Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 - VISTEON CORP | ex-312q2201510xq.htm |
| EX-32.2 - EXHIBIT 32.2 - VISTEON CORP | ex-322q2201510xq.htm |
| EX-31.1 - EXHIBIT 31.1 - VISTEON CORP | ex-311q2201510xq.htm |
| EX-32.1 - EXHIBIT 32.1 - VISTEON CORP | ex-321q2201510xq.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 June 30, 2015,
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 July 31, 2015, the registrant had outstanding 40,429,047 shares of common stock.
Exhibit index located on page number 65.
1
Visteon Corporation and Subsidiaries
Index
Part I - Financial Information | Page | |
Item 1 - Consolidated Financial Statements | ||
Consolidated Statements of Comprehensive Income (Unaudited) | ||
Consolidated Balance Sheets (Unaudited) | ||
Consolidated Statements of Cash Flows (Unaudited) | ||
Notes to Consolidated Financial Statements (Unaudited) | ||
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3 - Quantitative and Qualitative Disclosures about Market Risk | ||
Item 4 - Controls and Procedures | ||
Part II - Other Information | ||
Item 1 - Legal Proceedings | ||
Item 1A - Risk Factors | ||
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | ||
Item 6 - Exhibits | ||
Signatures | ||
Exhibit Index | ||
2
Part I
Financial Information
Item 1. | Consolidated Financial Statements |
VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Sales | $ | 812 | $ | 503 | $ | 1,628 | $ | 1,003 | |||||||
Cost of sales | 713 | 446 | 1,417 | 873 | |||||||||||
Gross margin | 99 | 57 | 211 | 130 | |||||||||||
Selling, general and administrative expenses | 65 | 48 | 123 | 94 | |||||||||||
Restructuring expense | 12 | 13 | 15 | 14 | |||||||||||
Interest expense | 7 | 7 | 12 | 15 | |||||||||||
Interest income | 1 | 2 | 1 | 4 | |||||||||||
Loss on debt extinguishment | 5 | 23 | 5 | 23 | |||||||||||
Equity in net income of non-consolidated affiliates | 12 | 7 | 11 | 7 | |||||||||||
Gain on sale of non-consolidated affiliates | 62 | 2 | 62 | 2 | |||||||||||
Other (income) expense, net | (4 | ) | 16 | 8 | 22 | ||||||||||
Income (loss) before income taxes | 89 | (39 | ) | 122 | (25 | ) | |||||||||
Provision (benefit) for income taxes | 24 | (2 | ) | 33 | 11 | ||||||||||
Net income (loss) from continuing operations | 65 | (37 | ) | 89 | (36 | ) | |||||||||
Income (loss) from discontinued operations, net of tax | 2,159 | (104 | ) | 2,205 | (57 | ) | |||||||||
Net income (loss) | 2,224 | (141 | ) | 2,294 | (93 | ) | |||||||||
Net income attributable to non-controlling interests | 16 | 14 | 36 | 43 | |||||||||||
Net income (loss) attributable to Visteon Corporation | $ | 2,208 | $ | (155 | ) | $ | 2,258 | $ | (136 | ) | |||||
Basic earnings (loss) per share: | |||||||||||||||
Continuing operations | $ | 1.34 | $ | (0.89 | ) | $ | 1.76 | $ | (1.04 | ) | |||||
Discontinued operations | 49.54 | (2.46 | ) | 49.79 | (1.85 | ) | |||||||||
Basic earnings (loss) per share attributable to Visteon Corporation | $ | 50.88 | $ | (3.35 | ) | $ | 51.55 | $ | (2.89 | ) | |||||
Diluted earnings (loss) per share: | |||||||||||||||
Continuing operations | $ | 1.31 | $ | (0.89 | ) | $ | 1.71 | $ | (1.04 | ) | |||||
Discontinued operations | 48.42 | (2.46 | ) | 48.58 | (1.85 | ) | |||||||||
Diluted earnings (loss) per share attributable to Visteon Corporation | $ | 49.73 | $ | (3.35 | ) | $ | 50.29 | $ | (2.89 | ) | |||||
Comprehensive income (loss): | |||||||||||||||
Comprehensive income (loss) | $ | 2,303 | $ | (107 | ) | $ | 2,323 | $ | (80 | ) | |||||
Comprehensive income (loss) attributable to Visteon Corporation | $ | 2,288 | $ | (131 | ) | $ | 2,296 | $ | (124 | ) | |||||
See accompanying notes to the consolidated financial statements.
3
VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
ASSETS | |||||||
Cash and equivalents | $ | 2,857 | $ | 476 | |||
Restricted cash | 9 | 9 | |||||
Accounts receivable, net | 554 | 572 | |||||
Inventories, net | 204 | 208 | |||||
Current assets held for sale | 18 | 1,630 | |||||
Other current assets | 285 | 239 | |||||
Total current assets | 3,927 | 3,134 | |||||
Property and equipment, net | 338 | 363 | |||||
Intangible assets, net | 148 | 156 | |||||
Investments in non-consolidated affiliates | 63 | 99 | |||||
Non-current assets held for sale | — | 1,425 | |||||
Other non-current assets | 462 | 146 | |||||
Total assets | $ | 4,938 | $ | 5,323 | |||
LIABILITIES AND EQUITY | |||||||
Short-term debt, including current portion of long-term debt | $ | 29 | $ | 29 | |||
Accounts payable | 484 | 513 | |||||
Accrued employee liabilities | 124 | 114 | |||||
Current liabilities held for sale | 11 | 959 | |||||
Other current liabilities | 353 | 217 | |||||
Total current liabilities | 1,001 | 1,832 | |||||
Long-term debt | 349 | 587 | |||||
Employee benefits | 456 | 489 | |||||
Deferred tax liabilities | 36 | 53 | |||||
Non-current liabilities held for sale | — | 430 | |||||
Other non-current liabilities | 246 | 111 | |||||
Stockholders’ equity: | |||||||
Preferred stock (par value $0.01, 50 million shares authorized, none outstanding at June 30, 2015 and December 31, 2014) | — | — | |||||
Common stock (par value $0.01, 250 million shares authorized, 55 million and 54 million shares issued, and 40 million and 44 million shares outstanding at June 30, 2015 and December 31, 2014, respectively) | 1 | 1 | |||||
Stock warrants | 2 | 3 | |||||
Additional paid-in capital | 1,230 | 1,246 | |||||
Retained earnings | 2,919 | 661 | |||||
Accumulated other comprehensive loss | (261 | ) | (299 | ) | |||
Treasury stock | (1,203 | ) | (747 | ) | |||
Total Visteon Corporation stockholders’ equity | 2,688 | 865 | |||||
Non-controlling interests | 162 | 956 | |||||
Total equity | 2,850 | 1,821 | |||||
Total liabilities and equity | $ | 4,938 | $ | 5,323 | |||
See accompanying notes to the consolidated financial statements.
4
VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS1
(Dollars in Millions)
(Unaudited)
Six Months Ended June 30 | |||||||
2015 | 2014 | ||||||
Operating Activities | |||||||
Net income (loss) | $ | 2,294 | $ | (93 | ) | ||
Adjustments to reconcile net income to net cash provided from operating activities: | |||||||
Gain on Climate Transaction | (2,332 | ) | — | ||||
Gain on sale of non-consolidated affiliates | (62 | ) | (2 | ) | |||
Asset impairments and losses on divestitures | 16 | 173 | |||||
Depreciation and amortization | 127 | 130 | |||||
Loss on debt extinguishment | 5 | 23 | |||||
Equity in net income of non-consolidated affiliates, net of dividends remitted | (2 | ) | 5 | ||||
Non-cash stock-based compensation | 6 | 6 | |||||
Other non-cash items | 3 | 7 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable | (18 | ) | (78 | ) | |||
Inventories | (32 | ) | (18 | ) | |||
Accounts payable | 32 | 21 | |||||
Accrued income taxes | 142 | 12 | |||||
Other assets and other liabilities | 25 | (59 | ) | ||||
Net cash provided from operating activities | 204 | 127 | |||||
Investing Activities | |||||||
Proceeds from Climate Transaction | 2,664 | — | |||||
Capital expenditures | (122 | ) | (127 | ) | |||
Loan to non-consolidated affiliate | (10 | ) | — | ||||
Proceeds from sale of non-consolidated affiliates | 91 | 58 | |||||
Other business divestitures and acquisitions | (24 | ) | (7 | ) | |||
Other | 5 | 5 | |||||
Net cash provided from (used by) investing activities | 2,604 | (71 | ) | ||||
Financing Activities | |||||||
Short-term debt, net | (6 | ) | 35 | ||||
Proceeds from issuance of debt, net of issuance costs | — | 590 | |||||
Principal payments on debt | (250 | ) | (4 | ) | |||
Repurchase of long-term notes | — | (419 | ) | ||||
Repurchase of common stock | (500 | ) | (500 | ) | |||
Dividends paid to non-controlling interests | (31 | ) | (45 | ) | |||
Exercised warrants and stock options | 19 | 9 | |||||
Other | (1 | ) | (2 | ) | |||
Net cash used by financing activities | (769 | ) | (336 | ) | |||
Effect of exchange rate changes on cash and equivalents | (9 | ) | 2 | ||||
Net increase (decrease) in cash and equivalents | 2,030 | (278 | ) | ||||
Cash and equivalents at beginning of the period | 827 | 1,677 | |||||
Cash and equivalents at end of the period | $ | 2,857 | $ | 1,399 | |||
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 current 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. Description of Business
Visteon Corporation (the “Company” or “Visteon”) is a global supplier of automotive systems, modules and components to automotive original equipment manufacturers (“OEMs”) worldwide including Ford, Nissan, Renault, Mazda, BMW, General Motors and Honda. Headquartered in Van Buren Township, Michigan, Visteon has a current workforce of approximately 11,500 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 vehicle cockpit electronics product line includes audio systems, infotainment systems, driver information systems, connectivity and telematics solutions and electronic control modules. 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 Interiors and Climate businesses, not subject to discontinued operations classification, that comprise the Other segment.
Climate
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. (“Hahn”) and Hankook Tire Co., Ltd. (“Hankook” and, together with Hahn, 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 (the “Purchase Agreement”), among Visteon and the Purchasers. See Note 3 "Discontinued Operations" for additional disclosures. The Company received net cash proceeds of approximately $2.7 billion and recognized a pre-tax gain of approximately $2.3 billion in connection with the closing of the Climate Transaction.
In connection with the closing of the Climate Transaction, Visteon, HVCC and/or the Purchasers have entered into certain other agreements, including a transition agreement (pursuant to which the parties will provide certain transition services for a specified period following the closing), a remediation agreement (pursuant to which Visteon will provide certain information technology services for a period of time), engineering and support agreements (pursuant to which the parties will support certain operations of the other following the closing), and a letter agreement (pursuant to which Visteon has agreed to purchase from HVCC certain electronics operations located in India).
Electronics
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 $299 million funded with cash on hand, including $31 million of cash and equivalents at the acquired business. The operating results for the business acquired have been included in the Electronics segment from the date of acquisition. The Electronics Acquisition was accounted for as a business combination, with the purchase price allocated on a preliminary basis as of July 2014.
Interiors
In May 2014, pursuant to a Master Purchase Agreement, as subsequently amended, Visteon agreed to divest substantially all of its global Interiors business (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. Effective November 1, 2014, the Company closed on the majority of the Interiors Divestiture (the "Master Closing"). Subsequent to the Master Closing, Visteon completed the sale of Interiors operations in India and Thailand on December 1, 2014 and February 2, 2015, respectively. Remaining operations subject to the Interiors Divestiture are located in Argentina and Brazil and are expected to close during 2015. Assets and liabilities associated with these operations continue to meet the "held for sale" criteria at June 30, 2015 and were classified as "Other current assets" or "Other current liabilities" in the consolidated balance sheets. These 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 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.
6
In preparing the June 30, 2015, financial statements, the Company determined that an indicator of impairment existed in relation to the long-lived assets of the European Interiors operation that is not subject to the Interiors Divestiture. Accordingly, the Company performed a recoverability test utilizing a probability weighted analysis of cash flows associated with continuing the operations and estimated cash flows associated with the potential sale of the operations. As a result of the analysis, the Company concluded that the assets were not recoverable. However, as the fair value of the underlying assets were determined to be in excess of the respective carrying value, no impairment was recorded as of June 30, 2015. The Company continues to pursue strategic alternatives to fully divest of its remaining European Interiors operation. To the extent that a sale transaction becomes more likely to occur in future periods an impairment charge may be required and such charge could be material. Additionally, due to certain liabilities and capital requirements of this remaining business, Visteon may be required to contribute cash to such business in connection with any disposition and such amounts could be material. As of June 30, 2015, the Company did not meet the specific criteria considered necessary for the European Interiors operation to be considered held for sale.
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.
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 (Income) Expense, Net: Other (income) expense, net includes transformation initiatives, integration costs and a provision for losses on recoverable taxes. Transformation initiatives include financial and advisory fees incurred in connection with execution of the Company's comprehensive value creation plan and certain severance costs associated with the Electronics Acquisition and the Climate Transaction. Transformation initiatives also include favorable hedging and exchange impacts of $22 million and $19 million for the three and six-month periods ended June 30, 2015 respectively, related to the Climate Transaction proceeds.
Integration costs include costs associated with re-branding, facility modification, information technology readiness and related professional services necessary to integrate businesses associated with the Electronics Acquisition. The Company expects to incur total integration costs of $40 million over a two-year period through the end of 2015, of which $27 million has been incurred through June 30, 2015.
Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(Dollars in Millions) | |||||||||||||||
Transformation initiatives | $ | (9 | ) | $ | 3 | $ | (1 | ) | $ | 7 | |||||
Integration costs | 5 | 5 | 9 | 7 | |||||||||||
Provision for losses on recoverable taxes | — | 8 | — | 8 | |||||||||||
$ | (4 | ) | $ | 16 | $ | 8 | $ | 22 | |||||||
7
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 June 30, 2015 the remaining cash related to the Climate Transaction proceeds is invested in a diversified portfolio of conservative cash and cash equivalents including money market funds, commercial paper rated A2/P2 and above with maturity under three months, and time deposits which mature under three months with highly rated banking institutions. The Company has $964 million in AAA rated money market mutual funds, all with daily liquidity, that are invested in high quality government and prime securities with asset values exceeding $15 billion per fund. The recorded value of such funds approximates fair value based on the nature of the investment.
Restricted Cash: Restricted cash represents amounts designated for uses other than current operations and includes $7 million related to the Letter of Credit Facility with US Bank National Association, and $2 million related to cash collateral for other corporate purposes at June 30, 2015.
Investments in Affiliates: The Company recorded equity in the net income of affiliates of $12 million and $7 million for the three-month periods ended June 30, 2015 and 2014, respectively. For the six-month periods ended June 30, 2015, and 2014, the Company recorded $11 million and $7 million, respectively. Investments in affiliates were $63 million and $99 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, affiliates accounted for under the equity method totaled $52 million and affiliates accounted for under the cost method totaled $11 million. 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 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 three and six months ended June 30, 2015.
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 three and six months ended June 30, 2014.
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 six months ended June 30, 2015, the Company recorded $13 million as changes in estimates for customer actions related to defective supplier parts. The following table provides a reconciliation of changes in the product warranty and recall claims liability.
Six Months Ended June 30 | |||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
Beginning balance | $ | 21 | $ | 23 | |||
Accruals for products shipped | 8 | 3 | |||||
Changes in estimates | 13 | — | |||||
Foreign currency translation | (3 | ) | — | ||||
Settlements | (3 | ) | (3 | ) | |||
Ending balance | $ | 36 | $ | 23 | |||
Recently Issued 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 and does not prohibit continuing involvement. 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 was
8
effective for interim and annual periods beginning after December 15, 2014, and should be applied prospectively. The Company adopted this new standard prospectively with effect from January 1, 2015.
In May 2014, the 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.
In February 2015, the FASB issued ASU No. 2015-2, "Consolidation (Topic 810)—Amendments to the Consolidation Analysis", which provides guidance on evaluating whether a reporting entity should consolidate certain legal entities. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities. Further, the amendments eliminate the presumption that a general partner should consolidate a limited partnership, as well as affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply the amendments using a modified retrospective approach or a full retrospective application. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
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. An entity should apply the new guidance on a retrospective basis. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In May 2015, the FASB issued ASU 2015-7, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. This amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity should apply the amendments retrospectively to all periods presented. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
NOTE 3. 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 the Interiors and Climate businesses have been reclassified to Income (loss) from discontinued operations, net of tax in the consolidated statements of comprehensive income for the three and six-month periods ended June 30, 2015 and 2014.
9
Discontinued operations are summarized as follows:
Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(Dollars in Millions) | |||||||||||||||
Sales | $ | 933 | $ | 1,537 | $ | 2,168 | $ | 3,019 | |||||||
Cost of sales | 862 | 1,371 | 2,000 | 2,731 | |||||||||||
Gross margin | 71 | 166 | 168 | 288 | |||||||||||
Selling, general and administrative expenses | 35 | 50 | 75 | 98 | |||||||||||
Gain on Climate Transaction | 2,332 | — | 2,332 | — | |||||||||||
Loss and impairment on Interiors Divestiture | 2 | 173 | 16 | 173 | |||||||||||
Restructuring expense | 1 | 4 | 2 | 5 | |||||||||||
Interest expense, net | 1 | 1 | 2 | 3 | |||||||||||
Equity in net income of non-consolidated affiliates | 3 | 4 | 6 | 6 | |||||||||||
Other (income) expense, net | (1 | ) | 5 | 5 | 9 | ||||||||||
Income (loss) from discontinued operations before income taxes | 2,368 | (63 | ) | 2,406 | 6 | ||||||||||
Provision for income taxes | 209 | 41 | 201 | 63 | |||||||||||
Income (loss) from discontinued operations, net of tax | 2,159 | (104 | ) | 2,205 | (57 | ) | |||||||||
Net income attributable to non-controlling interests | 9 | 10 | 24 | 30 | |||||||||||
Net income (loss) from discontinued operations attributable to Visteon | $ | 2,150 | $ | (114 | ) | $ | 2,181 | $ | (87 | ) | |||||
During the three-month period ended June 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. A summary of 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 billion 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 (income) expense, net" for the three and six months ended June 30, 2015.
(2) The Company remitted Korean withholding tax of $377 million, reducing proceeds classified as net cash provided from investing activities within the Company's consolidated statements of cash flows for the six months ended June 30, 2015. The Company believes it is more likely than not that such amounts will be recovered within one to five years after transaction close. The withholding tax recoverable is included the Company's consolidated balance sheets as "Other non-current assets" as of June 30, 2015.
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(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 six months ended June 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 six months ended June 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 six months ended June 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 June 30, 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 six months ended June 30, 2015. Amounts remaining to be paid are included in the Company's consolidated balance sheets as "Accrued employee liabilities" as of June 30, 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 after legal separation and regulatory approvals are met. 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, 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 June 30, 2015.
During the three and six-month periods ended June 30, 2015, the Company recorded additional losses and adjustments related to the Interiors Divestiture of $2 million and $16 million, respectively, including $3 million attributable to the sale of operations in Thailand. Consideration associated with the Interiors Divestiture remains subject to further adjustments.
Assets and liabilities related to the Interiors and Climate businesses have been reclassified as held for sale in the consolidated balance sheets. As of June 30, 2015, held for sale balances include assets and liabilities associated with operations subject to the Interiors Divestiture located in Argentina and Brazil.
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Held for sale balances are summarized as follows:
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
ASSETS HELD FOR SALE | |||||||
Cash and equivalents | $ | — | $ | 346 | |||
Restricted cash | — | — | |||||
Accounts receivable, net | 12 | 779 | |||||
Inventories, net | 5 | 329 | |||||
Other current assets | 1 | 176 | |||||
Total current assets held for sale | 18 | 1,630 | |||||
Property and equipment, net | — | 1,077 | |||||
Intangible assets, net | — | 251 | |||||
Investments in non-consolidated affiliates | — | 66 | |||||
Other non-current assets | — | 31 | |||||
Total non-current assets held for sale | — | 1,425 | |||||
Total assets held for sale | $ | 18 | $ | 3,055 | |||
LIABILITIES HELD FOR SALE | |||||||
Short-term debt, including current portion of long-term debt | $ | — | $ | 113 | |||
Accounts payable | 8 | 673 | |||||
Employee benefits | 3 | 60 | |||||
Other current liabilities | — | 113 | |||||
Total current liabilities held for sale | 11 | 959 | |||||
Long-term debt | — | 252 | |||||
Employee benefits | — | 77 | |||||
Deferred tax liabilities | — | 67 | |||||
Other non-current liabilities | — | 34 | |||||
Total non-current liabilities held for sale | — | 430 | |||||
Total liabilities held for sale | $ | 11 | $ | 1,389 | |||
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 six months ended June 30, 2015 and 2014 are as follows:
Six Months Ended June 30 | |||||||
2015 | 2014 | ||||||
(Dollars in Millions | |||||||
Depreciation and amortization | $ | 85 | $ | 101 | |||
Asset impairments and losses on divestiture | $ | 16 | $ | 173 | |||
Capital expenditures | $ | 81 | $ | 94 | |||
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Note 4. Restructuring Activities
During the three and six-month periods ended June 30, 2015, the Company recorded $13 million and $17 million, respectively, of restructuring expenses, including $1 million and $2 million for the three and six months ended June 30, 2015, respectively related to discontinued operations. 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.
Electronics
In connection with the Electronics Acquisition, the Company commenced a restructuring program designed to achieve cost savings through transaction synergies. Through June 30, 2015, the Company has recorded approximately $49 million of restructuring expenses under this program, associated with approximately 1,000 employees, and expects to incur up to approximately $60 million of restructuring costs during the program. During the three and six months ended June 30, 2015, the Company recorded $9 million and $12 million, respectively, of severance and termination benefits under this program associated with approximately 420 employees. The Company anticipates recording additional restructuring charges related to this program in future periods as underlying plans are finalized. Approximately $34 million remains accrued at June 30, 2015.
Corporate
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 $3 million and $1 million for restructuring expenses during the six months ended June 30, 2015 and 2014, respectively, primarily related to severance and termination benefits. As of June 30, 2015, $3 million remains accrued for this program.
Other
During 2014, the Company recorded $17 million and $18 million for the three and six months ended June 30, 2014, respectively, of restructuring expenses, including $4 million and $5 million for the three and six months ended June 30, 2014, respectively, related to discontinued operations. The expenses primarily related to employee and severance termination benefits, associated with Other operations, including the following activities:
• | The closure of a facility located in Quilmes, Argentina. In connection with the closure, the Company recorded $10 million of restructuring expenses, primarily related to severance and termination benefits associated with approximately 270 employees. Approximately $1 million remains accrued at June 30, 2015. |
• | The closure of a facility located in Port Elizabeth, South Africa. In connection with the closure, the Company recorded and paid cash to settle $2 million of restructuring expenses, primarily related to severance and termination benefits associated with approximately 90 employees. |
• | In connection with the previously announced restructuring of three Interiors facilities in France, the Company recorded an additional $5 million of restructuring expenses, classified as discontinued operations, of which $4 million remains accrued as of June 30, 2015, in addition to $2 million associated with a previously announced program for the fundamental reorganization of operations at a facility in Brazil. The Company retained approximately $6 million of restructuring reserves as part of the Interiors Divestiture. |
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Restructuring Reserves
Restructuring reserve balances of $44 million and $39 million at June 30, 2015 and December 31, 2014, respectively, are classified as "Other current liabilities" on the consolidated balance sheets. The Company anticipates that the activities associated with the restructuring reserve balance will be substantially completed by the first half of 2016. The Company’s consolidated restructuring reserves and related activity are summarized below, including amounts associated with discontinued operations.
Electronics | Corporate | Other | Total | ||||||||||||
(Dollars in Millions) | |||||||||||||||
December 31, 2014 | $ | 30 | $ | — | $ | 9 | $ | 39 | |||||||
Expense | 3 | — | 1 | 4 | |||||||||||
Utilization | (2 | ) | — | (1 | ) | (3 | ) | ||||||||
Foreign currency | (3 | ) | — | (1 | ) | (4 | ) | ||||||||
March 31, 2015 | 28 | — | 8 | 36 | |||||||||||
Expense | 9 | 3 | 1 | 13 | |||||||||||
Utilization | (4 | ) | — | (2 | ) | (6 | ) | ||||||||
Foreign currency | 1 | — | — | 1 | |||||||||||
June 30, 2015 | $ | 34 | $ | 3 | $ | 7 | $ | 44 | |||||||
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 5. Inventories
Inventories consist of the following components:
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
Raw materials | $ | 120 | $ | 117 | |||
Work-in-process | 44 | 43 | |||||
Finished products | 57 | 62 | |||||
Valuation reserves | (17 | ) | (14 | ) | |||
$ | 204 | $ | 208 | ||||
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NOTE 6. Other Assets
Other current assets are comprised of the following components:
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
Recoverable taxes | $ | 75 | $ | 67 | |||
Non-trade receivables | 58 | 28 | |||||
Contractually reimbursable engineering costs | 49 | 36 | |||||
Joint venture receivables | 47 | 52 | |||||
Prepaid assets and deposits | 34 | 30 | |||||
Deferred tax assets | 16 | 20 | |||||
Other | 6 | 6 | |||||
$ | 285 | $ | 239 | ||||
Non-trade receivables represent accounts receivable that the Company is invoicing on behalf of the buyer of the Interiors business. In connection with the Interiors Divestiture, the Company is invoicing on behalf of the buyer until underlying contractual customer agreements are transferred or otherwise modified.
Other non-current assets are comprised of the following components:
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
Recoverable taxes | $ | 404 | $ | 58 | |||
Deferred tax assets | 20 | 24 | |||||
Contractually reimbursable engineering costs | 4 | 31 | |||||
Other | 34 | 33 | |||||
$ | 462 | $ | 146 | ||||
In connection with the Climate Transaction, $377 million of Korean capital gains tax was withheld by the Purchasers and paid to the Korean government, classified as recoverable taxes. The Company has initiated filings with the Korean tax authorities pursuing a refund of the capital gains tax pursuant to the applicable income tax treaty with Korea and believes it is more likely than not that such amount will be recovered over the subsequent one to five years.
Current and non-current contractually reimbursable engineering costs of $49 million and $4 million, respectively, at June 30, 2015 and $36 million and $31 million, respectively, at December 31, 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 cash reimbursement payments of approximately $22 million during the remainder of 2015, $28 million in 2016, $1 million in 2017, $1 million in 2018 and $1 million in 2019.
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NOTE 7. Property and Equipment, net
Property and equipment, net consists of the following:
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
Land | $ | 16 | $ | 17 | |||
Buildings and improvements | 67 | 66 | |||||
Machinery, equipment and other | 361 | 337 | |||||
Construction in progress | 44 | 64 | |||||
488 | 484 | ||||||
Accumulated depreciation | (163 | ) | (136 | ) | |||
325 | 348 | ||||||
Product tooling, net of amortization | 13 | 15 | |||||
$ | 338 | $ | 363 | ||||
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 are summarized as follows:
Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(Dollars in Millions) | |||||||||||||||
Depreciation | $ | 17 | $ | 11 | $ | 32 | $ | 20 | |||||||
Amortization | 1 | 1 | 2 | 1 | |||||||||||
$ | 18 | $ | 12 | $ | 34 | $ | 21 | ||||||||
NOTE 8. Intangible Assets, net
Intangible assets, net at June 30, 2015 and December 31, 2014, are comprised of the following:
June 30, 2015 | December 31, 2014 | ||||||||||||||||||||||||
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 | $ | 39 | $ | 17 | $ | 22 | $ | 39 | $ | 13 | $ | 26 | ||||||||||||
Customer related | 10 | 87 | 14 | 73 | 87 | 10 | 77 | ||||||||||||||||||
Other | 32 | 8 | 1 | 7 | 8 | 1 | 7 | ||||||||||||||||||
Subtotal | 134 | 32 | 102 | 134 | 24 | 110 | |||||||||||||||||||
Indefinite-Lived: | |||||||||||||||||||||||||
Goodwill | 46 | — | 46 | 46 | — | 46 | |||||||||||||||||||
Total | $ | 180 | $ | 32 | $ | 148 | $ | 180 | $ | 24 | $ | 156 | |||||||||||||
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The Company recorded approximately $4 million and $8 million of amortization expense related to definite-lived intangible assets for the three and six-month periods ended June 30, 2015. The Company currently estimates annual amortization expense to be $15 million for 2015, $14 million for 2016, $12 million for 2017, $12 million for 2018 and $12 million for 2019. 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) | |||||||||||||||||||
Balance at December 31, 2014 | $ | 26 | $ | 77 | $ | 7 | $ | 46 | $ | 156 | |||||||||
Amortization | (4 | ) | (4 | ) | — | — | (8 | ) | |||||||||||
Balance at June 30, 2015 | $ | 22 | $ | 73 | $ | 7 | $ | 46 | $ | 148 | |||||||||
NOTE 9. Other Liabilities
Other current liabilities are summarized as follows:
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
Information technology separation and service obligations | $ | 57 | $ | 10 | |||
Non-trade payables | 51 | 24 | |||||
Electronics operations repurchase commitment | 50 | — | |||||
Restructuring reserves | 44 | 39 | |||||
Income taxes payable | 28 | 11 | |||||
Rent and royalties | 24 | 24 | |||||
Product warranty and recall accruals | 19 | 11 | |||||
Joint venture payables | 17 | 22 | |||||
Non-income taxes payable | 16 | 13 | |||||
Deferred income | 9 | 14 | |||||
Dividends payable | 8 | — | |||||
Foreign currency hedges | 1 | 15 | |||||
Deferred income taxes | — | 3 | |||||
Other | 29 | 31 | |||||
$ | 353 | $ | 217 | ||||
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 June 30, 2015 and December 31, 2014 remaining obligations totaled $57 million and $10 million, respectively.
In connection with the Climate Transaction, the Company entered an agreement to purchase certain electronics operations located in India, expected to close in 2016 after legal separation and regulatory approvals are met. The Company has recorded a repurchase obligation of $50 million, representing the estimated purchase price of the subject business.
Non-trade payables represent accounts payable for purchases the Company has made on behalf of the buyer of the Interiors business. In connection with the Interiors Divestiture, the Company agreed to continue to pay suppliers on behalf of the buyer until underlying contractual supplier agreements are transferred or otherwise modified.
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Other non-current liabilities are summarized as follows:
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
Income tax reserves | $ | 190 | $ | 47 | |||
Deferred income | 17 | 20 | |||||
Product warranty and recall accruals | 17 | 10 | |||||
Non-income tax reserves | 10 | 19 | |||||
Other | 12 | 15 | |||||
$ | 246 | $ | 111 | ||||
Income tax reserves include $147 million related to the anticipated U.S. income tax after the utilization of available net operating loss carry-forwards and other tax attributes in connection with the Climate Transaction as well as reserves for uncertain tax benefits, including interest and penalties, of $43 million. See Note 12, "Income Taxes" for additional details.
NOTE 10. Debt
The Company’s short and long-term debt consists of the following:
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
Short-Term Debt: | |||||||
Current portion of long-term debt | $ | 1 | $ | 8 | |||
Short-term borrowings | 28 | 21 | |||||
$ | 29 | $ | 29 | ||||
Long-Term Debt: | |||||||
Term debt facility | $ | 346 | $ | 583 | |||
Other | 3 | 4 | |||||
$ | 349 | $ | 587 | ||||
Short-Term Debt
Short-term borrowings are related to the Company's non-U.S. joint ventures and are payable in Chinese Renminbi and Russian Ruble. As of June 30, 2015 and December 31, 2014, the Company had international affiliate short-term borrowings of $28 million and $21 million, respectively. Short-term borrowings increased in 2015 primarily due to increased working capital needs at a joint venture in China. Available borrowings on outstanding affiliate credit facilities as of June 30, 2015, is approximately $24 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 at June 30, 2015.
The Company originally entered into a $600 million delayed draw Term Loan Facility on April 9, 2014 and subsequently executed an Amendment to the Credit Agreement on March 25, 2015. The Amendment, among other things, provides for certain modifications to the Credit Agreement to permit Visteon’s sale of its ownership interest in HVCC (Climate Transaction) and otherwise to update the Credit Agreement to account for HVCC no longer being a subsidiary of Visteon following the Climate Transaction. While certain waivers granted under the Amendment became effective on March 25, 2015, other waivers became effective concurrent with the consummation of the Climate Transaction on June 9, 2015. Under the Amendment, Term Lenders
18
agree to waive a requirement of the Credit Agreement that 100% of the net cash proceeds received by the Borrower or any of its Restricted Subsidiaries from the Climate Transaction be used to prepay the Term Loans so long as such net cash proceeds are used to prepay the Term Loans within five business days of the receipt of such net cash proceeds in an amount sufficient to reduce the aggregate principal amount of Term Loans outstanding after giving effect to such prepayment to no more than $350 million.
Visteon consummated the Climate Transaction on June 9, 2015 and subsequently paid down $246 million term loan principal on June 12, 2015 to reduce the outstanding aggregate principal amount of the Term Facility to approximately $350 million. In connection with the principal reduction, the 0.25% mandatory quarterly prepayment obligation was considered completed, therefore the Company will cease making quarterly amortization payments. During the three and six months ended June 30, 2015, the Company recorded $5 million of Loss on Debt Extinguishment costs, representing unamortized original issue discount, debt fees and amendment fees associated with the pay-down.
Other Long-Term Debt
As of June 30, 2015 and December 31, 2014, the Company had $3 million and $4 million, respectively, of other long-term debt outstanding, primarily related to information technology software leases.
NOTE 11. Employee Benefit Plans
Defined Benefit Plans
The Company's net periodic benefit costs for all defined benefit plans, including discontinued operations, for the three-month periods ended June 30, 2015 and 2014 were as follows:
U.S. Plans | Non-U.S. Plans | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(Dollars in Millions) | |||||||||||||||
Costs Recognized in Income: | |||||||||||||||
Service cost | $ | — | $ | — | $ | 6 | $ | 6 | |||||||
Interest cost | 9 | 13 | 6 | 6 | |||||||||||
Expected return on plan assets | (10 | ) | (16 | ) | (5 | ) | (4 | ) | |||||||
Amortization of losses and other | — | — | 3 | — | |||||||||||
Net pension (income) expense | $ | (1 | ) | $ | (3 | ) | $ | 10 | $ | 8 | |||||
The Company's net periodic benefit costs for all defined benefit plans, including discontinued operations, for the six-month periods ended June 30, 2015 and 2014 were as follows:
U.S. Plans | Non-U.S. Plans | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(Dollars in Millions) | |||||||||||||||
Costs Recognized in Income: | |||||||||||||||
Service cost | $ | — | $ | — | $ | 13 | $ | 12 | |||||||
Interest cost | 17 | 25 | 12 | 12 | |||||||||||
Expected return on plan assets | (21 | ) | (31 | ) | (11 | ) | (8 | ) | |||||||
Amortization of losses and other | — | — | 5 | 1 | |||||||||||
Net pension (income) expense | $ | (4 | ) | $ | (6 | ) | $ | 19 | $ | 17 | |||||
During the six-month period ended June 30, 2015, cash contributions to the Company's non-U.S. defined benefit pension plan were $11 million. The Company expects to make cash contributions to its U.S. defined benefit pension plans of $1 million and contributions to non-U.S. defined benefit pension plans of $21 million in 2015. The Company’s expected 2015 contributions may be revised.
19
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 $3 million for the three months ended June 30, 2015 and 2014, respectively. The expense related to matching contributions was approximately $7 million and $8 million for the six months ended June 30, 2015 and 2014, respectively.
NOTE 12. Income Taxes
During the three and six-month periods ended June 30, 2015, the Company recorded a provision for income tax on continuing operations of $24 million and $33 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 $14 million and $68 million, for the six months ended June 30, 2015 and 2014, respectively, resulting in an increase in the Company's effective tax rate in those periods.
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 six-month periods ended June 30, 2015 and 2014, the Company recognized expense of $5 million and $2 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 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.
In connection with the Climate Transaction, the Company recorded anticipated U.S. income tax of $147 million, related to the gain on sale, which represents the net amount of U.S. tax after the utilization of available net operating loss carry-forwards and other tax attributes, under the more likely than not assumption the Korean withholding taxes as described further below will be refunded one to five years post-closing. This amount is reflected as discontinued operations income tax expense and the related liability is included in "Other non-current liabilities" on the consolidated balance sheets.
Unrecognized Tax Benefits
Gross unrecognized tax benefits at June 30, 2015 and December 31, 2014, including amounts attributable to discontinued operations, were $41 million and $60 million, respectively. Of these amounts approximately $39 million and $40 million 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 June 30, 2015 and December 31, 2014 were $4 million and $27 million, respectively.
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There were several items that impacted the Company’s unrecognized tax benefits resulting in a $4 million net reduction in income tax expense, inclusive of interest and penalties, for the six-month period ended June 30, 2015, of which $7 million income tax benefit was reflected in continuing operations, partially offset by $3 million income tax expense reflected in discontinued operations. During the first quarter of 2015, the Company received a favorable order from the Joint Commissioner of Income Tax in India related to numerous appeals in connection with assessments initiated over seven years ago associated with the transfer price used to value certain share transactions. During the first and second quarters of 2015, the Internal Revenue Service completed consecutive audits of the Company's U.S. climate affiliate for the 2011 through 2013 tax years. In connection with the Climate Transaction, the Company eliminated substantially all of the unrecognized tax benefits associated with the climate legal entities by $21 million. Also in connection with this transaction, the amount of unrecognized tax benefits that impact the rate increased by $19 million to reflect the anticipated U.S. income tax related to the 2015 tax year after utilizing available tax attributes. As described further below, as a consequence of the Company abandoning its pursuit of further appeals related to the alleged underpayment of withholding tax on dividends paid from its Korean affiliates, the Company recorded $7 million of income tax expense related to dividends paid from its former Korean affiliates in 2013 and 2014.
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 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. A reconciliation of the beginning and ending amount of unrecognized tax benefits including amounts attributable to discontinued operations is as follows:
Six Months Ended June 30, 2015 | |||
(Dollars in Millions) | |||
Beginning balance | $ | 60 | |
Tax positions related to current period: | |||
Additions | 4 | ||
Tax positions related to prior periods: | |||
Additions | 12 | ||
Reductions | (35 | ) | |
Ending balance | $ | 41 | |
In connection with the Climate Transaction, $377 million of Korean capital gains tax was withheld by the Purchasers and paid to the Korean government. The Company has initiated filings with the Korean tax authorities pursuing a refund of the capital gains tax pursuant to the applicable income tax treaty with Korea and believes it is more likely than not that such amount will be recovered over the subsequent one to five years. Also in connection with the Climate Transaction, the Company withdrew its appeals related to the alleged underpayment of withholding tax on dividends paid from its former Korean affiliates through 2012 and eliminated the various income tax refund claims previously recorded at the Climate legal entities. As a consequence of these actions, the Company established a long-term income tax receivable of $377 million and reduced its previous balance by approximately $12 million, of which $7 million was reflected in discontinued operations income tax expense and $5 million reflected as discontinued operations related to the gain on the Climate Transaction.
During 2012, Brazil 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 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.
Appeal payments in Korea and Brazil, as well as contingent income tax refund claims associated with other jurisdictions, including applicable accrued interest income and exchange impacts, total $392 million as of June 30, 2015 and are included in Other non-current assets on the consolidated balance sheets.
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NOTE 13. Stockholders’ Equity and Non-controlling Interests
Changes in equity for the three months ended June 30, 2015 and 2014 are as follows:
2015 | 2014 | ||||||||||||||||||||||
Visteon | NCI | Total | Visteon | NCI | Total | ||||||||||||||||||
(Dollars in Millions) | |||||||||||||||||||||||
Three Months Ended June 30: | |||||||||||||||||||||||
Beginning balance | $ | 883 | $ | 940 | $ | 1,823 | $ | 1,931 | $ | 912 | $ | 2,843 | |||||||||||
Net income (loss) from continuing operations | 58 | 7 | 65 | (41 | ) | 4 | (37 | ) | |||||||||||||||
Net income (loss) from discontinued operations | 2,150 | 9 | 2,159 | (114 | ) | 10 | (104 | ) | |||||||||||||||
Net income (loss) | 2,208 | 16 | 2,224 | (155 | ) | 14 | (141 | ) | |||||||||||||||
Other comprehensive income (loss) | |||||||||||||||||||||||
Foreign currency translation adjustments | 67 | — | 67 | 17 | 7 | 24 | |||||||||||||||||
Benefit plans | 17 | — | 17 | — | — | — | |||||||||||||||||
Unrealized hedging (loss) gains | (4 | ) | (1 | ) | (5 | ) | 7 | 3 | 10 | ||||||||||||||
Total other comprehensive income (loss) | 80 | (1 | ) | 79 | 24 | 10 | 34 | ||||||||||||||||
Stock-based compensation, net | 11 | — | 11 | 11 | — | 11 | |||||||||||||||||
Warrant exercises | 6 | — | 6 | — | — | — | |||||||||||||||||
Share repurchase | (500 | ) | — | (500 | ) | (500 | ) | — | (500 | ) | |||||||||||||
Business divestitures | — | (785 | ) | (785 | ) | — | — | — | |||||||||||||||
Dividends to non-controlling interests | — | (8 | ) | (8 | ) | — | (26 | ) | (26 | ) | |||||||||||||
Ending balance | $ | 2,688 | $ | 162 | $ | 2,850 | $ | 1,311 | $ | 910 | $ | 2,221 | |||||||||||
Changes in equity for the six months ended June 30, 2015 and 2014 are as follows:
2015 | 2014 | ||||||||||||||||||||||
Visteon | NCI | Total | Visteon | NCI | Total | ||||||||||||||||||
(Dollars in Millions) | |||||||||||||||||||||||
Six Months Ended June 30: | |||||||||||||||||||||||
Beginning balance | $ | 865 | $ | 956 | $ | 1,821 | $ | 1,920 | $ | 953 | $ | 2,873 | |||||||||||
Net income (loss) from continuing operations | 77 | 12 | 89 | (49 | ) | 13 | (36 | ) | |||||||||||||||
Net income (loss) from discontinued operations | 2,181 | 24 | 2,205 | (87 | ) | 30 | (57 | ) | |||||||||||||||
Net income (loss) | 2,258 | 36 | 2,294 | (136 | ) | 43 | (93 | ) | |||||||||||||||
Other comprehensive income (loss) | |||||||||||||||||||||||
Foreign currency translation adjustments | — | (12 | ) | (12 | ) | 6 | (1 | ) | 5 | ||||||||||||||
Benefit plans | 33 | 1 | 34 | 1 | — | 1 | |||||||||||||||||
Unrealized hedging gains | 5 | 2 | 7 | 5 | 2 | 7 | |||||||||||||||||
Total other comprehensive income (loss) | 38 | (9 | ) | 29 | 12 | 1 | 13 | ||||||||||||||||
Stock-based compensation, net | 12 | — | 12 | 15 | — | 15 | |||||||||||||||||
Warrant exercises | 15 | — | 15 | — | — | — | |||||||||||||||||
Share repurchase | (500 | ) | — | (500 | ) | (500 | ) | — | (500 | ) | |||||||||||||
Business divestiture | — | (785 | ) | (785 | ) | — | — | — | |||||||||||||||
Dividends to non-controlling interests | — | (36 | ) | (36 | ) | — | (87 | ) | (87 | ) | |||||||||||||
Ending balance | $ | 2,688 | $ | 162 | $ | 2,850 | $ | 1,311 | $ | 910 | $ | 2,221 | |||||||||||
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Share Repurchase Program
As of January 1, 2014, a total of $875 million previously authorized by the Company's board of directors remained available for share repurchase. On May 8, 2014, the Company entered into 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. On October 15, 2014, the capped portion of the program concluded, and the Company received an additional 112,269 shares. The final settlement price for all shares delivered under the capped portion of the program was $96.19. On May 1, 2015, the uncapped portion of the program concluded and the Company received an additional 534,214 shares. The final settlement price for all shares delivered under the uncapped portion of the program was $97.25.
On June 11, 2015, the Company’s board of directors authorized an additional $125 million of share repurchase for a total of $500 million available through December 31, 2015. On June 16, 2015, the Company entered into a new 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 3,712,297 shares of common stock, which is approximately 80% of the total number of shares of the Company’s common stock expected to be repurchased under the ASB Agreement based on the closing price of the Company’s common stock on June 15, 2015. The final number of shares to be repurchased will be based on the average of the daily volume-weighted average prices of the Company’s common stock during the term of the transaction, less an agreed discount and subject to adjustments pursuant to the terms and conditions of the ASB Agreement. The final settlement of the transaction under the ASB Agreement is expected to occur by the end of 2015 but may be accelerated at the option of the third-party financial institution.
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:
June 30 | December 31 | ||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
HVCC | $ | — | $ | 798 | |||
Yanfeng Visteon Automotive Electronics Co., Ltd. ("YFVE") | 123 | 118 | |||||
Shanghai Visteon Automotive Electronics, Co., Ltd. | 37 | 39 | |||||
Other | 2 | 1 | |||||
$ | 162 | $ | 956 | ||||
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Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated other comprehensive income (loss) (“AOCI”) and reclassifications out of AOCI by component include:
Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(Dollars in Millions) | |||||||||||||||
Changes in AOCI: | |||||||||||||||
Beginning balance | $ | (341 | ) | $ | (24 | ) | $ | (299 | ) | $ | (12 | ) | |||
Other comprehensive (loss) income before reclassification, net of tax | (4 | ) | 35 | (42 | ) | 22 | |||||||||
Amounts reclassified from AOCI | — | (11 | ) | (4 | ) | (10 | ) | ||||||||
Climate divestiture | 84 | — | 84 | — | |||||||||||
Ending balance | $ | (261 | ) | $ | — | $ | (261 | ) | $ | — | |||||
Changes in AOCI by Component: | |||||||||||||||
Foreign currency translation adjustments | |||||||||||||||
Beginning balance | $ | (205 | ) | $ | (48 | ) | $ | (138 | ) | $ | (37 | ) | |||
Other comprehensive income (loss) before reclassification, net of tax (a) | 4 | 17 | (63 | ) | 6 | ||||||||||
Climate divestiture (b) | 63 | — | 63 | — | |||||||||||
Ending balance | (138 | ) | (31 | ) | (138 | ) | (31 | ) | |||||||
Benefit plans | |||||||||||||||
Beginning balance | (140 | ) | 26 | (156 | ) | 25 | |||||||||
Other comprehensive (loss) income before reclassification, net of tax (a) | (6 | ) | — | 8 | — | ||||||||||
Amounts reclassified from AOCI (c) | 3 | — | 5 | 1 | |||||||||||
Climate divestiture (b) | 20 | — | 20 | — | |||||||||||
Ending balance | (123 | ) | 26 | (123 | ) | 26 | |||||||||
Unrealized hedging gain (loss) | |||||||||||||||
Beginning balance | 4 | (2 | ) | (5 | ) | — | |||||||||
Other comprehensive (loss) income before reclassification, net of tax (d) | (2 | ) | 18 | 13 | 16 | ||||||||||
Amounts reclassified from AOCI (e) | (3 | ) | (11 | ) | (9 | ) | (11 | ) | |||||||
Climate divestiture (b) | 1 | — | 1 | — | |||||||||||
Ending balance | — | 5 | — | 5 | |||||||||||
Total AOCI | $ | (261 | ) | $ | — | $ | (261 | ) | $ | — | |||||
(a) There were no income tax effects for either period due to the recording of valuation allowance.
(b) Amounts are included in Income 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 11, "Employee Benefit Plans" for additional details.)
(d) Net tax benefit of $1 million and net tax expense $3 million are related to unrealized hedging (loss) gain for the three months ended June 30, 2015 and 2014, respectively. Net tax expense of $2 million are related to unrealized hedging gain for both the three and six months ended June 30, 2015 and 2014, respectively.
(e) Amount is included in Cost of sales in consolidated statements of comprehensive income.
Stock Warrants
During the three and six months ended June 30, 2015, the Company received payments of $5 million and $15 million related to approximately 139,000 and 303,000 warrants, respectively, converted to shares of common stock at an exercise price of $58.80 per share.
NOTE 14. Earnings (Loss) Per Share
Basic earnings (loss) 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.
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The table below provides details underlying the calculations of basic and diluted earnings (loss) per share:
Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In Millions, Except Per Share Amounts) | |||||||||||||||
Numerator: | |||||||||||||||
Net income (loss) from continuing operations attributable to Visteon | $ | 58 | $ | (41 | ) | $ | 77 | $ | (49 | ) | |||||
Income (loss) from discontinued operations, net of tax | 2,150 | (114 | ) | 2,181 | (87 | ) | |||||||||
Net income (loss) attributable to Visteon | $ | 2,208 | $ | (155 | ) | $ | 2,258 | $ | (136 | ) | |||||
Denominator: | |||||||||||||||
Average common stock outstanding - basic | 43.4 | 46.2 | |||||||||||||