint ventures in the People’s Republic of China, including Yanfeng and YFVE.
On December 17, 2013, Visteon completed the sale of its 50% ownership interest in Yanfeng for cash proceeds of $928 million (before applicable taxes). On November 7, 2013, Visteon made a cash payment of $58 million to subscribe to an additional 11% ownership interest in YFVE, increasing Visteon's direct ownership interest in YFVE from a non-controlling 40% direct ownership interest to a controlling 51% direct ownership interest. From that date, the financial position, results of operations and cash flows of YFVE have been consolidated into the Company's financial statements as part of the Electronics business unit.

As of September 30, 2014, and in accordance with the Master Agreement, YFVE completed the sale of its ownership interests in certain joint ventures to Yanfeng Visteon Electronics (China) Investment Co., Ltd. ("YFVIC") for cash proceeds of $37 million. No gains or losses were recorded on these transactions by YFVE due to the Company's 50% ownership interest in YFVIC. Differences between carrying value and proceeds on these investments, if any, have been deferred as a basis adjustment to the Company's investment in YFVIC.

In October 2014, YFVIC completed the purchase of Yanfeng’s 49% direct ownership in YFVE pursuant to the Master Agreement. The purchase by YFVIC was financed through a shareholder loan from Yanfeng and external borrowings of approximately $40 million which were guaranteed by Visteon. 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.

10



NOTE 5. Investments in Affiliates

The Company recorded equity in the net income of affiliates of $2 million and $48 million for the three-month periods ended September 30, 2014 and 2013, and $15 million and $134 million for the nine-month periods ended September 30, 2014 and 2013, respectively. Investments in affiliates were $167 million and $228 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014, affiliates accounted for under the equity method totaled $123 million and affiliates accounted for under the cost method totaled $44 million. Effective December 17, 2013, and in accordance with the Master Agreement, the Company, among other things, completed the sale of its 50% ownership interest in Yanfeng and changed from the equity method to the cost method of accounting for certain Yanfeng related Interiors joint ventures, including Yanfeng Visteon Jinqiao Automotive Trim Systems Co., Ltd.

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. In April 2014, Visteon completed the sale of its 50% ownership stake in Duckyang, a Korean automotive interiors joint venture for total cash of $31 million.

NOTE 6. Restructuring

During the three and nine-months ended September 30, 2014, the Company recorded restructuring expenses of $9 million and $23 million, respectively. Given the economically-sensitive and highly competitive nature of the automotive industry, the Company continues to closely monitor current market factors and industry trends taking action as necessary, including but not limited to, additional restructuring actions. However, there can be no assurance that any such actions will be sufficient to fully offset the impact of adverse factors on the Company or its results of operations, financial position and cash flows.

Restructuring reserve balances of $15 million and $29 million at September 30, 2014 and December 31, 2013, respectively, are classified as Other current liabilities on the consolidated balance sheets. The Company anticipates that the activities associated with these reserves will be substantially completed by the end of 2014. The Company’s restructuring reserves and related activity, including amounts attributable to discontinued operations, are as follows.
 
Climate
 
Electronics
 
Corporate
 
Other
 
Total
 
(Dollars in Millions)
Balance at December 31, 2013
$
1

 
$

 
$
3

 
25

 
$
29

Expenses
1

 

 
1

 

 
2

Utilization
(1
)
 

 
(3
)
 
(6
)
 
(10
)
Balance at March 31, 2014
$
1

 
$

 
$
1

 
$
19

 
$
21

Expenses
12

 

 

 
5

 
17

Utilization

 

 
(1
)
 
(11
)
 
(12
)
Balance at June 30, 2014
$
13

 
$

 
$

 
$
13

 
$
26

   Expenses
4

 
5

 

 
6

 
15

   Utilization
(16
)
 
(1
)
 

 
(8
)
 
(25
)
   Foreign currency

 

 

 
(1
)
 
(1
)
Balance at September 30, 2014
$
1

 
$
4

 
$

 
$
10

 
$
15


Restructuring Activities - Three and Nine Months Ended September 30, 2014

In connection with the Electronics Acquisition, the Company commenced a restructuring program designed to achieve cost savings through transaction synergies. The Company expects to incur approximately $40 million to $60 million of restructuring costs during the program. During the three-months ended September 30, 2014, the Company recorded $5 million of severance and termination benefits under this program associated with approximately 115 employees. The Company anticipates recording additional restructuring charges related to this program in future periods as underlying plans are finalized. Approximately $4 million remains accrued at September 30, 2014.

The Company previously announced a $100 million 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 restructure three European Interiors facilities, to consolidate its Climate operations and to realign its corporate and administrative functions directly to their corresponding operational beneficiary. As of September 30, 2014, this $100 million restructuring program

11



has been substantially completed. During the three-months ended September 30, 2014, the Company recorded $10 million of restructuring expenses, including amounts associated with discontinued operations, primarily related to the following activities:

The previously announced closure of the Climate facility located in Quilmes, Argentina. In connection with the closure, the Company recorded an additional $3 million of restructuring expenses, related to severance and termination benefits.
The Company recorded $6 million of severance and termination benefits associated with approximately 100 employees at two European Interiors facilities. This amount has been classified within discontinued operations on the Consolidated Statements of Comprehensive (Loss) Income for the three-month period ended September 30, 2014. Approximately $3 million remains accrued as of September 30, 2014.

During the second quarter of 2014, the Company recorded $17 million of restructuring expenses, including amounts associated with discontinued operations, among which $10 million and $2 million were primarily related to severance and termination benefits in connection with the previously announced closure of the Climate facilities in Quilmes, Argentina and Port Elizabeth, South Africa, respectively, and $5 million was in connection with the previously announced restructuring of three Interiors facilities in France.

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.

Restructuring Activities - Three and Nine Months Ended September 30, 2013

During the third quarter of 2013, the Company recorded $10 million of restructuring expenses, net of reversals, primarily related to severance and termination benefits associated with approximately 250 employees, including $7 million related to the reorganization of the operations at a facility in Brazil and $2 million in connection with the reorganization of the Company's Climate operations.

During the first quarter of 2013, the Company recorded $20 million of restructuring expenses, net of reversal, primarily related to severance and termination benefits associated with approximately 140 employees, including $14 million in connection with the reorganization of the Company's Climate operations in France and $6 million related to the transformation of its corporate and administrative functions. The Company recorded $2 million of additional restructuring expenses associated with these programs during the first quarter of 2014.

NOTE 7. Other Expenses

Other expenses consist of the following:
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Transformation costs
$
13

 
$
8

 
$
20

 
$
21

Integration costs
4

 

 
11

 

Provision for losses on recoverable taxes

 

 
8

 

Loss on asset contribution
3

 

 
3

 

Gain on sale of equity interest

 

 
(2
)
 
(5
)
UK Administration recovery

 
(2
)
 

 
(2
)
 
$
20

 
$
6

 
$
40

 
$
14


Transformation Costs
Business transformation costs of $13 million and $20 million were incurred during the three-month and nine-month periods ended September 30, 2014, respectively, related to financial and advisory services associated with continued execution of the Company's comprehensive value creation plan, including fees associated with the Electronics Acquisition.




12



Integration Costs
During the three and nine -month periods ended September 30, 2014, the Company recorded $4 million and $11 million, respectively, of costs to integrate the businesses associated with Electronics Acquisition. Integration costs incurred were related to re-branding, facility modification, information technology readiness and related professional services.

Provision for Losses on Recoverable Taxes
The Company recorded $8 million during the three months ended June 30, 2014 to adjust recoverable value-added taxes to net realizable value attributable to business exit activities.

Loss on Asset Contribution
During the three months ended September 30, 2014, the Company contributed land and building with a net book value of $3 million to the local municipality in Quilmes, Argentina for the benefit of former employees.

Gain on Sale of Equity Interest
In April 2014, the Company completed the sale of its 50% ownership interest in Duckyang Industry Co., Ltd. ("Duckyang"), a Korean automotive interiors supplier. In connection with the transaction, the Company received total cash of approximately $31 million, including $6 million of dividends. The Company recorded a pre-tax gain of approximately $2 million on this transaction during the nine months ended September 30, 2014. In June 2013, the Company completed the sale of its 20% equity interest in Dongfeng Visteon Automotive Trim Systems Co., Ltd. ("Dongfeng") for proceeds of approximately $20 million and recognized a gain of $5 million during the nine months ended September 30, 2013.

NOTE 8. Inventories

Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. A summary is provided below:
 
September 30
 
December 31
 
2014
 
2013
 
(Dollars in Millions)
Raw materials
$
282

 
$
204

Work-in-process
163

 
191

Finished products
139

 
104

Valuation reserves
(22
)
 
(27
)
 
$
562

 
$
472


Effective July 1, 2014, the Company recorded $101 million of inventory at fair value in connection with the Electronics Acquisition. The fair value of inventory was based on management's estimate, available information, and reasonable and supportable assumptions, resulting in an increase of $2 million over the acquiree's historical cost. This amount was subsequently expensed in Cost of sales on the Company’s Consolidated Statements of Comprehensive (Loss) Income during the three-month period ended September 30, 2014.


13



NOTE 9. Other Assets

Other current assets are comprised of the following components:
 
September 30
 
December 31
 
2014
 
2013
 
(Dollars in Millions)
Recoverable taxes
$
148

 
$
140

Joint venture receivables
61

 
63

Pledged accounts receivable

 
52

Prepaid assets and deposits
49

 
45

Deferred tax assets
35

 
36

Contractually reimbursable engineering costs
30

 

Other
22

 
16

 
$
345

 
$
352

Pledged accounts receivable are related to an arrangement, through a subsidiary in France, to sell accounts receivable with recourse on an uncommitted basis. At September 30, 2014 these pledged receivables totaling $30 million were reclassified as assets held for sale in connection with the Interiors Divestiture.

Other non-current assets are comprised of the following components:
 
September 30
 
December 31
 
2014
 
2013
 
(Dollars in Millions)
Deferred tax assets
$
90

 
$
69

Recoverable taxes
49

 
63

Contractually reimbursable engineering costs
42

 
13

Other
36

 
40

 
$
217

 
$
185

Current and non-current contractually reimbursable engineering costs of $30 million and $42 million, respectively, at September 30, 2014, 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 reimbursements of approximately $10 million, $34 million, $21 million, $6 million and $1 million in the annual periods of 2014, 2015, 2016, 2017 and 2018 and after, respectively.

NOTE 10. Property and Equipment

Property and equipment, net consists of the following:
 
September 30
 
December 31
 
2014
 
2013
 
(Dollars in Millions)
Land
$
147

 
$
162

Buildings and improvements
294

 
301

Machinery, equipment and other
1,326

 
1,309

Construction in progress
159

 
145

Total property and equipment
1,926

 
1,917

Accumulated depreciation
(598
)
 
(580
)
 
1,328

 
1,337

Product tooling, net of amortization
75

 
77

Property and equipment, net
$
1,403

 
$
1,414



14



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 expense for property and equipment, inclusive of amounts attributable to discontinued operations, is as follows:
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Depreciation
$
58

 
$
54

 
$
157

 
$
160

Amortization
3

 
3

 
8

 
8

 
$
61

 
$
57

 
$
165

 
$
168


NOTE 11. Intangible Assets

Intangible assets, net are summarized as follows:
 
Estimated Weighted Average Useful Life (years)
 
September 30, 2014
 
December 31, 2013
 
 
Gross Carrying Value    
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value    
 
Accumulated Amortization
 
Net Carrying Value
 
 
 
(Dollars in Millions)
Definite-Lived
 
 
Developed technology
8
 
$
229

 
$
106

 
$
123

 
$
219

 
$
88

 
$
131

Customer related
10
 
213

 
59

 
154

 
214

 
45

 
169

Other
39
 
30

 
10

 
20

 
32

 
9

 
23

Subtotal
 
 
$
472

 
$
175

 
$
297

 
$
465

 
$
142

 
$
323

Indefinite-Lived
 
 
Goodwill
 
 
 
 
 
 
$
107

 
 
 
 
 
$
97

Trade names
 
 
 
 
 
 
27

 
 
 
 
 
27

Subtotal
 
 
 
 
 
 
134

 
 
 
 
 
124

    Total
 
 
 
 
 
 
$
431

 
 
 
 
 
$
447


Effective July 1, 2014, and in connection with the Electronics Acquisition, the Company recorded approximately $16 million of identifiable intangible assets, predominantly related to developed technology. These definite lived intangible assets are being amortized over their estimated useful lives of 6 years, using the straight-line method.

In connection with the Thermal Acquisition, the Company recorded intangible assets including developed technology of $6 million and customer related assets of $2 million. These definite lived intangible assets are being amortized using the straight-line method over their estimated useful lives of 9 years for developed technology and 12-14 years for customer related assets. Additionally, the Company recorded goodwill of approximately $8 million for the excess of the purchase price over the net of the fair values of the identifiable assets and liabilities acquired.

During the three-month period ended June 30, 2014, the Company determined that assets and liabilities subject to the Interiors Divestiture met the "held for sale" criteria. As the fair value of the assets and liabilities subject to the Interiors Divesiture was less than the carrying value, the long-lived assets were written down in their entirety, which included definite lived intangible assets of $7 million as of June 30, 2014. The Company recorded approximately $14 million and $40 million of amortization expense related to definite-lived intangible assets for the three-month and nine-month periods ended September 30, 2014, respectively. The Company currently estimates annual amortization expense to be $52 million for 2014, $54 million for 2015, $53 million for 2016, $51 million for 2017 and $45 million for 2018. Indefinite-lived intangible assets, including goodwill and trade names 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.

15



A roll-forward of the gross carrying amounts of intangible assets, by product group is presented below.
 
Definite-lived intangibles
 
Indefinite-lived intangibles
 
 
 
Developed Technology
 
Customer Related
 
Other
 
Trade Names
 
Goodwill
 
Total
 
(Dollars in Millions)
Climate:
 
Balance at December 31, 2013
$
109

 
$
80

 
$
15

 
$
27

 
$
46

 
$
277

Business acquisitions
6

 
2

 

 

 
10

 
18

Foreign currency
(1
)
 
(8
)
 
(2
)
 

 

 
(11
)
Amortization expenses
(18
)
 
(9
)
 

 

 

 
(27
)
Balance at September 30, 2014
$
96

 
$
65

 
$
13

 
$
27

 
$
56

 
$
257

Electronics:
 
Balance at December 31, 2013
$
14

 
$
89

 
$
8

 
$

 
$
51

 
$
162

Business acquisitions
16

 

 

 

 

 
16

Foreign currency
2

 
8

 
(1
)
 

 

 
9

Amortization expenses
(5
)
 
(8
)
 

 

 
$

 
(13
)
Balance at September 30, 2014
$
27

 
$
89

 
$
7

 
$

 
$
51

 
$
174

Other:
 
Balance at December 31, 2013
$
8

 
$

 
$

 
$

 
$

 
$
8

Loss on assets held for sale
(7
)
 

 

 

 

 
(7
)
Foreign currency
(1
)
 

 

 

 

 
(1
)
Balance at September 30, 2014
$

 
$

 
$

 
$

 
$

 
$

Total:
 
Balance at December 31, 2013
$
131

 
$
169

 
$
23

 
$
27

 
$
97

 
$
447

Business acquisitions
22

 
2

 

 

 
10

 
34

Foreign currency

 

 
(3
)
 

 

 
(3
)
Amortization expenses
(23
)
 
(17
)
 

 

 

 
(40
)
Loss on assets held for sale
(7
)
 

 

 

 

 
(7
)
Balance at September 30, 2014
$
123

 
$
154

 
$
20

 
$
27

 
$
107

 
$
431

 
NOTE 12. Debt

The Company’s short and long-term debt consists of the following:
 
September 30 2014
 
December 31 2013
 
(Dollars in Millions)
Short-term debt
 
 
 
Current portion of term facility due April 9, 2021
$
6

 
$

Current portion of other long-term debt
1

 
2

Short-term borrowings
134

 
104

Total short-term debt
$
141

 
$
106

 
 
 
 
Long-term debt
 
 
 
6.75% senior notes due April 15, 2019
$

 
$
396

Term facility due April 9, 2021
584

 

HVCC USD term loan due May 30, 2016
100

 
100

HVCC KRW term loan due May 30, 2016
95

 
95

Other
61

 
33

Total long-term debt
$
840

 
$
624



16



On April 9, 2014, the Company entered into a new credit agreement (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 (the “Administrative Agent”), which provides for (i) delayed draw term loans in an aggregate principal of $600 million (the “Term Facility”) and (ii) a $200 million revolving credit facility (the “Revolving Facility”). The Company and certain of its subsidiaries have granted a security interest in substantially all of their respective property, subject to certain limitations.

At the Company’s option, loans under the Term Facility and Revolving Facility may be maintained from time to time at an interest rate equal to the applicable rate (“Applicable Rate”) plus the applicable domestic rate (“Base Rate”) or the LIBOR-based rate (“Eurodollar Rate”). The Base Rate shall be a fluctuating rate per annum equal to the highest of (i) the rate equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published by the Federal Reserve Bank of New York on the following Business Day, plus 0.50%; (ii) the rate established by the Administrative Agent as its “prime rate” at its principal U.S. office and (iii) the Eurodollar Rate (which, for the purposes of establishing the Base Rate, shall not be less than 0.75%) plus 1%. The Eurodollar Rate shall be equal to the quotient obtained by dividing (a) the ICE Benchmark Administration Limited LIBOR Rate by (b) the difference between 1.00 and the reserve percentage under regulations issued from time to time by the Board of Governors of the Federal Reserve System of the United States for determining the maximum reserve requirement with respect to Eurocurrency funding. The Applicable Rate varies based on certain corporate credit ratings at the time of borrowing, and ranges from 1.00% to 1.75% for Base Rate loans and 2.00% to 2.75% for Eurodollar Rate loans.

Up to $75 million of the Revolving Facility is available for the issuance of letters of credit, and any such issuance of letters of credit will reduce the amount available for loans under the Revolving Facility. Up to $20 million of the Revolving Facility is available for swing line advances, and any such swing line advances will reduce the amount available for loans under the Revolving Facility. The Company may request increases in the limits under the Term Facility and the Revolving Facility and may request the addition of one or more term loan facilities under the Credit Agreement.

The Term Facility shall mature on April 9, 2021 (the “Term Facility Maturity Date”), and the Revolving Facility shall mature on April 9, 2019 (the “Revolving Facility Maturity Date”). Loans made under the Term Facility are due and payable in full on the Term Facility Maturity Date. Loans made under the Revolving Facility are due and payable in full on the Revolving Facility Maturity Date. Outstanding borrowings may be prepaid without penalty (other than borrowings made for the purpose of reducing the effective interest rate margin or weighted average yield of the loans) in $100,000 increments over $500,000 for loans maintained under the Base Rate and in $250,000 increments over $1,000,000 for loans maintained under the Eurodollar Rate. In the event the Company makes a prepayment of the term loans in connection with a repricing transaction at any time prior to the six month anniversary of the closing date, the Company must pay a prepayment premium equal to 1.0% of the principal amount of term loans prepaid or repaid to the applicable lenders under the Term Facility. There are mandatory prepayments of principal in connection with: (i) excess cash flow sweeps (in the amount of 50%, with step downs to 25% and 0% of the excess cash flow, depending on the then-applicable leverage), (ii) certain asset sales or other dispositions (including as a result of casualty or condemnation), (iii) certain refinancings of indebtedness and (iv) over-advances under the Revolving Facility. The Company is also required to repay quarterly 0.25% of the initial term loan drawn.

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 Term Facility and the Revolving Facility require that, as of the last day of any four consecutive fiscal quarters of the Company last ended (commencing as of June 30, 2014), the Company maintain a total net leverage ratio no greater than 3.00:1.00 (the “Financial Maintenance Covenant”). During any period when the Company’s corporate and family ratings meet certain specified ratings, certain of the negative covenants shall be suspended and the Financial Maintenance Covenant shall only be tested with respect to the Revolving Facility. As of September 30, 2014, the Company was in compliance with the Financial Maintenance Covenant.

All obligations under the Credit Agreement and obligations in respect of certain cash management services and swap agreements with the lenders and their affiliates are unconditionally guaranteed by certain of the Company’s subsidiaries. In connection with the Credit Agreement, on April 9, 2014, (i) the Company, certain of its subsidiaries and the Administrative Agent entered into a Security Agreement (the “Security Agreement”), (ii) certain subsidiaries of the Company and the Administrative Agent entered into a Guaranty Agreement (the “Guaranty Agreement”) and (iii) the Company, certain of its subsidiaries and the Administrative Agent entered into an Intellectual Property Security Agreement (the “Intellectual Property Security Agreement” and, together with the Security Agreement and the Guaranty Agreement, the “Security Documents”). Pursuant to the Security Documents, all obligations under the Credit Agreement are secured by a first-priority perfected lien (subject to certain exceptions) in substantially all of the property of the Company and the subsidiaries party to the Security Agreement, subject to certain limitations.


17



In connection with signing of the Credit Agreement, on April 9, 2014, the Company terminated its $130 million revolving loan credit agreement dated October 1, 2010. On June 23, 2014, the Company drew the $600 million term loan, net of an original issue discount of $9 million. On September 30, 2014, the company made its first mandatory repayment of 0.25% of the initial term loan or $1.5 million. As of September 30, 2014, $598.5 million face value was outstanding under the Term Facility, and there were no outstanding borrowings under the Revolving Facility.

6.75% Senior Notes Due April 15, 2019

The Company's 6.75% senior notes due April 15, 2019 (the"Senior Notes"), were issued under an Indenture (the “Indenture”) among the Company, the subsidiary guarantors named therein, and The Bank of New York Mellon Trust Company, N.A., as trustee. The Indenture and the form of Senior Notes provide, among other things, that prior to April 15, 2014, the Company had the option to redeem up to 10% of the Senior Notes during any 12-month period from the issue date until April 15, 2014, for a 103% redemption price, plus accrued and unpaid interest to the redemption date. On April 10, 2014, the Company exercised this right and redeemed $50 million, or 10%, of its Senior Notes. Additionally, the Company had the option to redeem a portion or all of the Senior Notes beginning on April 15, 2014, for a 105.063% redemption price, plus accrued and unpaid interest to the redemption date. On April 9, 2014, the Company exercised this right and issued a call notice and redeemed the remaining $350 million of its Senior Notes on May 9, 2014. The Company recorded a $23 million loss on extinguishment of debt in the nine months ended September 30, 2014, related to the premium paid on the debt redemption and unamortized original issue discount, debt fees and other debt issue costs associated with the Senior Notes.

HVCC Term Loans

During the first quarter of 2013, HVCC entered into and fully drew on two unsecured bilateral term loan credit agreements with aggregate available borrowings of approximately $195 million. As of September 30, 2014, the U.S. dollar ("USD") equivalent of these agreements was $195 million. Both credit agreements mature in May 2016, and are subject to financial covenants requiring total debt to EBITDA of not greater than 3.2x and a total interest coverage test of more than 3x. The Company was in compliance with such covenants at September 30, 2014.

Short-Term Debt

Short-term borrowings are primarily related to the Company's non-U.S. operations and are payable in various currencies. As of September 30, 2014, the Company had international affiliate short-term borrowings of $134 million, approximately $115 million of which is related to HVCC. As of December 31, 2013, the Company had international affiliate short-term borrowings of $104 million, approximately $68 million of which is related to HVCC. These borrowings are payable in both USD and non-USD currencies including, but not limited to, the Euro, Korean Won, Turkish Lira, and Chinese Yuan.

Short-term borrowings at December 31, 2013, include an arrangement, through a subsidiary in France, to sell accounts receivable with recourse on an uncommitted basis. The amount of financing available is dependent on the amount of receivables less customary reserves. The Company pays a 25 basis points servicing fee on all receivables sold, as well as a financing fee of three-month Euribor plus 95 basis points on the advanced portion. Outstanding borrowings under the facility at September 30, 2014 were $12 million with $30 million of receivables pledged as security, both of which were classified as held for sale. At December 31, 2013, there were $31 million outstanding borrowings under the facility with $52 million of receivables pledged as security. Pursuant to the Purchase Agreement the Company is required to fund any amounts outstanding under this facility as Master Closing of the Interiors Divestiture. On November 1, 2014, in connection with the Master Closing, the Company funded the outstanding balance under this facility which was approximately $1 million.

Fair Value of Debt

The Company's fair value of debt excluding debt included in Liabilities held for sale was approximately $978 million and $755 million at September 30, 2014 and December 31, 2013, respectively. Fair value estimates were based on quoted market prices or current rates for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities. Accordingly, the Company's debt fair value disclosures are classified as Level 1, "Market Prices" and Level 2, "Other Observable Inputs" in the fair value hierarchy, respectively.


18



NOTE 13. Employee Benefit Plans

Defined Benefit Plans

The Company's net periodic benefit costs for the three-month periods ended September 30, 2014 and 2013 were as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Service cost
$

 
$

 
$
6

 
$
5

Interest cost
9

 
12

 
6

 
7

Expected return on plan assets
(12
)
 
(16
)
 
(4
)
 
(4
)
Settlements
(25
)
 

 

 

Special termination benefits

 
1

 

 

Amortization of actuarial losses

 

 
1

 

Net pension (benefit) expense
$
(28
)
 
$
(3
)
 
$
9

 
$
8


The Company's net periodic benefit costs for the nine-month periods ended September 30, 2014 and 2013 were as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Service cost
$

 
$

 
$
18

 
$
17

Interest cost
34

 
36

 
18

 
21

Expected return on plan assets
(43
)
 
(47
)
 
(12
)
 
(14
)
Settlements
(25
)
 

 

 

Special termination benefits

 
1

 

 

Amortization of actuarial losses

 

 
2

 
1

Net pension (benefit) expense
$
(34
)
 
$
(10
)
 
$
26

 
$
25


During the nine-month period ended September 30, 2014, the Company made cash contributions to non-U.S. defined benefit pension plans and U.S. retirement plans of $17 million and $2 million, respectively. During 2014, the Company expects to make additional cash contributions to its non-U.S. defined benefit pension plans of $26 million. The Company’s expected 2014 contributions may be revised.

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. The expense related to matching contributions was approximately $3 million for both the three-month periods ended September 30, 2014 and 2013. The expense related to matching contributions was approximately $11 million and $9 million for the nine-month periods ended September 30, 2014 and 2013, respectively.

Annuity Purchase

On July 22, 2014, the Company purchased a non-participating annuity contract from Prudential Insurance Company of America (“Prudential”) for certain participants under the U.S. defined benefit pension plan (the “Plan”). The annuity purchase covered approximately 3,900 participants and resulted in the settlement of approximately $350 million of the outstanding pension benefit obligation (“PBO”) under the Plan and recognized a settlement gain of $25 million during the three months ended September 30, 2014. This gain is the pro-rata portion of the existing unamortized gain in accumulated other comprehensive (loss) income ("AOCI") and was calculated based on the percentage of the Plan's PBO that was settled as part of the annuity purchase. Prudential has unconditionally and irrevocably guaranteed the full payment of benefits to plan participants associated with the annuity purchase and benefits payment will be in the same form that was in effect under the Plan. Prudential has also assumed all investment risk associated with the assets that were delivered as annuity contract premiums.

19



NOTE 14. Income Taxes

During the three and nine-month periods ended September 30, 2014, the Company recorded income tax provisions of $22 million and $94 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 pre-tax losses in the U.S. and certain other jurisdictions due to valuation allowances. Pre-tax losses from continuing operations in jurisdictions where valuation allowances are maintained and no income tax benefits are recognized totaled $51 million and $44 million, for the three months ended September 30, 2014 and 2013, respectively, resulting in an increase in the Company's effective tax rate in those years.

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 three-month periods ended September 30, 2014 and 2013, the Company recognized expense 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. 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.

The need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will continue to 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 adjusted 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. As part of the Electronics Acquisition, an existing Visteon legal entity in Mexico with substantial net operating loss carryforward attributes for which a valuation allowance was previously recorded acquired a portion of the operations in Mexico. Management projects the combined results from the acquired business should result in the partial utilization of the existing net operating loss carryforward attributes prior to their expiration, and consequently, the Company recognized a tax benefit through continuing operations of $5 million related to the partial elimination of the valuation allowance during the third quarter of 2014.

Unrecognized Tax Benefits

Gross unrecognized tax benefits were $83 million at September 30, 2014, and $73 million at December 31, 2013, of which approximately $38 million and $30 million, respectively, represent the amount of unrecognized tax 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 on uncertain tax positions in income tax expense and related amounts accrued at September 30, 2014 and December 31, 2013 were $27 million and $23 million, respectively.

With few exceptions, the Company is no longer subject to U.S. federal tax examinations for years before 2009 or state and local, or non-U.S. income tax examinations for years before 2003. 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 the U.S. and Asia (including Korea) 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.







20



A reconciliation of unrecognized tax benefits, including amounts attributable to discontinued operations, is as follows:
 
Nine Months Ended September 30, 2014
 
(Dollars in Millions)
Beginning balance
$
73

    Additions to tax positions related to current period
6

    Additions to tax positions related to prior periods
7

    Settlements with tax authorities
(1
)
    Lapses in statute of limitations
(1
)
    Effect of exchange rate changes
(1
)
Ending balance
$
83

During 2012, South Korean tax authorities commenced a review of the Company's South Korean affiliates (including Halla) for tax years 2007 through 2012, and issued formal notice of assessments, including penalties, of approximately $25 million for alleged underpayment of withholding tax on dividends paid and other items, including certain management service fees charged by Visteon. The Company's South Korean affiliates have paid approximately $25 million to the tax authorities in 2013 and 2012, as required under South Korean tax regulations, to pursue the appeals process. During the third quarter of 2014, the tax authorities refunded approximately $11 million to the Company's South Korean affiliates, comprised of $5 million representing substantially all of the tax associated with the management service fees charged by Visteon and $6 million representing a partial refund related to withholding tax on dividends paid. The Company continues to evaluate all available settlement opportunities, including litigation related to the outstanding items and believes that it is more likely than not that it will receive a favorable outcome.

During 2012, Brazilian tax authorities issued tax assessment notices to Visteon Sistemas Automotivos (“Sistemas”) of approximately $15 million related to the sale of its chassis business to a third party. During 2013, after attempts to reopen an appeal of the administrative decision failed, Sistemas opened a judicial proceeding against the government to address the notice which required a deposit in the amount of the assessment in order to suspend the debt and allow Sistemas to operate regularly before the tax authorities. 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 in South Korea and Brazil, as well as contingent income tax refund claims associated with other jurisdictions, including applicable accrued interest income, totaled $34 million as of September 30, 2014, and were included in Other non-current assets on the consolidated balance sheet.

NOTE 15. Stockholders’ Equity and Non-controlling Interests

Changes in equity for the three months ended September 30, 2014 and 2013 are as follows:
 
2014
 
2013
 
Visteon
 
NCI
 
Total
 
Visteon
 
NCI
 
Total
 
(Dollars in Millions)
Stockholders' equity beginning balance
$
1,311

 
$
910

 
$
2,221

 
$
1,352

 
$
745

 
$
2,097

Net income from continuing operations
8

 
22

 
30

 
45

 
17

 
62

Net loss from discontinued operations
(29
)
 

 
(29
)
 
(2
)
 

 
(2
)
Net (loss) income
(21
)
 
22

 
1

 
43

 
17

 
60

Other comprehensive (loss) income
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
(52
)
 
(13
)
 
(65
)
 
36

 
14

 
50

    Benefit plans
(37
)
 

 
(37
)
 
(2
)
 

 
(2
)
    Unrealized hedging (loss) gains
(2
)
 
(2
)
 
(4
)
 
5

 
2

 
7

    Total other comprehensive (loss) income
(91
)
 
(15
)
 
(106
)
 
39

 
16

 
55

Stock-based compensation, net
3

 

 
3

 
4

 

 
4

Warrant exercises
5

 

 
5

 

 

 

Share repurchase

 

 

 
(125
)
 

 
(125
)
Business acquisitions

 
46

 
46

 

 

 

Dividends to non-controlling interests

 
7

 
7

 

 
(6
)
 
(6
)
Stockholders' equity ending balance
$
1,207

 
$
970

 
$
2,177

 
$
1,313

 
$
772

 
$
2,085


21



Changes in equity for the nine months ended September 30, 2014 and 2013 are as follows:
 
2014
 
2013
 
Visteon
 
NCI
 
Total
 
Visteon
 
NCI
 
Total
 
(Dollars in Millions)
Stockholders' equity beginning balance
$
1,920

 
$
953

 
$
2,873

 
$
1,385

 
$
756

 
$
2,141

Net income from continuing operations
32

 
76

 
108

 
177

 
51

 
228

Net (loss) income from discontinued operations
(189
)
 
(11
)
 
(200
)
 

 
2

 
2

Net (loss) income
(157
)
 
65

 
(92
)
 
177

 
53

 
230

Other comprehensive (loss) income
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
(46
)
 
(14
)
 
(60
)
 
(18
)
 
(6
)
 
(24
)
    Benefit plans
(36
)
 

 
(36
)
 
8

 

 
8

    Unrealized hedging gains (loss)
3

 

 
3

 
(6
)
 
(3
)
 
(9
)
    Total other comprehensive loss
(79
)
 
(14
)
 
(93
)
 
(16
)
 
(9
)
 
(25
)
Stock-based compensation, net
18

 

 
18

 
14

 

 
14

Warrant exercises
5

 

 
5

 
3

 

 
3

Share repurchase
(500
)
 

 
(500
)
 
(250
)
 

 
(250
)
Business acquisitions

 
46

 
46

 

 

 

Dividends to non-controlling interests

 
(80
)
 
(80
)
 

 
(28
)
 
(28
)
Stockholders' equity ending balance
$
1,207

 
$
970

 
$
2,177

 
$
1,313

 
$
772

 
$
2,085

Stock Options

During the three and nine-month periods ended September 30, 2014, the Company received payments of $2 million and $12 million related to the exercise of 29,847 and 151,789 stock options, respectively.

Share Repurchase Program

Since July 2012, the Company's board of directors has authorized a total of $1.175 billion in share repurchases. On May 8, 2014, the Company announced an accelerated stock buyback ("ASB") program with a third-party financial institution to purchase shares of common stock for an aggregate purchase price of $500 million. Under the program, the Company paid the financial institution $500 million and received an initial delivery of 3,394,157 shares of common stock using a reference price of $92.07, and an additional delivery of 1,129,001 shares of common stock following the conclusion of the hedge period which determined a certain minimum amount of shares guaranteed under a portion of the program that had a maximum per share price of $100.54. The final settlement will be generally based on the volume-weighted average price of the Company's common stock over a period of up to approximately 12 months, less a negotiated discount, 50 percent of which will be subject to a maximum per share price. On October 15, 2014, the capped portion of the program concluded, and the Company received an additional 112,269 shares. As of September 30, 2014, $375 million remained authorized and available for repurchase through December 31, 2015. The Company anticipates that additional repurchases of common stock, if any, would occur from time to time in open market or privately negotiated transactions depending on market and economic conditions, share price, trading volume, alternative uses of capital and other.

Non-controlling Interests

Non-controlling interests in the Visteon Corporation economic entity are as follows:
 
September 30
 
December 31
 
2014
 
2013
 
(Dollars in Millions)
HVCC
$
785

 
$
777

YFVE
114

 
139

SVAE
40

 

Visteon Interiors Korea, Ltd.
15

 
22

Other
16

 
15

Total non-controlling interests
$
970

 
$
953




In connection with the Electronics Acquisition, the Company acquired a controlling 60% interest in Shanghai Visteon Automotive Electronics Co., Ltd. ("SVAE"). In connection with the preliminary purchase price allocation, the non-controlling interest in SVAE was recorded at estimated fair value based on management's estimates, available information, and reasonable and supportable assumptions as the July 1, 2014, transaction closing date. Additionally, the Company utilized a third-party to assist with the estimation of fair value. The estimated fair value of the non-controlling interest in SVAE of $38 million was based on the discounted cash flows method, which is an income approach. This fair value measurement is classified within level 3 of the fair value hierarchy.

Accumulated Other Comprehensive Income (loss)

Changes in AOCI and reclassifications out of AOCI by component includes:
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Changes in AOCI:
 
 
 
 
 
 
 
Beginning balance
$

 
$
(145
)
 
$
(12
)
 
$
(90
)
Other comprehensive income (loss) before reclassification, net of tax
(59
)
 
42

 
(37
)
 
(8
)
Amounts reclassified from AOCI
(32
)
 
(3
)
 
(42
)
 
(8
)
Ending balance
$
(91
)
 
$
(106
)
 
$
(91
)
 
$
(106
)
 
 
 
 
 
 
 
 
Changes in AOCI by component:
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
  Beginning balance
$
(31
)
 
$
(43
)
 
$
(37
)
 
$
11

Other comprehensive income (loss) before reclassification, net of tax
(52
)
 
36

 
(46
)
 
(16
)
  Amounts reclassified from AOCI (a)

 

 

 
(2
)
  Ending balance
(83
)
 
(7
)
 
(83
)
 
(7
)
Benefit plans
 
 
 
 
 
 
 
  Beginning balance
26

 
(98
)
 
25

 
(108
)
  Other comprehensive income before reclassification, net of tax (b)
(13
)
 
(2
)
 
(13
)
 
7

  Amounts reclassified from AOCI (c)
(24
)
 

 
(23
)
 
1

  Ending balance
(11
)
 
(100
)
 
(11
)