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EX-10.1 - EXHIBIT 10.1 - VISTEON CORPex-101q1201610xq.htm
EX-10.2 - EXHIBIT 10.2 - VISTEON CORPex-102q1201610xq.htm
EX-31.2 - EXHIBIT 31.2 - VISTEON CORPex-312q1201610xq.htm
EX-32.2 - EXHIBIT 32.2 - VISTEON CORPex-322q1201610xq.htm
EX-32.1 - EXHIBIT 32.1 - VISTEON CORPex-321q1201610xq.htm
EX-31.1 - EXHIBIT 31.1 - VISTEON CORPex-311q1201610xq.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 March 31, 2016,
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 April 21, 2016, the registrant had outstanding 34,009,529 shares of common stock.
Exhibit index located on page number 48.


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 March 31
 
2016
 
2015
Sales
$
802

 
$
816

Cost of sales
681

 
704

Gross margin
121

 
112

Selling, general and administrative expenses
56

 
58

Restructuring expense
10

 
3

Interest expense
4

 
5

Interest income
2

 

Equity in net (loss) of non-consolidated affiliates

 
(1
)
Other expense, net
4

 
12

Income before income taxes
49

 
33

Provision for income taxes
13

 
9

Net income from continuing operations
36

 
24

(Loss) income from discontinued operations, net of tax
(13
)
 
46

Net income
23

 
70

Net income attributable to non-controlling interests
4

 
20

Net income attributable to Visteon Corporation
$
19

 
$
50

 
 
 
 
Basic earnings per share:
 
 
 
    Continuing operations
$
0.84

 
$
0.43

    Discontinued operations
(0.34
)
 
0.70

    Basic earnings per share attributable to Visteon Corporation
$
0.50

 
$
1.13

 
 
 
 
Diluted earnings per share:
 
 
 
    Continuing operations
$
0.83

 
$
0.42

    Discontinued operations
(0.34
)
 
0.68

    Diluted earnings per share attributable to Visteon Corporation
$
0.49

 
$
1.10

 
 
 
 
Comprehensive income:
 
 
 
Comprehensive income
$
42

 
$
20

Comprehensive income attributable to Visteon Corporation
$
38

 
$
8


See accompanying notes to the consolidated financial statements.

3



VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
 
(Unaudited)
 
 
 
March 31
 
December 31
 
2016
 
2015
ASSETS
Cash and equivalents
$
801

 
$
2,728

Short-term investments

 
47

Restricted cash
7

 
8

Accounts receivable, net
538

 
502

Inventories, net
182

 
187

Other current assets
204

 
581

Total current assets
1,732

 
4,053

 
 
 
 
Property and equipment, net
349

 
351

Intangible assets, net
129

 
133

Investments in non-consolidated affiliates
56

 
56

Other non-current assets
102

 
88

Total assets
$
2,368

 
$
4,681

 
 
 
 
LIABILITIES AND EQUITY
Distribution payable

$
15

 
$
1,751

Short-term debt, including current portion of long-term debt
36

 
37

Accounts payable
480

 
482

Accrued employee liabilities
99

 
132

Other current liabilities
298

 
370

Total current liabilities
928

 
2,772

 
 
 
 
Long-term debt
346

 
346

Employee benefits
261

 
268

Deferred tax liabilities
22

 
21

Other non-current liabilities
79

 
75

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock (par value $0.01, 50 million shares authorized, none outstanding at March 31, 2016 and December 31, 2015)

 

Common stock (par value $0.01, 250 million shares authorized, 55 million and 55 million shares issued, and 34 million and 40 million shares outstanding at March 31, 2016 and December 31, 2015, respectively)
1

 
1

Additional paid-in capital
1,243

 
1,345

Retained earnings
1,213

 
1,194

Accumulated other comprehensive loss
(171
)
 
(190
)
Treasury stock
(1,700
)
 
(1,293
)
Total Visteon Corporation stockholders’ equity
586

 
1,057

Non-controlling interests
146

 
142

Total equity
732

 
1,199

Total liabilities and equity
$
2,368

 
$
4,681

See accompanying notes to the consolidated financial statements.

4



VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS1 
(Dollars in Millions)
(Unaudited)
 
Three Months Ended
March 31
 
2016
 
2015
Operating Activities
 
 
 
Net income
$
23

 
$
70

Adjustments to reconcile net income to net cash (used by) provided from operating activities:
 
 
 
Depreciation and amortization
21

 
68

Losses on divestitures and impairments
1

 
14

Equity in net income of non-consolidated affiliates, net of dividends remitted

 
(2
)
Non-cash stock-based compensation
2

 
3

Changes in assets and liabilities:
 
 
 
Accounts receivable
(24
)
 
(62
)
Inventories
9

 
(29
)
Accounts payable
4

 
110

Accrued income taxes
(43
)
 
(18
)
Other assets and other liabilities
(51
)
 
19

Net cash (used by) provided from operating activities
(58
)
 
173

Investing Activities
 
 
 
Capital expenditures
(25
)
 
(55
)
Climate Transaction withholding tax refund
356

 

Short-term investments
47

 

Loan to non-consolidated affiliates
(8
)
 
(10
)
Proceeds from asset sales
3

 
3

Other

 
(8
)
Net cash provided from (used by) investing activities
373

 
(70
)
Financing Activities
 
 
 
Short-term debt, net

 
(10
)
Principal payments on debt
(1
)
 
(3
)
Distribution payments
(1,736
)
 

Repurchase of common stock
(500
)
 

Dividends paid to non-controlling interests

 
(3
)
Exercised warrants and stock options

 
10

Stock based compensation tax withholding payments
(11
)
 

Net cash used by financing activities
(2,248
)
 
(6
)
Effect of exchange rate changes on cash and equivalents
7

 
(17
)
Net (decrease) increase in cash and equivalents
(1,926
)
 
80

Cash and equivalents at beginning of the period
2,729

 
827

Cash and equivalents at end of the period
$
803

 
$
907

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 within other current assets 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 automotive supplier that designs, engineers and manufactures innovative electronics products for nearly every original equipment vehicle manufacturer ("OEM") worldwide including Ford, Nissan, Renault, Mazda, BMW, General Motors and Honda. Visteon is headquartered in Van Buren Township, Michigan and has an international network of manufacturing operations, technical centers and joint venture operations, supported by approximately 11,000 employees, dedicated to the design, development, manufacture and support of its product offerings and its global customers. The Company's manufacturing and engineering footprint is principally located outside of the U.S., with a heavy concentration in low-cost geographic regions. Visteon delivers value for its customers and stockholders through its technology-focused core vehicle cockpit electronics business. The Company's cockpit electronics product portfolio includes audio systems, information displays, instrument clusters, head up displays, infotainment systems, and telematics solutions. The Company's vehicle cockpit electronics business is comprised of and reported under the Electronics segment. In addition to the Electronics segment, the Company has residual operations in South America and Europe previously associated with the former Interiors and Climate businesses, not subject to discontinued operations classification, that comprise Other. A summary of transactions impacting the Company's businesses is provided below.

Exit of Climate Business

On June 9, 2015, Visteon Corporation and its wholly owned subsidiary, VIHI, LLC (collectively, “Visteon”) completed the sale to Hahn & Co. Auto Holdings Co., Ltd. and Hankook Tire Co., Ltd. (together, the “Purchasers”) of all of its shares of Halla Visteon Climate Control Corporation, a Korean corporation (“HVCC”), for approximately $3.4 billion, or KRW 52,000 per share, after adjusting for the 2014 dividend paid by HVCC to Visteon (the “Climate Transaction”), pursuant to and in accordance with the Share Purchase Agreement, dated as of December 17, 2014, among Visteon and the Purchasers. See Note 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 the second quarter 2015. The results of operations for the Climate business have been classified as (Loss) income from discontinued operations, net of tax in the consolidated statements of comprehensive income for the three month period ended March 31, 2015.

Exit of Interiors Business

On December 1, 2015, Visteon completed the sale and transfer of its equity ownership in Visteon Deutschland GmbH, which operated the Berlin, Germany interiors plant ("Germany Interiors Divestiture") . The Company contributed cash, of approximately $141 million, assets of $27 million, and liabilities of $198 million including pension related liabilities. The Company will make a final contribution payment of approximately $34 million by November 2016 included in the Company's consolidated balance sheet as "Other current liabilities" as of March 31, 2016.

During 2014, the Company divested the majority of its global Interiors business (the "Interiors Divestiture"). Subsequently, Visteon completed the sale of its Interiors operations in Thailand on February 2, 2015. Remaining operations subject to the Interiors Divestiture are located in Argentina and Brazil and are expected to close during 2016. Assets and liabilities associated with these operations continue to meet the "held for sale" criteria at March 31, 2016 and are 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. See Note 3 "Discontinued Operations" for additional disclosures. 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.

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.


6



Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all subsidiaries that are more than 50% owned and over which the Company exercises control. Investments in affiliates of greater than 20% and for which the Company exercises significant influence but does not exercise control are accounted for using the equity method. All other investments in non-consolidated affiliates are accounted for using the cost method.

The Company determines whether joint ventures in which it has invested is a Variable Interest Entity (“VIE”) at the start of each new venture and when a reconsideration event has occurred. An enterprise must consolidate a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company determined that Yanfeng Visteon Electronics (China) Investment Co., Ltd. ("YFVIC"), is a VIE. The Company holds a variable interest in YFVIC primarily related to its ownership interests and subordinated financial support. The Company and Yanfeng Visteon Automotive Trim Systems Co., Ltd. (an unrelated party) each own 50% of YFVIC. YFVIC is not consolidated since the Company is not the primary beneficiary.

At March 31, 2016, the Company’s investment in YFVIC is $23 million. In addition, at March 31, 2016, the Company has receivables due from YFVIC, including trade receivables and other advances of $29 million, subordinated loans receivable of $18 million and payables due to YFVIC of $14 million. At December 31, 2015, the Company’s investment in YFVIC was $23 million and it had receivables due from YFVIC, including trade receivables and other advances of $36 million, a subordinated loan receivable of $10 million and payables due to YFVIC of $17 million. At March 31, 2016, the Company’s maximum exposure to loss in YFVIC is $97 million, which includes assets described above and a $27 million loan guarantee.

Use of Estimates: The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect amounts reported herein. Management believes that such estimates, judgments and assumptions are reasonable and appropriate. However, due to the inherent uncertainty involved, actual results may differ from those provided in the Company's consolidated financial statements.

Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation.

Other Expense, Net: Other expense, net includes transformation initiatives, transaction hedging and exchange, and integration costs. Transformation initiatives include information technology separation costs and financial and advisory services incurred in connection with execution of the Company's comprehensive value creation plan. Transaction hedging and exchange losses of $1 million for the three months ended March 31, 2016 relate to the Climate Transaction Korean withholding tax refund exchange impacts and $3 million for the three months ended March 31, 2015 relate to Climate Transaction proceeds hedging impacts.

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.
 
Three Months Ended
March 31
 
2016
 
2015
 
(Dollars in Millions)
Transformation initiatives
$
2

 
$
5

Transaction hedging and exchange
1

 
3

Integration costs
1

 
4

 
$
4

 
$
12


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 March 31, 2016 the Company's cash balances are invested in a diversified portfolio of cash and cash equivalents including money market funds, commercial paper rated A2/P2 and above with maturity under three months, time deposits and other short-term cash investments, which mature under three months with highly rated banking institutions. The cost of such funds approximates fair value based on the nature of the investment.




7



Short-term Investments: Short-term investments of $47 million as of December 31, 2015 included corporate bonds, asset backed securities, and commercial paper with maturities between three and twelve months held as part of the Company's separately managed accounts. The cost of these Level 1 investments approximated fair value. These investments were liquidated during the first quarter of 2016.

Restricted Cash: Restricted cash represents amounts designated for uses other than current operations and includes $6 million related to the Letter of Credit Facility, and $1 million related to cash collateral for other corporate purposes at March 31, 2016.

Investments in Affiliates: The Company recorded equity in the net loss of affiliates of less than $1 million for the three month period ended March 31, 2016 and $1 million for the three month period ended March 31, 2015. Investments in affiliates were $56 million at March 31, 2016 and December 31, 2015. At March 31, 2016, affiliates accounted for under the equity method totaled $45 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.

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. The following table provides a reconciliation of changes in the product warranty and recall claims liability:

 
Three Months Ended March 31
 
2016
 
2015
 
(Dollars in Millions)
Beginning balance
$
38

 
$
20

Accruals for products shipped
4

 
3

Changes in estimates
(2
)
 

Specific cause actions
(1
)
 

Recoverable warranty/recalls
1

 

Foreign currency
1

 
(1
)
Settlements
(3
)
 
(2
)
Ending balance
$
38

 
$
20


Recently Issued Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-9, "Revenue from Contracts with Customers", which is the new comprehensive revenue recognition standard that will supersede existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. This ASU allows for both retrospective and prospective methods of adoption. In July 2015, the FASB approved a one-year deferral of the effective date of the standard. As such, the new standard will become effective for annual and interim periods beginning after December 15, 2017 with early adoption on the original effective date permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-3, "Simplifying the Presentation of Debt Issuance Cost". The ASU requires debt issuance costs associated with a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company adopted the guidance on a retrospective basis during the three months ending March 31, 2016 and accordingly, previously issued debt issuance costs in the amount of $1 million as of December 31, 2015 have been reclassified as a reduction of the corresponding debt liability.


8



In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)": The amendments supersede current lease requirements in Topic 840 which require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

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 business have been reclassified to (loss) income from discontinued operations, net of tax in the consolidated statements of comprehensive income for the three month periods ended March 31, 2016 and 2015. The three month period ended March 31, 2015 also included the results of operations for the Climate business, sold during the second quarter of 2015.

Discontinued operations are summarized as follows:
 
Three Months Ended
March 31
 
2016
 
2015
 
(Dollars in Millions)
Sales
$
9

 
$
1,235

Cost of sales
13

 
1,138

Gross margin
(4
)
 
97

Selling, general and administrative expenses

 
40

Loss and impairment on Interiors Divestiture
1

 
14

Restructuring expense

 
1

Interest expense, net

 
1

Equity in net income of non-consolidated affiliates

 
3

Other expense, net

 
6

(Loss) income from discontinued operations before income taxes
(5
)
 
38

Provision for (benefit from) income taxes
8

 
(8
)
(Loss) income from discontinued operations, net of tax
(13
)
 
46

Net income attributable to non-controlling interests

 
15

Net (loss) income from discontinued operations attributable to Visteon
$
(13
)
 
$
31


During the three months ended March 31, 2016, the Company recorded currency impacts of $8 million in connection with the Korean capital gains withholding tax recovered during the first quarter of 2016.



















9





As of March 31, 2016 and December 31, 2015, held for sale balances include assets and liabilities associated with operations subject to the Interiors Divestiture located in Argentina and Brazil.

Held for sale balances, classified as "Other current assets" and "Other current liabilities" on the consolidated balance sheets are summarized as follows:
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
ASSETS HELD FOR SALE
Cash and equivalents
$
2

 
$
1

Accounts receivable, net
9

 
9

Inventories, net
5

 
4

Other current assets
4

 
3

Total current assets held for sale
20

 
17

 
 
 
 
Total assets held for sale
$
20

 
$
17

 
 
 
 
LIABILITIES HELD FOR SALE
Accounts payable
6

 
6

Employee benefits
3

 
2

Other current liabilities
1

 
1

Total current liabilities held for sale
10

 
9

 
 
 
 
Total liabilities held for sale
$
10

 
$
9


The Company has combined cash flows from discontinued operations with cash flows from continuing operations within the operating, investing and financing categories within the consolidated statements of cash flows. Cash and non-cash items for certain operating and investing activities related to discontinued operations for the three months ended March 31, 2016 and 2015 are as follows:
 
Three Months Ended
March 31
 
2016
 
2015
 
(Dollars in Millions)
Depreciation and amortization
$

 
$
47

Asset impairments and losses on divestiture
$
1

 
$
14

Capital expenditures
$
1

 
$
29


Note 4. Restructuring Activities

During the three months ended March 31, 2016 and 2015, the Company recorded $10 million, net of reversals, and $4 million of restructuring expenses, respectively, including $1 million for the three months ended March 31, 2015 related to discontinued operations. Given the economically-sensitive and highly competitive nature of the automotive electronics industry, the Company continues to closely monitor current market factors and industry trends taking action as necessary, including but not limited to, additional restructuring actions. However, there can be no assurance that any such actions will be sufficient to fully offset the impact of adverse factors on the Company or its results of operations, financial position and cash flows.





10




Electronics

During the first quarter of 2016, the Company announced a restructuring program to transform the Company's engineering organization and supporting functional areas to focus on execution and technology. The organization will be comprised of regional engineering, product management and advanced technologies, and global centers of competence. Through March 31, 2016, the Company has recorded approximately $11 million of restructuring expenses under this program, associated with approximately 90 employees, which remains accrued as of March 31, 2016. The Company expects to record additional restructuring costs related to this program as the underlying plan is finalized.

During the fourth quarter of 2015, the Company announced a restructuring program designed to reduce the workforce at a European Electronics facility. The Company recorded $12 million of severance and termination benefits under this program associated with approximately 100 employees, of which $11 million remains accrued as of March 31, 2016. The Company expects to record additional restructuring costs related to this program as the underlying plan is finalized.

In connection with the Electronics Acquisition, the Company commenced a restructuring program designed to achieve annual cost savings through transaction synergies of approximately $70 million. During the three months ended March 31, 2015, the Company recorded $2 million of severance and termination benefits under this program associated with approximately 55 employees and $1 million in legal and consulting fees. As of March 31, 2016, $9 million remains accrued for this program and charges are considered substantially complete.

Other

During the three months ended March 31, 2015, the Company recorded $1 million of restructuring expenses, classified as discontinued operations, related to employee and severance termination benefits in connection with the reorganization of the Company's Climate operations in France.

Restructuring Reserves

Restructuring reserve balances of $36 million and $38 million at March 31, 2016 and December 31, 2015, respectively, are classified as "Other current liabilities" on the consolidated balance sheets. The Company anticipates that the activities associated with the restructuring reserve balance will be substantially completed by the end of 2016. The Company’s consolidated restructuring reserves and related activity are summarized below, including amounts associated with discontinued operations.
 
Electronics
 
Other
 
Total
 
(Dollars in Millions)
December 31, 2015
$
33

 
$
5

 
$
38

   Expense
11

 

 
11

   Utilization
(13
)
 

 
(13
)
   Reversals
(1
)
 

 
(1
)
   Foreign currency
1

 

 
1

March 31, 2016
$
31

 
$
5

 
$
36


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.











11




NOTE 5. Inventories

Inventories consist of the following components:
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Raw materials
$
97

 
$
90

Work-in-process
41

 
53

Finished products
44

 
44

 
$
182

 
$
187


NOTE 6. Other Assets

Other current assets are comprised of the following components:
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Recoverable taxes
$
64

 
$
425

Joint venture receivables
35

 
44

Prepaid assets and deposits
32

 
28

Contractually reimbursable engineering costs
25

 
34

Assets held for sale
20

 
17

Notes receivable
19

 
21

Other
9

 
12

 
$
204

 
$
581

Recoverable taxes as of December 31, 2015 included Korean capital gains tax withheld by the Purchasers and paid to the Korean government in connection with the Climate Transaction of $364 million adjusted for currency and interest impacts. In January 2016, the Company recovered the entire amount of the Korean capital gains withholding tax, adjusted for currency impacts, of $356 million.

As of March 31, 2016 and December 31, 2015 assets held for sale of $20 million and $17 million, respectively, represent assets associated with operations subject to the Interiors Divestiture located in Argentina and Brazil. See Note 3 "Discontinued Operations" for additional disclosures.

Other non-current assets are comprised of the following components:
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Deferred tax assets
$
34

 
$
34

Recoverable taxes
22

 
20

Long term notes receivable
21

 
13

Contractually reimbursable engineering costs
4

 
4

Other
21

 
17

 
$
102

 
$
88


Current and non-current contractually reimbursable engineering costs of $25 million and $4 million, respectively, at March 31, 2016 and $34 million and $4 million, respectively, at December 31, 2015, are related to pre-production design and development costs incurred pursuant to long-term supply arrangements that are contractually guaranteed for reimbursement by customers.

12



The Company expects to receive cash reimbursement payments of approximately $21 million during the remainder of 2016, $7 million in 2017, and $1 million in 2018.

NOTE 7. Property and Equipment, net

Property and equipment, net consists of the following:
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Land
$
17

 
$
15

Buildings and improvements
71

 
64

Machinery, equipment and other
379

 
353

Construction in progress
52

 
75

 
519

 
507

Accumulated depreciation
(186
)
 
(170
)
 
333

 
337

Product tooling, net of amortization
16

 
14

 
$
349

 
$
351


Property and equipment is depreciated principally using the straight-line method of depreciation over the related asset's estimated useful life. Generally, buildings and improvements are depreciated over a 40-year estimated useful life, leasehold improvements are depreciated on a straight-line basis over the initial lease term period, and machinery, equipment and other are depreciated over estimated useful lives ranging from 3 to 15 years. Product tooling is amortized using the straight-line method over the estimated life of the tool, generally not exceeding six years. Depreciation and amortization expenses for property and equipment, excluding discontinued operations, are summarized as follows:
 
Three Months Ended
March 31
 
2016
 
2015
 
(Dollars in Millions)
Depreciation
$
16

 
$
16

Amortization
1

 
1

 
$
17

 
$
17


NOTE 8. Intangible Assets, net

Intangible assets, net at March 31, 2016 and December 31, 2015, are comprised of the following:
 
 
 
March 31, 2016
 
December 31, 2015
 
Estimated Weighted Average Useful Life (years)
 
Gross Carrying Value    
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value    
 
Accumulated Amortization
 
Net Carrying Value
 
 
 
(Dollars in Millions)
Definite-Lived:
 
 
Developed technology
7
 
$
39

 
$
21

 
$
18

 
$
39

 
$
20

 
$
19

Customer related
10
 
84

 
20

 
64

 
84

 
17

 
67

Other
32
 
8

 
1

 
7

 
8

 
1

 
7

Subtotal
 
 
131

 
42

 
89

 
131

 
38

 
93

Indefinite-Lived:
 
 
Goodwill
 
 
40

 

 
40

 
40

 

 
40

    Total
 
 
$
171

 
$
42

 
$
129

 
$
171

 
$
38

 
$
133


13




The Company recorded approximately $4 million of amortization expense related to definite-lived intangible assets for the three months ended March 31, 2016 and 2015. The Company currently estimates annual amortization expense to be $14 million for 2016 and $12 million each year from 2017 through 2020. Indefinite-lived intangible assets are not amortized but are tested for impairment at least annually, or earlier when events and circumstances indicate that it is more likely than not that such assets have been impaired.

A roll-forward of the carrying amounts of intangible assets is presented below:
 
Definite-lived intangibles
 
Indefinite-lived intangibles
 
 
 
Developed Technology
 
Customer Related
 
Other
 
Goodwill
 
Total
 
(Dollars in Millions)
 
 
 
 
 
 
 
 
 
 
December 31, 2015
$
19

 
$
67

 
$
7

 
$
40

 
$
133

Amortization
(1
)
 
(3
)
 

 

 
(4
)
March 31, 2016
$
18

 
$
64

 
$
7

 
$
40

 
$
129


NOTE 9. Other Liabilities

Other current liabilities are summarized as follows:
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Electronics operations repurchase commitment
$
50

 
$
50

Restructuring reserves
36

 
38

Contribution payable
34

 
33

Product warranty and recall accruals
24

 
26

Information technology separation and service obligations
26

 
36

Rent and royalties
23

 
33

Income taxes payable
19

 
63

Joint venture payables
15

 
18

Deferred income
11

 
11

Liabilities held for sale
10

 
9

Non-income taxes payable
8

 
20

Foreign currency hedges
6

 
2

Other
36

 
31

 
$
298

 
$
370


In connection with the Climate Transaction, the Company entered into an agreement to purchase certain electronics operations located in India, expected to close in 2016 after legal separation and regulatory approvals are met. The Company has recorded a repurchase commitment of $50 million during 2015, representing the estimated purchase price of the subject business.

In connection with the Germany Interiors Divestiture, the Company will make a final contribution payment of approximately $34 million by November 2016.

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 March 31, 2016 and December 31, 2015 remaining obligations totaled $26 million and $36 million, respectively.

As of March 31, 2016 and December 31, 2015 liabilities held for sale of $10 million and $9 million, respectively, represent liabilities associated with operations subject to the Interiors Divestiture located in Argentina and Brazil. See Note 3 "Discontinued Operations" for additional disclosures.

14





Other non-current liabilities are summarized as follows:
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Income tax reserves
$
27

 
$
25

Deferred income
16

 
15

Product warranty and recall accruals
14

 
12

Non-income tax reserves
10

 
10

Other
12

 
13

 
$
79

 
$
75


NOTE 10. Debt

The Company’s short and long-term debt consists of the following:
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Short-Term Debt:
 
 
 
Current portion of long-term debt
$
2

 
$
3

Short-term borrowings
34

 
34

 
$
36

 
$
37

Long-Term Debt:
 
 
 
Term debt facility
$
345

 
$
345

Other
1

 
1

 
$
346

 
$
346


As of December 31, 2015 previously issued debt issuance costs were reclassified as a reduction of the corresponding debt liability in accordance with ASU No. 2015-3, "Simplifying the Presentation of Debt Issuance Cost". These costs approximated $1 million as of March 31, 2016 and December 31, 2015.

Short-Term Debt

Short-term borrowings are primarily related to the Company's non-U.S. joint ventures and are payable in Chinese Yuan and Thai Baht. The Company had international affiliate short-term borrowings of $34 million as of March 31, 2016 and December 31, 2015. Availability under outstanding affiliate credit facilities as of March 31, 2016 is approximately $19 million.

Long-Term Debt

The Credit Agreement, dated as of April 9, 2014 and as amended by Waiver and Amendment No. 1 dated as of March 25, 2015 (the “Credit Agreement”), by and among the Company, as borrower, each lender from time to time party thereto, each letter of credit issuer from time to time party thereto and Citibank, N.A., as administrative agent, provides for (i) an aggregate principal of $350 million (the “Term Facility”) and (ii) a $200 million revolving credit facility (the “Revolving Facility”). The Term Facility matures on April 9, 2021 and the Revolving Facility matures on April 9, 2019. The Credit Agreement requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, including financial covenants and contains customary events of default. The Company was in compliance with such covenants as of March 31, 2016.

Other Long-Term Debt

The Company had $1 million of other long-term debt outstanding as of March 31, 2016 and December 31, 2015, primarily related to information technology software leases.



15




NOTE 11. Employee Benefit Plans

Defined Benefit Plans

The Company's net periodic benefit costs for all defined benefit plans, for the three month periods ended March 31, 2016 and 2015 were as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Millions)
Costs Recognized in Income:
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
1

 
$
2

Interest cost
7

 
8

 
2

 
5

Expected return on plan assets
(10
)
 
(11
)
 
(2
)
 
(5
)
Amortization of losses and other

 

 

 
1

Net pension (income) expense
$
(3
)
 
$
(3
)
 
$
1

 
$
3


During the three months ended March 31, 2016, cash contributions to the Company's U.S. and non-U.S. defined benefit pension plan were $3 million and $2 million, respectively. The Company expects to make cash contributions to its defined benefit pension plans of $14 million in 2016. The Company’s expected 2016 contributions may be revised.

2016 Discount Rate for Estimated Service and Interest Cost: Through December 31, 2015, the Company recognized service and interest cost components of pension expense using a single weighted average discount method representing the constant annual rate required to discount all future benefit payments related to past service. During the fourth quarter of 2015, the Company changed the method used to estimate the service and interest components of net periodic benefit cost for pension benefits for its U.S. and certain non-U.S. plans. The Company has elected to utilize a disaggregated discount rate approach resulting in different amounts of interest cost compared to the traditional single weighted-average discount rate approach because of different weightings given to each subset of payments.

This change does not affect the measurement of the total benefit obligation, but resulted in a decrease in the service and interest components of benefit cost beginning in 2016. Based on current economic conditions, the Company estimates that the service cost and interest cost for the affected plans will be reduced by approximately $7 million in 2016 as a result of the change in method. The Company has accounted for this as a change in accounting estimate that is inseparable from a change in accounting principle, and accordingly has accounted for it on a prospective basis.

Defined Contribution Plans

Most U.S. salaried employees and certain non-U.S. employees are eligible to participate in defined contribution plans by contributing a portion of their compensation, which is partially matched by the Company. For the U.S. defined contribution plan, the Company matches 100% of contributions on the first 6% of pay contributed. The expense related to matching contributions was approximately $2 million and $4 million for the three months ended March 31, 2016 and 2015, respectively.

NOTE 12. Income Taxes

During the three month period ended March 31, 2016, the Company recorded a provision for income tax on continuing operations of $13 million 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. The Company recorded a provision for income tax of $9 million during the three months ended March 31, 2015. The increase in income tax expense reflects the non-recurrence of an $8 million benefit, including interest and penalties, primarily attributable to favorable audit developments in Asia leading to changes in judgment during the first quarter of 2015, and $1 million related to uncertain tax positions recorded in connection with developments associated with an ongoing audit in Mexico.
Pre-tax losses from continuing operations in jurisdictions where valuation allowances are maintained and no income tax benefits are recognized totaled $7 million and $26 million, for the three months ended March 31, 2016 and 2015, 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.

16




During the three month periods ended March 31, 2016 and 2015, the Company recognized expense primarily related to non-U.S. withholding taxes, of $2 million in both years, 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 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 regards to the full valuation allowance recorded against the U.S. net deferred tax assets, significant judgment is applied in determining whether a carryback opportunity related to the 2015 tax year provides an incremental source of taxable income to support partial realization of the U.S. net deferred tax assets, which includes estimating the amount of future tax losses that would be available to carryback.
 
Unrecognized Tax Benefits

Gross unrecognized tax benefits at March 31, 2016 and December 31, 2015, including amounts attributable to discontinued operations, were $32 million and $37 million, respectively. Of these amounts approximately $23 million and $29 million at March 31, 2016 and December 31, 2015, respectively, represent the amount of unrecognized benefits that, if recognized, would impact the effective tax rate. The gross unrecognized tax benefit differs from that which would impact the effective tax rate due to uncertain tax positions embedded in other deferred tax attributes carrying a full valuation allowance. Since the uncertainty is expected to be resolved while a full valuation allowance is maintained, these uncertain tax positions should not impact the effective tax rate in current or future periods. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense and related amounts accrued at March 31, 2016 and December 31, 2015 were $4 million and $3 million, respectively.

The decrease in gross unrecognized tax benefits is primarily related to settling tax assessments from the Korean tax authorities in the amount of $7 million related to underpayment of withholding taxes. This decrease was partially offset by increases for audit developments in Mexico and anticipated transfer pricing-related exposures worldwide totaling $2 million.
With few exceptions, the Company is no longer subject to U.S. federal tax examinations for years before 2012 or state and local, or non-U.S. income tax examinations for years before 2003 although U.S. net operating losses carried forward into open tax years technically remain open to adjustment. Although it is not possible to predict the timing of the resolution of all ongoing tax audits with accuracy, it is reasonably possible that certain tax proceedings in Europe, Asia, Mexico and the U.S. could conclude within the next twelve months and result in a significant increase or decrease in the balance of gross unrecognized tax benefits. Given the number of years, jurisdictions and positions subject to examination, the Company is unable to estimate the full range of possible adjustments to the balance of unrecognized tax benefits. The long-term portion of uncertain income tax positions (including interest) in the amount of $27 million is included in Other non-current liabilities on the consolidated balance sheet.







17



A reconciliation of the beginning and ending amount of unrecognized tax benefits including amounts attributable to discontinued operations is as follows:
 
Three Months Ended
March 31, 2016
 
(Dollars in Millions)
Beginning balance
$
37

Tax positions related to current period:
 
Additions
1

Tax positions related to prior periods:
 
Additions
1

Settlements with tax authorities
(7
)
Ending balance
$
32


During 2012, Brazil tax authorities issued tax assessment notices to Visteon Sistemas Automotivos (“Sistemas”) of approximately $13 million, adjusted for currency impacts and accrued interest, 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. These appeal payments, as well as income tax refund claims associated with other jurisdictions, total $14 million as of March 31, 2016, and are included in Other non-current assets on the consolidated balance sheet.

NOTE 13. Stockholders’ Equity and Non-controlling Interests

Changes in equity for the three months ended March 31, 2016 and 2015 are as follows:
 
2016
 
2015
 
Visteon
 
NCI
 
Total
 
Visteon
 
NCI
 
Total
 
(Dollars in Millions)
Three Months Ended March 31
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,057

 
$
142

 
$
1,199

 
$
865

 
$
956

 
$
1,821

Net income from continuing operations
32

 
4

 
36

 
19

 
5

 
24

Net (loss) income from discontinued operations
(13
)
 

 
(13
)
 
31

 
15

 
46

Net income
19

 
4

 
23

 
50

 
20

 
70

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
23

 

 
23

 
(67
)
 
(12
)
 
(79
)
    Benefit plans

 

 

 
16

 
1

 
17

    Unrealized hedging (loss) gain
(4
)
 

 
(4
)
 
9

 
3

 
12

    Total other comprehensive income (loss)
19

 

 
19

 
(42
)
 
(8
)
 
(50
)
Stock-based compensation, net
(9
)
 

 
(9
)
 
1

 

 
1

Warrant exercises

 

 

 
9

 

 
9

Share repurchase
(500
)
 

 
(500
)
 

 

 

Dividends to non-controlling interests

 

 

 

 
(28
)
 
(28
)
Ending balance
$
586

 
$
146

 
$
732

 
$
883

 
$
940

 
$
1,823


Share Repurchase Program
On June 16, 2015, the Company announced an accelerated stock buyback ("ASB") program with a third-party financial institution to purchase shares of common stock for an aggregate purchase price of $500 million, as the first of announced shareholder return actions. Under the program, the Company paid the financial institution $500 million and received an initial delivery of 3,712,297 shares of common stock using a reference price of $107.75. The program concluded in December 2015 and the Company received an additional 1,058,965 shares. The final settlement price for all shares delivered under this 2015 ASB program was $104.79.

18






During the fourth quarter of 2015, the Company entered into an agreement with a third party financial institution to purchase up to $150 million of Visteon common stock in accordance with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934 ("10b5-1 Share Repurchase Program"). During the period of the program, which concluded on March 1, 2016, the Company paid approximately $105 million to repurchase 1,607,849 shares at an average price of $65.05.   

On March 1, 2016, the Company entered into another ASB program with a third-party financial institution to purchase shares of common stock for an aggregate purchase price of $395 million. Under the program, the Company paid the financial institution $395 million and received an initial delivery of 4,370,678 shares of common stock using a reference price of $72.30. The 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 this ASB Agreement is expected to occur by the end of 2016, 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 transactions or in privately negotiated transactions depending on market and economic conditions, share price, trading volume, alternative uses of capital and other factors.

Distribution

On December 9, 2015, the Company declared a special distribution of $43.40 per share of its common stock outstanding as of January 15, 2016, or approximately $1.75 billion in the aggregate. On January 22, 2016 approximately $1.74 billion was paid, the remaining $15 million will be paid over a two-year period upon vesting and settlement of restricted stock units and performance-based share units previously granted to the Company's employees. These amounts were classified as "Distribution payable" on the Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015. The special cash distribution was funded from Climate Transaction proceeds.

Non-Controlling Interests
Non-controlling interests in the Visteon Corporation economic entity are as follows:
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Yanfeng Visteon Automotive Electronics Co., Ltd. ("YFVE")
$
103

 
$
100

Shanghai Visteon Automotive Electronics, Co., Ltd.
42

 
41

Other
1

 
1

 
$
146

 
$
142



19



Accumulated Other Comprehensive (Loss) Income
Changes in Accumulated other comprehensive (loss) income (“AOCI”) and reclassifications out of AOCI by component include:
 
Three Months Ended
March 31
 
2016
 
2015
 
(Dollars in Millions)
Changes in AOCI:
 
 
 
Beginning balance
$
(190
)
 
$
(299
)
Other comprehensive income (loss) before reclassification, net of tax
21

 
(39
)
Amounts reclassified from AOCI
(2
)
 
(3
)
Ending balance
$
(171
)
 
$
(341
)
 
 
 
 
Changes in AOCI by Component:
 
 
Foreign currency translation adjustments
 
 
 
  Beginning balance
$
(155
)
 
$
(138
)
Other comprehensive income (loss) before reclassification, net of tax (a)
23

 
(68
)
  Amounts reclassified from AOCI

 
1

  Ending balance
(132
)
 
(205
)
Benefit plans
 
 
 
  Beginning balance
(36
)
 
(156
)
  Other comprehensive income before reclassification, net of tax (a)

 
15

  Amounts reclassified from AOCI (b)

 
1

  Ending balance
(36
)
 
(140
)
Unrealized hedging gain (loss)
 
 
 
  Beginning balance
1

 
(5
)
  Other comprehensive (loss) income before reclassification, net of tax (c)
(2
)
 
15

  Amounts reclassified from AOCI (d)
(2
)
 
(6
)
  Ending balance
(3
)
 
4

Total AOCI
$
(171
)
 
$
(341
)
(a) There were no income tax effects for the three month periods ending March 31, 2016 and 2015, due to the recording of valuation allowance.
(b) Amount included in the computation of net periodic pension cost. (See Note 11, "Employee Benefit Plans" for additional details.)
(c) Net tax benefit of $1 million and tax expense of $4 million are related to unrealized hedging gains for the three months ended March 31, 2016 and 2015, respectively.
(d) Amount is included in Cost of sales in consolidated statements of comprehensive income.

Stock Warrants

During the three months ended March 31, 2015, the Company received payments of $10 million related to approximately 164,000 warrants converted to shares of common stock at an exercise price of $58.80 per share.

NOTE 14. Earnings Per Share

Basic earnings per share is calculated by dividing net income attributable to Visteon by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common and potential dilutive common shares outstanding. Performance based share units are considered contingently issuable shares, and are included in the computation of diluted earnings per share based on the number of shares that would be issuable if the reporting date were the end of the contingency period and if the result would be dilutive.


20



The table below provides details underlying the calculations of basic and diluted earnings (loss) per share:
 
Three Months Ended
March 31
 
2016
 
2015
 
(In Millions, Except Per Share Amounts)
Numerator:
 
 
 
Net income from continuing operations attributable to Visteon
$
32

 
$
19

(Loss) income from discontinued operations, net of tax
(13
)
 
31

Net income attributable to Visteon
$
19

 
$
50

Denominator:
 
 
 
Average common stock outstanding - basic
38.1

 
44.4

Dilutive effect of performance based share units and other
0.4

 
1.1

Diluted shares
38.5

 
45.5

 
 
 
 
Basic and Diluted Per Share Data:
 
 
 
Basic earnings (loss) per share attributable to Visteon:
 
 
 
Continuing operations
$
0.84

 
$
0.43

Discontinued operations
(0.34
)
 
0.70

 
$
0.50

 
$
1.13

Diluted earnings (loss) per share attributable to Visteon:
 
 
 
Continuing operations
$
0.83

 
$
0.42

Discontinued operations
(0.34
)
 
0.68

 
$
0.49

 
$
1.10


NOTE 15. Fair Value Measurements and Financial Instruments

The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs.
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

Fair Value of Debt

The Company's fair value of debt was approximately $387 million and $385 million at March 31, 2016 and December 31, 2015, respectively. Fair value estimates were based on the current rates offered to the Company for debt of the same remaining maturities. Accordingly, the Company's debt fair value disclosures are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.

Financial Instruments

Foreign Exchange Risk: The Company’s net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, subsidiary dividends and investments in subsidiaries. The Company utilizes derivative financial instruments, including forward and option contracts, to protect the Company’s cash flow from changes in exchange rates. Foreign currency exposures are reviewed periodically and any natural offsets are considered prior to entering into a derivative financial instrument. The Company’s current primary hedged foreign currency exposures include the Euro, Japanese Yen and Mexican Peso. Where possible, the Company utilizes a strategy of partial coverage for transactions in these currencies.


21



Foreign currency hedge instruments are measured at fair value on a recurring basis under an income approach using industry-standard models that consider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying and non-performance risk. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Accordingly, the Company's foreign currency instruments are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.

As of March 31, 2016 and December 31, 2015, the Company had derivative instruments that consisted primarily of option and forward contracts to hedge changes in foreign currency exchange rates with notional amounts of approximately $124 million and$114 million, respectively. Fair value estimates of these contracts are based on quoted market prices and other observable inputs. The instruments have been designated as cash flow hedges with the effective portion of the gain or loss reported in the "Accumulated other comprehensive loss" component of Stockholders’ equity in the Company’s consolidated balance sheet. There was no ineffectiveness associated with these derivatives as of March 31, 2016 and the fair value of such derivatives was an asset of $3 million.

During 2015, the Company entered into currency exchange derivatives with a notional amount of $150 million to manage foreign currency exposure on certain non-U.S. denominated foreign entities. These derivatives have been designated as hedges of the Company's net investments in European affiliates with the effective portion of the gain or loss reported in the "Accumulated other comprehensive loss" component of Stockholder's equity in the Company's consolidated balance sheet. There was no ineffectiveness associated with these derivatives as of March 31, 2016 and the fair value of such derivatives was a liability of $2 million.

Interest Rate Risk: The Company is subject to interest rate risk principally in relation to variable-rate debt. The Company uses derivative financial instruments to manage exposure to fluctuations in interest rates in connection with its risk management policies. During 2015, the Company entered into interest rate swaps with a notional amount of $150 million that effectively convert designated cash flows associated with underlying interest payments on the Term Facility from a variable interest rate to a fixed interest rate, the maturities of these swaps will not exceed the underlying Term Facility. The instruments have been designated as cash flow hedges with the effective portion of the gain or loss reported in "Accumulated other comprehensive loss" component of Stockholders' equity in the Company's consolidated balance sheets and such gains and losses will be reclassified at the time the underlying hedged transactions are realized. The ineffective portion of these swaps is assessed based on the hypothetical derivative method and is recorded as interest expense in the Company's consolidated statements of comprehensive income. As of March 31, 2016 there was no ineffectiveness associated with these derivatives and the fair value was a liability of $4 million.

The interest rate swaps are valued under an income approach using industry-standard models that consider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying and non-performance risk. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Accordingly, the Company's interest rate swaps are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.
 





















22



Financial Statement Presentation

The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. Derivative financial instruments designated and non-designated as hedging instruments are included in the Company’s consolidated balance sheets at March 31, 2016 and December 31, 2015, as follows:
 
 
Gross Amount Recognized
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts Presented in the Statement of Financial Position
 
 
March 31
 
December 31
 
March 31
 
December 31
 
March 31
 
December 31
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in Millions)
Other Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Designated-Foreign Currency Derivatives
 
$
3

 
$
7

 
$

 
$
1

 
$
3

 
$
6

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Current Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Designated-Foreign Currency Derivatives
 
$
3

 
$

 
$
1

 
$

 
$
2

 
$

Designated-Interest Rate Swaps
 
4

 
1

 

 

 
4

 
1

 
 
$
7

 
$
1

 
$
1

 
$

 
$
6

 
$
1


Gains and losses on derivative financial instruments for the three months ended March 31, 2016 and 2015 are as follows:
 
 
Recorded in AOCI, net of tax
 
Reclassified from AOCI into Income
 
Recorded in Income
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in Millions)
Foreign currency risk:
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
$
(5
)
 
$
15

 
$
2

 
$
6

 
$

 
$

Non-designated cash flow hedges
 

 

 

 

 

 
(1
)
Interest rate risk:
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
(3
)
 

 

 

 

 

Foreign currency risk - Other expense, net:
 
 
 
 
 
 
 
 
 
 
 
 
KRW option and forward contracts
 

 
(4
)
 

 

 

 
(3
)
 
 
$
(8
)
 
$
11

 
$
2

 
$
6

 
$

 
$
(4
)

Concentrations of Credit Risk
Financial instruments including cash equivalents, derivative contracts, and accounts receivable, expose the Company to counter-party credit risk for non-performance. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s requirement of high credit standing. The Company’s counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counter-party and through monitoring counter-party credit risks.

The Company's credit risk with any individual customer does not exceed ten percent of total accounts receivables except for Ford and its affiliates which represents 17% and 18% at March 31, 2016 and December 31, 2015, respectively, Mazda which represents 10% of the Company's accounts receivables at March 31, 2016 and December 31, 2015, respectively, and Nissan/Renault which represents 11% of the Company's accounts receivables at March 31, 2016.





23



NOTE 16. Commitments and Contingencies

Litigation and Claims

In 2003, the Local Development Finance Authority of the Charter Township of Van Buren, Michigan (the “Township”) issued approximately $28 million in bonds finally maturing in 2032, the proceeds of which were used at least in part to assist in the development of the Company’s U.S. headquarters located in the Township. During January 2010, the Company and the Township entered into a settlement agreement (the “Settlement Agreement”) that, among other things, reduced the taxable value of the headquarters property to current market value and facilitated certain claims of the Township in the Company’s chapter 11 proceedings. The Settlement Agreement also provided that the Company would continue to negotiate in good faith with the Township in the event that property tax payments was inadequate to permit the Township to meet its payment obligations with respect to the bonds. In September 2013, the Township notified the Company in writing that it is estimating a shortfall in tax revenues of between $25 million and $36 million, which could render it unable to satisfy its payment obligations under the bonds. On May 12, 2015, the Township commenced a proceeding against the Company in the U. S. Bankruptcy Court for the District of Delaware in connection with the foregoing. Upon the Company’s motion to dismiss, the Township dismissed the proceeding before the Delaware Bankruptcy Court and re-commenced the proceeding against the Company in the Michigan Wayne County Circuit Court for the State of Michigan on July 2, 2015. The Township sought damages or, alternatively, declaratory judgment that, among other things, the Company is responsible under the Settlement Agreement for payment of any shortfall in the bond debt service payments. On February 2, 2016 the Wayne County Circuit Court dismissed the Township’s lawsuit without prejudice on the basis that the Township’s claims were not ripe for adjudication and the Township has appealed this decision to the Michigan Court of Appeals. The Company disputes the factual and legal assertions made by the Township and intends to vigorously defend the matter. The Company is not able to estimate the possible loss or range of loss in connection with this matter.

In November 2013, the Company and HVCC, jointly filed an Initial Notice of Voluntary Self-Disclosure statement with the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) regarding certain sales of automotive HVAC components by a minority-owned, Chinese joint venture of HVCC into Iran. The Company updated that notice in December 2013, and subsequently filed a voluntary self-disclosure regarding these sales with OFAC in March 2014. In May 2014, the Company voluntarily filed a supplementary self-disclosure identifying additional sales of automotive HVAC components by the Chinese joint venture, as well as similar sales involving an HVCC subsidiary in China, totaling approximately $12 million, and filed a final voluntary-self disclosure with OFAC on October 17, 2014. OFAC is currently reviewing the results of the Company’s investigation. Following that review, OFAC may conclude that the disclosed sales resulted in violations of U.S. economic sanctions laws and warrant the imposition of civil penalties, such as fines, limitations on the Company's ability to export products from the United States, and/or referral for further investigation by the U.S. Department of Justice. Any such fines or restrictions may be material to the Company’s financial results in the period in which they are imposed, but at this time is not able to estimate the possible loss or range of loss in connection with this matter. Additionally, disclosure of this conduct and any fines or other action relating to this conduct could harm the Company’s reputation and have a material adverse effect on our business, operating results and financial condition. The Company cannot predict when OFAC will conclude its own review of our voluntary self-disclosures or whether it may impose any of the potential penalties described above.

The Company's operations in Brazil are subject to highly complex labor, tax, customs and other laws. While the Company believes that it is in compliance with such laws, it is periodically engaged in litigation regarding the application of these laws. As of March 31, 2016, the Company maintained accruals of approximately $9 million for claims aggregating approximately $72 million. The amounts accrued represent claims that are deemed probable of loss and are reasonably estimable based on the Company's assessment of the claims and prior experience with similar matters.

While the Company believes its accruals for litigation and claims are adequate, the final amounts required to resolve such matters could differ materially from recorded estimates and the Company's results of operations and cash flows could be materially affected.

Guarantees and Commitments

On January 12, 2016, Visteon entered into a share purchase agreement to acquire all shares of AllGo Systems, Inc., USA ("AllGo Systems") for initial consideration of $15 million and contingent consideration of $7 million, expected to close during the second quarter of 2016. AllGo Systems is a leading developer of embedded multimedia system solutions to global vehicle manufacturers.

The Company provided a $27 million loan guarantee to YFVIC, a 50% owned joint venture, in connection with the October 2014 YFVIC acquisition of a 49% direct ownership interest in YFVE. The guarantee contains standard non-payment provisions to cover the borrowers in event of non-payment of principal, accrued interest, and other fees for its five year tenor.


24



As part of the agreements of the Climate Transaction and Interiors Divestiture, the Company continues to provide lease guarantees to divested Climate and Interiors entities. As of March 31, 2016, the Company has approximately $11 million and $9 million outstanding guarantees respectively related to divested Climate and Interiors entities. These guarantees will generally cease upon expiration of current lease agreements.

As part of the Interiors Divestiture the Company agreed to provide a $56 million revolving credit facility in connection with the Master Closing, representing the shortfall to the targeted amount of $90 million in external financing. The seller-backed facility was reduced as buyer credit facilities ramped up and the seller-backed facility will be reduced further if the buyer adds working capital facilities in Russia and Thailand. Draws under the seller-backed facility are only be available to the extent buyer external credit facilities are fully drawn and any draws on the seller-backed facility generally must be repaid prior amounts outstanding on any external credit facilities. The seller-backed facility has a maturity of three years, an interest rate of Libor plus 5% and a default rate of interest for any interest and/or principal payment defaults. As of April 6, 2016, this revolving credit facility to the buyer was reduced to $35 million as additional receivable financing became available to the buyer. As of March 31, 2016, there were no draws on this facility.

Environmental Matters

The Company is subject to the requirements of federal, state, local and foreign environmental and occupational safety and health laws and regulations and ordinances. These include laws regulating air emissions, water discharge and waste management. The Company is also subject to environmental laws requiring the investigation and cleanup of environmental contamination at properties it presently owns or operates and at third-party disposal or treatment facilities to which these sites send or arranged to send hazardous waste. The Company is aware of contamination at some of its properties. These sites are in various stages of investigation and cleanup. The Company currently is, has been, and in the future may become the subject of formal or informal enforcement actions or procedures.

Costs related to environmental assessments and remediation efforts at operating facilities, previously owned or operated facilities, or other waste site locations are accrued when it is probable that a liability has been incurred and the amount of that liability can be reasonably estimated. Estimated costs are recorded at undiscounted amounts, based on experience and assessments, and are regularly evaluated. The liabilities are recorded in Other current liabilities and Other non-current liabilities in the consolidated balance sheets. At March 31, 2016, and December 31, 2015, the Company had recorded a reserve of less than $1 million for environmental matters. However, estimating liabilities for environmental investigation and cleanup is complex and dependent upon a number of factors beyond the Company’s control and which may change dramatically. Accordingly, although the Company believes its reserve is adequate based on current information, the Company cannot provide any assurance that its ultimate environmental investigation and cleanup costs and liabilities will not exceed the amount of its current reserve.

Other Contingent Matters

Various legal actions, governmental investigations and proceedings and claims are pending or may be instituted or asserted in the future against the Company, including those arising out of alleged defects in the Company’s products; governmental regulations relating to safety; employment-related matters; customer, supplier and other contractual relationships; intellectual property rights; product warranties; product recalls; and environmental matters. Some of the foregoing matters may involve compensatory, punitive or antitrust or other treble damage claims in very large amounts, or demands for recall campaigns, environmental remediation programs, sanctions, or other relief which, if granted, would require very large expenditures. The Company enters into agreements that contain indemnification provisions in the normal course of business for which the risks are considered nominal and impracticable to estimate.

Contingencies are subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Reserves have been established by the Company for matters discussed in the immediately foregoing paragraph where losses are deemed probable and reasonably estimable. It is possible, however, that some of the matters discussed in the foregoing paragraph could be decided unfavorably to the Company and could require the Company to pay damages or make other expenditures in amounts, or a range of amounts, that cannot be estimated at March 31, 2016 and that are in excess of established reserves. The Company does not reasonably expect, except as otherwise described herein, based on its analysis, that any adverse outcome from such matters would have a material effect on the Company’s financial condition, results of operations or cash flows, although such an outcome is possible.





25



NOTE 17. Segment Information

Financial results for the Company's reportable segments have been prepared using a management approach, which is consistent with the basis and manner in which financial information is evaluated by the Company's chief operating decision-making group in allocating resources and in assessing performance. The Company’s chief operating decision making group, comprised of the Chief Executive Officer and Chief Financial Officer, evaluates the performance of the Company’s segments primarily based on net sales, before elimination of inter-company shipments, Adjusted EBITDA (non-GAAP financial measure) and operating assets.

The Company’s current reportable segments are as follows:
Electronics - The Company's Electronics segment provides vehicle cockpit electronics products to customers, including audio systems, information displays, instrument clusters, head up displays, infotainment systems, and telematics solutions.
Other - Other includes entities in South America and South Africa previously associated with the Climate business but not subject to the Climate Transaction. During 2015, other also included the Berlin, Germany operations previously associated with the Interiors business and sold during the fourth quarter of 2015.

Segment Sales
 
Three Months Ended
March 31
 
2016
 
2015
 
(Dollars in Millions)
Electronics
$
793

 
$
781

Other
9

 
44

Eliminations

 
(9
)
Total consolidated sales
$
802

 
$
816


Segment Adjusted EBITDA

The Company defines Adjusted EBITDA as net income attributable to the Company adjusted to eliminate the impact of depreciation and amortization, restructuring expense, net interest expense, loss on debt extinguishment, equity in net income of non-consolidated affiliates, loss on divestiture, gain on non-consolidated affiliate transactions, other net expense, provision for income taxes, discontinued operations, net income attributable to non-controlling interests, non-cash stock-based compensation expense, pension settlement gains and other non-operating gains and losses.

Adjusted EBITDA is presented as a supplemental measure of the Company's financial performance that management believes is useful to investors because the excluded items may vary significantly in timing or amounts and/or may obscure trends useful in evaluating and comparing the Company's operating activities across reporting periods. Not all companies use identical calculations
and, accordingly, the Company's presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of
other companies.

Adjusted EBITDA is not a recognized term under accounting principles generally accepted in the United States and does not purport to be a substitute for net income as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. Adjusted EBITDA has limitations as an analytical tool and is not intended to be a measure of cash flow available for management's discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. In addition, the Company uses Adjusted EBITDA (i) as a factor in incentive compensation decisions, (ii) to evaluate the effectiveness of the Company's business strategies and (iii) because the Company's credit agreements use measures similar to Adjusted EBITDA to measure compliance with certain covenants. Adjusted EBITDA, as determined and measured by the Company should not be compared to similarly titled measures reported by other companies.

Segment Adjusted EBITDA is summarized below:

26



 
Three Months Ended
March 31
 
2016
 
2015
 
(Dollars in Millions)
Electronics
$
94

 
$
84

Other
(5
)
 
(6
)
Adjusted EBITDA
$
89

 
$
78


During the first quarter of 2016, the Company changed its corporate cost allocation methodology for management reporting purposes. Accordingly, costs associated with the Company's corporate headquarters and other administrative support functions have been included with the Electronics operating segment, representing ongoing business costs.

The reconciliation of Adjusted EBITDA to net income attributable to Visteon is as follows:
 
Three Months Ended
March 31
 
2016
 
2015
 
(Dollars in Millions)
Adjusted EBITDA
$
89

 
$
78

  Depreciation and amortization
21

 
21

  Restructuring expense
10

 
3

  Interest expense, net
2

 
5

  Equity in net loss of non-consolidated affiliates

 
1

  Other expense, net
4

 
12

  Provision for income taxes
13

 
9

  Loss (income) from discontinued operations, net of tax
13

 
(46
)
  Net income attributable to non-controlling interests
4

 
20

  Non-cash, stock-based compensation expense
2

 
3

  Other
1

 

Net income attributable to Visteon Corporation
$
19

 
$
50


Segment Total Assets:    


Total Assets
 
March 31
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Electronics
$
2,332

 
$
4,649

Other
36

 
32

Total consolidated assets
$
2,368

 
$
4,681


27



Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations, financial condition and cash flows of Visteon Corporation (“Visteon” or the “Company”). MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission on February 25, 2016, and the financial statements and accompanying notes to the financial statements included elsewhere herein.

Description of Business

Visteon Corporation (the "Company" or "Visteon") is a global automotive supplier that designs, engineers and manufactures innovative electronics products for nearly every original equipment vehicle manufacturer ("OEM") worldwide including Ford, Nissan, Renault, Mazda, BMW, General Motors and Honda. Visteon is headquartered in Van Buren Township, Michigan and has an international network of manufacturing operations, technical centers and joint venture operations, supported by approximately 11,000 employees, dedicated to the design, development, manufacture and support of its product offerings and its global customers. The Company's manufacturing and engineering footprint is principally located outside of the U.S., with a heavy concentration in low-cost geographic regions. Visteon delivers value for its customers and stockholders through its technology-focused core vehicle cockpit electronics business. The Company's cockpit electronics product portfolio includes audio systems, information displays, instrument clusters, head up displays, infotainment systems, and telematics solutions. The Company's vehicle cockpit electronics business is comprised of and reported under the Electronics segment. In addition to the Electronics segment, the Company has residual operations in South America and Europe previously associated with the former Interiors and Climate businesses, not subject to discontinued operations classification, that comprise Other.

Strategic Initiatives

Visteon is a technology-focused, pure-play supplier of automotive cockpit electronics and connected car solutions. The Company has laid out the following three strategic initiatives for 2016 and beyond:

Strengthen the Core - Visteon offers technology and related manufacturing operations for audio, head-up displays, information displays, infotainment, instrument clusters and telematics products. The Company's backlog, defined as cumulative remaining life of program booked sales, is approximately $15.6 billion as of March 31, 2016, or 5.0 times 2015 full year sales, reflecting a strong booked sales base on which to launch future growth.

Move Selectively to Adjacent Products - As consumer demand continues to evolve with an increase of electronics content per vehicle, the Company strives to further develop expertise in the areas of cockpit domain controllers, next generation safety applications, and vehicle cyber security. These areas require assessment as consumer needs shift and related products complement Visteon's core products.

On January 12, 2016, Visteon entered into a share purchase agreement to acquire all shares of AllGo Systems, Inc., USA ("AllGo Systems") for initial consideration of $15 million and contingent consideration of $7 million, expected to close during the second quarter of 2016. AllGo Systems is a leading developer of embedded multimedia system solutions to global vehicle manufacturers. The acquisition further strengthens the Company's technological capabilities as it develops the next generation infotainment products.

Deliver Cost Efficiencies - Visteon core business financial results continue to improve with Adjusted EBITDA margin for electronics of 11.9% in the first quarter of 2016 compared with 10.8% in the first quarter of 2015. The Company expects to deliver cost efficiencies by achieving selling, general and administrative and engineering efficiencies, improving free cash flow, optimizing its capital structure and driving savings benefits as revenues grow.

During the first quarter of 2016, the Company announced a restructuring program to remodel the Company's engineering organization to focus on execution and technology. The future organization will be comprised of customer regional engineering, product management and advanced technologies, and global centers of competence.








28



Transformation Milestones

The Company has achieved the milestones which transformed the Company's business operations into a pure-play supplier of automotive cockpit electronics and connected car solutions.

A summary of the most recent milestones completing the transformation are summarized below:

Exit of Climate Business - On June 9, 2015, Visteon Corporation and its wholly owned subsidiary, VIHI, LLC (collectively, “Visteon”) completed the sale to Hahn & Co. Auto Holdings Co., Ltd. and Hankook Tire Co., Ltd. (together, the “Purchasers”) of all of its shares of Halla Visteon Climate Control Corporation, a Korean corporation (“HVCC”), for approximately $3.4 billion, or KRW 52,000 per share, after adjusting for the 2014 dividend paid by HVCC to Visteon (the “Climate Transaction”), pursuant to and in accordance with the Share Purchase Agreement, dated as of December 17, 2014, among Visteon and the Purchasers. 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 the second quarter 2015.

Exit of Interiors Business - On December 1, 2015, Visteon completed the sale and transfer of its equity ownership in Visteon Deutschland GmbH, which operated the Berlin, Germany interiors plant ("Germany Interiors Divestiture"). The Company contributed cash, of approximately $141 million, assets of $27 million, and liabilities of $198 million including pension related liabilities. The Company will make a final contribution payment of approximately $34 million by November 2016 included in the Company's consolidated balance sheet as "Other current liabilities" as of March 31, 2016.
During 2014, the Company divested the majority of its global Interiors business (the "Interiors Divestiture"). Subsequently, Visteon completed the sale of its Interiors operations in Thailand on February 2, 2015. Remaining operations subject to the Interiors Divestiture are located in Argentina and Brazil and are expected to close during 2016. Assets and liabilities associated with these operations continue to meet the "held for sale" criteria at March 31, 2016 and 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.

Enhance Shareholder Returns - In connection with the Climate Transaction, the Company expects to return $2.5 billion - $2.75 billion of cash to shareholders through 2016 via a series of actions including share buybacks and special distributions.

On June 16, 2015, the Company announced an accelerated stock buyback ("ASB") program with a third-party financial institution to purchase shares of Visteon common stock for an aggregate purchase price of $500 million, as the first of these shareholder return actions. Under the program, the Company paid the financial institution $500 million and received an initial delivery of 3,712,297 shares of common stock using a reference price of $107.75. The program concluded in December 2015 and the Company received an additional 1,058,965 shares. The final settlement price for all shares delivered under this 2015 ASB program was $104.79.

During the fourth quarter of 2015, the Company entered into an agreement with a third party financial institution to purchase up to $150 million of Visteon common stock in accordance with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934 ("10b5-1 Share Repurchase Program"). During the period of the program, which concluded on March 1, 2016, the Company paid approximately $105 million to repurchase 1,607,849 shares at an average price of $65.05.   

On December 9, 2015, the Company declared a special distribution of $43.40 per share of its common stock outstanding as of January 15, 2016, or approximately $1.75 billion in the aggregate. On January 22, 2016 approximately $1.74 billion was distributed to shareholders. An additional amount of approximately $15 million will be paid over a two-year period as related to the vesting and settlement of restricted stock units and performance-based share units previously granted to the Company's employees. These amounts were classified as "Distribution payable" on the Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015.

On March 1, 2016, the Company entered into another ASB program with a third-party financial institution to purchase shares of Visteon common stock for an aggregate purchase price of $395 million. Under the program, the Company paid the financial institution $395 million and received an initial delivery of 4,370,678 shares of common stock using a reference price of $72.30. The 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

29



to the terms and conditions of the ASB Agreement. The final settlement of this ASB Agreement is expected to occur by the end of 2016 but may be accelerated at the option of the third-party financial institution.

Executive Summary

The Company's Electronics sales for the three months ended March 31, 2016 totaled $793 million, the pie charts below highlight the sales breakdown for Visteon's Electronics segment for the three months ended March 31, 2016.
During the first quarter of 2016, the global automotive industry continued to experience modest growth driven by Asia Pacific, North America and Europe.  Production volumes in South America continued to contract due to varying economic, political and social factors.

On April 16, 2016 there was an earthquake in Kyushu Japan which has the potential to directly or indirectly disrupt material supply and electronic component production of various automotive suppliers, including Visteon, and correspondingly vehicle manufacturers.   Visteon is assessing the situation and working with its suppliers and customers to minimize disruption but at this time cannot quantify potential adverse impacts on the Company’s financial condition, results of operations and cash flows, if any.

Light vehicle production levels for the three months ended March 31, 2016 and 2015, by geographic region are provided below:
 
Three Months Ended
March 31
 
2016
 
2015
 
Change
 
(Units in Millions)
Global
22.9

 
22.6

 
1.3
 %
Asia Pacific
11.6

 
11.6

 
1.4
 %
Europe
5.6

 
5.4

 
2.2
 %
North America
4.5

 
4.3

 
5.2
 %
South America
0.6

 
0.8

 
(26.9
)%
Other
0.6

 
0.5

 
0.6
 %
 
 
 
 
 
 
Source: IHS Automotive
Significant aspects of the Company's financial results during the three month periods ended March 31, 2016 include the following:

The Company recorded sales of $802 million for the three months ended March 31, 2016, representing a decrease of $14 million when compared with the same period of 2015. The decrease was primarily due to the Germany Interiors Divestiture and Euro and Chinese Yuan currency impacts, partially offset by higher production volumes, and new business in Asia Pacific, North America, and Europe.
Gross margin was $121 million or 15.1% of sales for the three months ended March 31, 2016, compared to $112 million or 13.7% of sales for the same period of 2015. The increase was primarily attributable to increased volume and improved cost performance partially offset by unfavorable currency.
Net income attributable to Visteon was $19 million for the three months ended March 31, 2016, compared to net income of $50 million for the same period of 2015. The decrease of $31 million includes lower income from discontinued operations of $59 million representing the results of Climate operations during the three months ended March 31, 2015, sold in June of 2015. This decrease was partially offset by lower non-controlling interest of $16 million also related to the Climate operations and higher gross margin of $9 million.
Including discontinued operations, cash used by operating activities was $58 million for the three months ended March 31, 2016, a decrease of $231 million compared with the same period of 2015. The reduction is primarily related to the exit of the Climate business, and higher tax and restructuring payments.

30



Total cash and short-term investments, excluding amounts held for sale were $808 million as of March 31, 2016, $1,975 million lower than $2,783 million as of December 31, 2015, primarily attributable to the special distribution of approximately $1,736 million and share repurchases of $500 million, partially offset by the Climate Transaction withholding tax refund of $356 million.

Consolidated Results of Operations - Three Months Ended March 31, 2016 and 2015

The Company's consolidated results of operations for the three months ended March 31, 2016 and 2015 were as follows:
 
Three Months Ended March 31
 
2016
 
2015
 
Change
 
(Dollars in Millions)
Sales
$
802

 
$
816

 
$
(14
)
Cost of sales
681

 
704

 
(23
)
Gross margin
121

 
112

 
9

Selling, general and administrative expenses
56

 
58

 
(2
)
Restructuring expense
10

 
3

 
7

Interest expense, net
2

 
5

 
(3
)
Equity in net income (loss) of non-consolidated affiliates

 
(1
)
 
1

Other expense, net
4

 
12

 
(8
)
Provision for income taxes
13

 
9

 
4

Net income from continuing operations
36

 
24

 
12

(Loss) income from discontinued operations
(13
)
 
46

 
(59
)
Net income
23

 
70

 
(47
)
Net income attributable to non-controlling interests
4

 
20

 
(16
)
Net income attributable to Visteon Corporation
$
19

 
$
50

 
$
(31
)
Adjusted EBITDA*
$
89

 
$
78

 
$
11

 
 
 
 
 
 
* Adjusted EBITDA is a Non-GAAP financial measure, as further discussed below.

Sales

Sales for the three months ended March 31, 2016 totaled $802 million, which represents a decrease of $14 million compared with the same period of 2015. Favorable volumes, product mix, and net new business increased sales by $54 million. The sale of an Interiors facility in Germany on December 1, 2015 decreased first quarter sales by $26 million. Unfavorable currency further decreased sales by $24 million, primarily attributable to the weakening Euro, Chinese Yuan, Thai Baht, and Indian Rupee. Other reductions were associated with customer pricing, net of design savings.

Cost of Sales

Cost of sales decreased $23 million for the three months ended March 31, 2016 when compared with the same period in 2015. Increased volumes, product mix, and net new business increased cost of sales by $43 million. The sale of the German Interiors facility decreased cost of sales by $27 million. Foreign currency decreased cost of sales by $20 million primarily attributable to the Euro partially offset by the Japanese Yen. Lower engineering cost recoveries increased cost of sales by $3 million while a supplier recovery for warranty decreased cost of sales by $3 million. Net efficiencies, including material, design and usage economics and manufacturing efficiencies, decreased cost of sales by $19 million.

Gross Margin

Gross margin was $121 million or 15.1% of sales for the three months ended March 31, 2016 compared to $112 million or 13.7% of sales for the same period of 2015. The $9 million increase in gross margin included $11 million from favorable volumes, net new business and product mix. The sale of the German Interiors facility improved gross margin by $1 million. Gross margin also included $1 million of favorable net cost performance, driven by material and manufacturing cost efficiencies which more than offset customary pricing reductions. The increases in gross margin were partially offset by unfavorable currency of $4 million primarily attributable to the Japanese Yen.


31



Selling, General and Administrative Expenses

Selling, general, and administrative expenses were $56 million and $58 million during the three months ended March 31, 2016 and 2015, respectively. The decrease is primarily related to net efficiencies and favorable currency impacts related to the weakening Euro.

Restructuring Expense

Electronics: During the first quarter of 2016, the Company announced a restructuring program to transform the Company's engineering organization and supporting functional areas to focus on execution and technology. The organization will be comprised of regional engineering, product management and advanced technologies, and global centers of competence. Through March 31, 2016, the Company has recorded approximately $11 million of restructuring expenses under this program, associated with approximately 90 employees,which remains accrued as of March 31, 2016. The Company expects to record additional restructuring costs related to this program as the underlying plan is finalized.

During the fourth quarter of 2015, the Company announced a restructuring program designed to reduce the workforce at a European Electronics facility. The Company recorded $12 million of severance and termination benefits under this program associated with approximately 100 employees, of which $11 million remains accrued as of March 31, 2016. The Company expects to record additional restructuring costs related to this program as the underlying plan is finalized.

In connection with the Electronics Acquisition, the Company commenced a restructuring program designed to achieve annual cost savings through transaction synergies, of approximately $70 million. During the three months ended March 31, 2015, the Company recorded $2 million primarily related to severance and termination benefits under this program associated with approximately 55 employees and $1 million of legal and consulting fees. Approximately $9 million remains accrued at March 31, 2016 for this program and charges are considered substantially complete.

Other: During the three months ended March 31, 2015, the Company recorded $1 million of restructuring expenses, classified as discontinued operations, related to employee and severance termination benefits in connection with the reorganization of the Company's Climate operations in France.

The Company's restructuring reserves and related activity are summarized below for the three months ended March 31, 2016.