UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

 

Commission File Number 1-15827

 

VISTEON CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (800)-VISTEON

 

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 (Section 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         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. (Check one):

 

Large Accelerated Filer          Accelerated Filer          Non-Accelerated Filer          Smaller Reporting Company   ü  

(Do not check if a 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  

 

As of October 23, 2009, the Registrant had outstanding 130,334,131 shares of common stock, par value $1.00 per share.

 

Exhibit index located on page number 63.

 

 

VISTEON CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

INDEX

 

 

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

 

See accompanying notes to the consolidated financial statements.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to the consolidated financial statements.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

 

See accompanying notes to the consolidated financial statements.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

 

Visteon Corporation (the “Company” or “Visteon”) is a leading global supplier of climate, interiors and electronics systems, modules and components to global automotive original equipment manufacturers (“OEMs”). Headquartered in Van Buren Township, Michigan, Visteon has a workforce of approximately 30,000 employees and a network of manufacturing operations, technical centers, sales offices and joint ventures in every major geographic region of the world.

 

Reorganization under Chapter 11 of the U.S. Bankruptcy Code

 

On May 28, 2009 (the “Petition Date”), Visteon and certain of its U.S. subsidiaries (the “Debtors”) filed voluntary petitions for reorganization relief under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Court”). The reorganization cases are being jointly administered as Case No. 09-11786 under the caption “In re Visteon Corporation, et al” (hereinafter referred to as the “Chapter 11 Proceedings”). The Debtors continue to operate their businesses as “debtors-in-possession” (“DIP”) under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. The Company’s other subsidiaries, primarily non-U.S. subsidiaries, have been excluded from the Chapter 11 Proceedings and continue to operate their businesses without supervision from the Court and are not subject to the requirements of the Bankruptcy Code.

 

The Chapter 11 Proceedings were initiated in response to sudden and severe declines in global automotive production during the latter part of 2008 and early 2009 and the adverse impact on the Company’s cash flows and liquidity. Under the Chapter 11 Proceedings, the Debtors expect to develop and implement a plan to restructure their capital structure to reflect the current automotive industry demand. Additional details regarding the status of the Company’s Chapter 11 Proceedings are included herein under Note 4, “Voluntary Reorganization under Chapter 11 of the United States Bankruptcy Code,” to the consolidated financial statements.

 

Visteon UK Limited Administration

 

On March 31, 2009, in accordance with the provisions of the United Kingdom Insolvency Act of 1986 and pursuant to a resolution of the board of directors of Visteon UK Limited, a company organized under the laws of England and Wales (the “UK Debtor”) and an indirect, wholly-owned subsidiary of the Company, representatives from KPMG (the “Administrators”) were appointed as administrators in respect of the UK Debtor (the “UK Administration”). The UK Administration was initiated in response to continuing operating losses of the UK Debtor and mounting labor costs and their related demand on the Company’s cash flows, and does not include the Company or any of the Company’s other subsidiaries. The effect of the UK Debtor’s entry into administration was to place the management, affairs, business and property of the UK Debtor under the direct control of the Administrators. Since their appointment, the Administrators have wound down the business of UK Debtor and closed its operations in Enfield, UK, Basildon, UK and Belfast, UK, and made the employees redundant. The Administrators continue to realize the UK Debtor’s assets, comprised mainly of receivables.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The UK Debtor recorded sales, negative gross margin and net loss of $32 million, $7 million and $10 million, respectively, for the three months ended March 31, 2009. As of March 31, 2009 total assets of $64 million, total liabilities of $132 million and related amounts deferred as “Accumulated other comprehensive income” of $84 million, were deconsolidated from the Company’s balance sheet resulting in a deconsolidation gain of $152 million. The Company also recorded $57 million for contingent liabilities related to the UK Administration, including $45 million of costs associated with former employees of the UK Debtor, for which the Company was reimbursed from the escrow account on a 100% basis.

 

Additional amounts related to these items or other contingent liabilities for potential claims under the UK Administration, which may result from (i) negotiations; (ii) actions of the Administrators; (iii) resolution of contractual arrangements, including unexpired leases; (iv) material adverse developments; or other events, may be recorded in future periods. No assurance can be provided that the Company will not be subject to future litigation and/or liabilities related to the UK Administration. Additional liabilities, if any, will be recorded when they become probable and estimable and could materially affect the Company’s results of operations and financial condition in future periods.

 

Transactions with Ford Motor Company

 

The Company transacts a significant amount of commercial activity with Ford Motor Company (“Ford”). The financial statement impact of these commercial activities is summarized in the table below.

 

 

 

On May 13, 2009, the Company entered into certain transactions whereby Ford purchased, assumed and took an assignment of all of the outstanding loans, obligations and other interests of the lenders under the ABL Credit Agreement. As of September 30, 2009, the balance owed to Ford under the ABL Credit Agreement was approximately $110 million, including $21 million related to unreimbursed draws on letters of credit. Additionally, as of September 30, 2009 there was approximately $35 million outstanding on undrawn letters of credit.

 

 

Interim Financial Statements:  The unaudited consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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. The Company’s management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the SEC. Interim results are not necessarily indicative of full year results.

 

Financial Statement Presentation:  The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and on a going concern basis, which contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 Proceedings, such realization of assets and liquidation of liabilities, without substantial adjustments to amounts and/or changes of ownership, is highly uncertain.

 

The appropriateness of using the going concern basis for the Company’s financial statements is dependent upon, among other things, the Company’s ability to: (i) obtain sufficient DIP financing; (ii) comply with various orders entered by the Court in connection with the Chapter 11 Proceedings; (ii) maintain adequate cash on hand; (iii) generate sufficient cash from operations; (iv) achieve confirmation of a plan of reorganization under the Bankruptcy Code; and (v) achieve profitability following such confirmation.

 

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

 

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

 

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 does not exercise control are accounted for using the equity method. The consolidated financial statements also include the accounts of certain entities in which the Company holds a controlling interest based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary.

 

Revenue Recognition:  The Company records revenue when persuasive evidence of an arrangement exists, delivery occurs or services are rendered, the sales price or fee is fixed or determinable and collectibility is reasonably assured. The Company delivers product and records revenue pursuant to commercial agreements with its customers generally in the form of an approved purchase order, including the effects of contractual customer price productivity. The Company does negotiate discrete price changes with its customers, which are generally the result of unique commercial issues between the Company and its customers and are generally the subject of specific negotiations between the Company and its customers. The Company records amounts associated with discrete price changes as a reduction to revenue when specific facts and circumstances indicate that a price reduction is probable and the amounts are reasonably estimable. The Company records amounts associated with discrete price changes as an increase to revenue upon execution of a legally enforceable contractual agreement and when collectibility is reasonably assured.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Services revenues are recognized as services are rendered, and associated costs of providing such services are recorded as incurred. Services revenues and related costs for the first nine months of 2009 included $27 million of contractual reimbursement from Ford under the Amended Reimbursement Agreement for costs associated with the separation of ACH leased employees no longer required to provide such services.

 

Restricted Cash:  Restricted cash includes approximately $80 million under the terms of the ABL Credit Agreement and $20 million pursuant to a cash collateral order of the Court.

 

Subsequent Events:  The Company evaluated all transactions for subsequent event impacts on the periods presented through October 29, 2009.

 

 

In July 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (“ASC”) as the only authoritative source of generally accepted accounting principles. The ASC is effective for interim and annual reporting periods ending after September 15, 2009. The Company implemented use of the ASC without a significant impact on its consolidated financial statements.

 

In June 2009, the FASB issued guidance which amends the consolidation provisions that apply to Variable Interest Entities (“VIEs”). This guidance is effective for fiscal years that begin after November 15, 2009 and the Company is currently evaluating the impact this guidance may have on its consolidated financial statements.

 

In May 2009 the FASB issued guidance requiring disclosures on management’s assessment of subsequent events, the Company adopted this guidance on a prospective basis as of April 1, 2009 without material impact on its consolidated financial statements.

 

In connection with ASC Topic 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements, the Company provided expanded disclosures as of January 1, 2008 without a material impact on its consolidated financial statements. The application of ASC 820 to the Company’s nonfinancial assets and liabilities did not impact the Company’s consolidated financial statements. The Company also adopted related guidance on estimating fair value when the volume and level of activity have significantly decreased and on identifying circumstances that indicate a transaction is not orderly as of June 30, 2009 without material impact on its consolidated financial statements.

 

In April 2009, the FASB issued guidance requiring disclosures around the fair value of financial instruments for interim reporting periods, including (a) the fair value at the period end and (b) the methods and assumptions used to calculate the fair value. The Company adopted this guidance without a material impact on its consolidated financial statements.

 

In December 2008, the FASB issued guidance requiring disclosure of (a) how pension plan asset investment allocation decisions are made, (b) the major categories of plan assets, (c) the inputs and valuation techniques used to measure the fair value of plan assets, (d) the effect of fair value measurements using significant unobservable inputs on changes in plan assets and (e) significant concentrations of risk within plan assets. These disclosures are required for fiscal years ending after December 15, 2009.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

In March 2008, the FASB issued guidance requiring disclosure of (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. These disclosures were provided by the Company on a prospective basis with effect from January 1, 2009, as more fully described in Note 17 “Financial Instruments” to the consolidated financial statements.

 

In December 2007, the FASB issued guidance on the accounting and reporting for business combination transactions and noncontrolling interests in consolidated financial statements. The Company adopted this guidance effective January 1, 2009 as more fully described in Note 14 “Shareholders’ Deficit” to the consolidated financial statements.

 

 

On May 28, 2009, the Debtors filed voluntary petitions for reorganization relief under the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The reorganization cases are being jointly administered as Case No. 09-11786 under the caption “In re Visteon Corporation, et al.” The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. The Company’s other subsidiaries, primarily non-U.S. subsidiaries, have been excluded from the Chapter 11 Proceedings and continue to operate their businesses without supervision from the Court and are not subject to the requirements of the Bankruptcy Code.

 

Implications of Chapter 11 Proceedings

 

Under section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect pre-petition indebtedness or to exercise control over the property of the debtor’s estate. Absent an order of the Court, substantially all pre-petition liabilities are subject to settlement under a plan of reorganization. While operating as debtors-in-possession under the Bankruptcy Code and subject to approval of the Court or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, a confirmed plan of reorganization or other arrangement could materially change the amounts and classifications in the historical consolidated financial statements.

 

Subsequent to the petition date, the Debtors received approval from the Court to pay or otherwise honor certain pre-petition obligations generally designed to stabilize the Debtors’ operations including employee obligations, tax matters and from limited available funds, pre-petition claims of certain critical vendors, certain customer programs, limited foreign business operations, adequate protection payments and certain other pre-petition claims. Additionally, the Debtors have been paying and intend to continue to pay undisputed post-petition claims in the ordinary course of business.

 

To successfully emerge from chapter 11, in addition to obtaining exit financing, the Court must confirm a plan of reorganization, the filing of which will depend upon the timing and outcome of numerous ongoing matters in the Chapter 11 Proceedings. The Debtors currently expect to file a plan of reorganization that provides for the Debtors’ emergence from bankruptcy in early to mid 2010, but there can be no assurance that the Court will confirm the Company’s plan of reorganization or that any such plan will be implemented successfully. On October 7, 2009 the Court entered an order extending the Debtors’ exclusive period to file a chapter 11 plan of reorganization until December 10, 2009 and to solicit votes to accept a proposed chapter 11 plan of reorganization until February 10, 2010.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The Company’s plan of reorganization will determine the rights and satisfaction of claims of various creditors and security holders. At this time, it is not possible to predict with certainty the effect of the Chapter 11 Proceedings on the Company’s business. The Debtors will include estimates of expected claims dispositions in the plan of reorganization, but the ultimate settlement of those claims will continue to be subject to the uncertain outcome of litigation, negotiations and Court decisions up to and for a period of time after a plan of reorganization is confirmed. The Company believes that its presently outstanding equity securities will have no value and will be canceled under any plan of reorganization. For this reason, the Company urges that caution be exercised with respect to existing and future investments in any security of the Company.

 

Status of Chapter 11 Proceedings

 

The Debtors are currently funding post-petition operations under a temporary cash collateral order from the Court. There can be no assurance that such cash collateral funds will be sufficient to meet the Debtors ongoing cash needs or that the Debtors will be successful in extending the duration of the cash collateral order with the Court to continue operating as debtors-in-possession absent an approved DIP financing arrangement.

 

The Debtors continue to work with their customers on a global basis to facilitate the reorganization of the Company’s business. During July 2009, the Company executed support agreements with certain European customers that provide for, among other things, accelerated payment terms, price increases, restructuring cost reimbursements and settlement payments for invested research and engineering costs and other unrecovered amounts. During the three-month period ended September 30, 2009 the Company received non-refundable settlement payments of approximately $40 million in connection with these agreements and anticipates receipt of additional non-refundable settlement payments of approximately $30 million on or before each of June 30, 2010 and June 30, 2011, subject to the terms and conditions of these agreements. The Company recorded $9 million of revenue associated with these settlement payments during the third quarter of 2009, with $31 million deferred on the balance sheet at September 30, 2009. Additionally, during July 2009, the Debtors sold their 80% interest in Halla Climate Systems Alabama Corp. (“Halla Alabama”) to the Debtors’ 70% owned joint venture, Halla Climate Control Corporation under Bankruptcy Code Section 363 for cash proceeds to the Debtors’ of $37 million.

 

On September 17, 2009, the Debtors filed a motion with the Court seeking authority to enter into a customer accommodation agreement and related access and security agreement (together, the “GM Accommodation Agreement”) with General Motors Corporation (“GM”). Pursuant to the GM Accommodation Agreement, GM has agreed to, among other things, pay approximately $8 million in cash surcharge payments above the purchase order price for GM component parts produced; reimburse up to $10 million for restructuring costs associated with the consolidation of certain of the Company’s Mexican facilities; reimburse $4 million of engineering, design and development support costs; accelerate payment terms; reimburse the Company for costs associated with the wind-down of operations related to the production of interior and fuel tank GM component parts; and pay approximately $8 million in cure payments in connection with the assumption and assignment of purchase orders with the Company in the Motors Liquidation Company (f/k/a General Motors Corporation) chapter 11 case.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

In exchange for these benefits, the Company agreed to continue producing and delivering component parts to GM during the term of the GM Accommodation Agreement as well as provide considerable assistance to GM in re-sourcing production to other suppliers. Also, the Company agreed to build an inventory bank for GM, provided GM pays for such inventory on an accelerated basis and covers the Company’s out-of-pocket expenses in maintaining and handling the inventory. In addition, the GM Accommodation Agreement grants GM an option to purchase equipment and tooling owned by the Company that is exclusively used to manufacture GM component parts, provides GM with a right to access the Company’s facilities if the Company ceases production and grants to GM a security interest in certain operating assets that would be necessary for GM component part production. In general, the rights and benefits inuring to the Company and GM pursuant to the GM Accommodation Agreement expire on the earlier of the date that resourcing of production is completed or March 31, 2010. The Court entered an order approving the Debtors motion with respect to the GM Accommodation Agreement on October 7, 2009.

 

On October 2, 2009, the Debtors filed a motion with the Court seeking authority to enter into a customer accommodation agreement and related access and security agreement (together, the “Chrysler Accommodation Agreement”) with Chrysler Group LLC (“Chrysler”). The effectiveness of the Chrysler Accommodation Agreement is contingent upon approval by the Court. Pursuant to the Chrysler Accommodation Agreement, Chrysler has agreed to, among other things, pay surcharge payments to the Company above the purchase order price for Chrysler component parts produced by the Company in an aggregate amount of $13 million; pay approximately $5 million for the purchase of certain tooling used at the Company’s Saltillo, Mexico facility to manufacture Chrysler component parts; purchase certain designated equipment and tooling exclusively used to manufacture Chrysler component parts at the Company’s Highland Park, Michigan and Saltillo, Mexico facilities; reimburse the Company for certain costs associated with the wind-down of certain lines of Chrysler component part production; accelerate payment terms; and pay approximately $13 million to the Company as cure payments in connection with the assumption and assignment of purchase orders with the Company in the Old Carco LLC (f/k/a Chrysler LLC) chapter 11 case.

 

In exchange for these benefits, the Company will continue to produce and deliver component parts to Chrysler during the term of the Chrysler Accommodation Agreement, as well as provide assistance to Chrysler in re-sourcing certain lines of production. The Company also has agreed to build an inventory bank for Chrysler, provided that Chrysler will pay for such parts in accordance with the payment terms set forth in the Chrysler Accommodation Agreement and will cover the Company’s incremental costs incurred in the production of such parts to the extent such costs exceed purchase order prices. The Company will also grant Chrysler an option to purchase certain machinery and equipment exclusively used to manufacture Chrysler component parts, and has agreed to seek Court approval for the sale of the Company’s Highland Park, Michigan and Saltillo, Mexico facilities as going concerns if Chrysler designates such facilities for sale prior to the termination date of the Chrysler Accommodation Agreement. The Chrysler Accommodation Agreement provides Chrysler with a right to access the Company’s facilities if the Company ceases production and grants to Chrysler a security interest in certain operating assets that would be necessary for Chrysler component part production. In general, the rights and benefits inuring to the Company and Chrysler pursuant to the Chrysler Accommodation Agreement expire on the earlier of the date that resourcing of production is completed or March 31, 2010.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

On October 23, 2009, the Debtors filed a motion with the Court seeking authority to, among other things, enter into (i) a customer accommodation agreement and related access and security agreement (together, the “Nissan Accommodation Agreement”) with Nissan North America, Inc. (“Nissan”), and (ii) an asset purchase agreement (the “Nissan Purchase Agreement”) among the Company, GCM-Visteon Automotive Systems, LLC, GCM-Visteon Automotive Leasing Systems, LLC, MIG-Visteon Automotive Systems, LLC, and VC Regional Assembly & Manufacturing, LLC (collectively, the “Sellers”), Haru Holdings, LLC (the “Buyer”) and Nissan. The effectiveness of the Nissan Accommodation Agreement is contingent upon approval by the Court.

 

Pursuant to the Nissan Purchase Agreement, the Sellers have agreed to sell to the Buyer certain assets, intellectual property, agreements and rights (the “Assets”) primarily related to the Sellers’ automobile cockpit module, front end module, and interior manufacturing and assembly businesses located at their plants in LaVergne, Tennessee, Smyrna, Tennessee, Tuscaloosa, Alabama, and Canton, Mississippi, as well as certain other direct-shipment sourcing arrangements. The Nissan Purchase Agreement provides that the Buyer will make the following payments to the Sellers:

 

 

The amounts of these payments are subject to adjustment in accordance with the Nissan Purchase Agreement. The Nissan Purchase Agreement also contains customary representations, warranties, indemnities, covenants and conditions to closing, including the approval of the Court.

 

Pursuant to the Nissan Accommodation Agreement, Nissan has agreed to, among other things, accelerate its payment terms on outstanding purchase orders, limit its ability to set-off against accounts receivables owing to the Company and forbear from re-sourcing component parts to a third party supplier during the term of the Nissan Accommodation Agreement. The Company will, among other things, continue to produce and deliver component parts to Nissan during the term of the Nissan Accommodation Agreement and will build an inventory bank for Nissan at its request (provided that Nissan will pay for such inventory bank parts on an accelerated basis and will also cover the Company’s out-of-pocket expenses in maintaining and handling the inventory). The Company will also provide assistance and cooperation to Nissan in preparing for and carrying out the transition of various production lines to other suppliers in the event the Company defaults. Also, the Nissan Accommodation Agreement provides Nissan with an access right to certain facilities if the Company fails to maintain continuity of supply as required.

 

On October 28, 2009, the Debtors filed a motion with the Court seeking authority to enter into a Letter of Credit Reimbursement and Security Agreement that provides for a committed $40 million letter of credit facility that expires on September 30, 2010 (“LOC Facility”). Amounts drawn under the LOC Facility would be subject to a fee of 0.65% per annum of the outstanding balance and would be secured by cash collateral. Amounts undrawn would be subject to a fee of 0.40% per annum of the undrawn balance.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

On October 28, 2009, the Debtors filed a motion with the Court seeking authority to borrow up to $150 million under the terms of a proposed senior secured super-priority priming debtor-in-possession credit and guarantee agreement (the “Proposed DIP Facility”) with certain pre-petition secured term loan lenders (the “DIP Lenders”) and Wilmington Trust Company, as administrative agent. Borrowings under the Proposed DIP Facility would be used to finance working capital, capital expenditures and other general corporate purposes in accordance with an approved budget.

 

The Proposed DIP Facility would mature on the earliest of (i) six months after the closing of such facility; provided, that the Company may extend it an additional three months, (ii) the effective date of the Debtor’s plan of reorganization, and (c) the date a sale or sales of all or substantially all of the Company’s and guarantors’ assets is or are consummated under section 363 of the Bankruptcy Code. Borrowing under the Proposed DIP Facility will be secured by, among other things, a first priority perfected security interest in assets that constitute first priority collateral under pre-petition secured term loans and certain otherwise unencumbered assets (including the assets of Visteon Electronics Corporation), as well as a second priority perfected security interest in assets that constitute first priority collateral under the ABL Credit Agreement. The Proposed DIP Facility would also contain other usual and customary affirmative and negative covenants, events of default, indemnification, representations, warranties and conditions.

 

Financial Statement Classification

 

Financial reporting applicable to companies in chapter 11 of the Bankruptcy Code generally does not change the manner in which financial statements are prepared. However, it does require, among other disclosures, that the financial statements for periods subsequent to the filing of the chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, revenues, expenses, realized gains and losses and provisions for losses that can be directly associated with the reorganization of the business have been reported separately as reorganization items in the Company’s statements of operations. Reorganization items included in the consolidated statements of operations include costs directly related to the Chapter 11 Proceedings, as follows:

 

 

Cash payments for reorganization costs during the nine months ended September 30, 2009 were approximately $11 million.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Additionally, pre-petition liabilities subject to compromise under a plan of reorganization have been reported separately from both pre-petition liabilities that are not subject to compromise and from liabilities arising subsequent to the petition date. Liabilities that may be affected by a plan of reorganization are reported at amounts expected to be allowed, even if they may be settled for lesser amounts. Liabilities subject to compromise as of September 30, 2009 are set forth below and represent the Company’s estimate of known or potential pre-petition claims to be resolved in connection with the Chapter 11 Proceedings. Such claims remain subject to future adjustments, which may result from (i) negotiations; (ii) actions of the Court; (iii) disputed claims; (iv) rejection of executory contracts and unexpired leases; (v) the determination as to the value of any collateral securing claims; (vi) proofs of claim; or (vii) other events. Liabilities subject to compromise include the following:

 

 

Substantially all of the Company’s pre-petition debt is in default, including $1.5 billion principal amount due under the seven-year secured term loans due 2013; $862 million principal amount under various unsecured notes due 2010, 2014 and 2016; and $110 million of other secured and unsecured borrowings. Debt discounts of $8 million, deferred financing costs of $14 million and fair value of terminated interest rate swaps of $23 million are no longer being amortized and have been included as a valuation adjustment to the related pre-petition debt. Effective May 28, 2009, the Company ceased recording interest expense on outstanding pre-petition debt instruments classified as liabilities subject to compromise. Adequate protection amounts pursuant to the cash collateral order of the Court, and as related to the ABL Credit Agreement have been classified as “Interest expense” on the Company’s statements of operations. Interest expense on a contractual basis would have been $54 million and $172 million for the three-month and nine-month periods ended September 30, 2009.

 

Employee liabilities subject to compromise includes $315 million related to other post-employment benefit obligations. On June 26, 2009 the Debtors requested the Court to enter an order authorizing the Debtors to modify or terminate certain plans and programs giving rise to such benefits.

 

Additionally, a confirmed plan of reorganization could also materially change the amounts and classifications reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

On August 26, 2009, pursuant to the Bankruptcy Code, the Debtors filed statements and schedules with the Court setting forth the assets and liabilities of the Debtors as of the Petition Date. In September 2009, the Debtors issued approximately 57,000 proof of claim forms to their current and prior employees, known creditors, vendors and other parties with whom the Debtors have previously conducted business. To the extent that recipients disagree with the claims as quantified on these forms, the recipient may file discrepancies with the Court. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the Chapter 11 Proceedings. However, the Court will ultimately determine liability amounts, if any, that will be allowed for these claims. An October 15, 2009 bar date was set for the filing of proofs of claim against the Debtors. Because the Debtors have not completed their evaluation of these claims, the ultimate number and allowed amount of such claims are not presently known. The resolution of such claims could result in a material adjustment to the Debtors’ financial statements.

 

Debtors Financial Statements

 

The financial statements included below represent the condensed combined financial statements of the Debtors and exclude the Company’s other subsidiaries, primarily non-U.S. subsidiaries. These statements reflect the results of operations, financial position and cash flows of the combined Debtor subsidiaries, including certain amounts and activities between Debtor and non-Debtor subsidiaries of the Company, which are eliminated in the consolidated financial statements.

 

CONDENSED COMBINED DEBTORS-IN-POSSESSION
STATEMENT OF OPERATIONS

 

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

CONDENSED COMBINED DEBTORS-IN-POSSESSION
BALANCE SHEET

 

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

CONDENSED COMBINED DEBTORS-IN-POSSESSION
STATEMENT OF CASH FLOWS

 

 

 

The Company has undertaken various restructuring and exit activities to achieve its strategic and financial objectives. Restructuring activities include, but are not limited to, plant closures, divestitures, production relocation, administrative cost structure realignment and consolidation of available capacity and resources. The Company expects to finance restructuring programs with cash pursuant to the terms of certain customer accommodation and support agreements, cash on hand, cash generated from its ongoing operations or through cash available under its existing debt agreements, subject to the terms of applicable covenants.

 

2009 Restructuring Actions

 

During the third quarter of 2009, the Company recorded $27 million in employee severance and termination benefit costs related to headcount reductions, including $11 million associated with approximately 160 employees at two European Interiors facilities, $6 million associated with approximately 60 employees at the Company’s North American headquarters and $10 million associated with approximately 300 employees at a North American Electronics facility. The Company recorded $4 million for the reimbursement of restructuring costs associated with a European Interiors facility pursuant to a customer support agreement.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The following is a summary of the Company’s consolidated restructuring reserves and related activity.

 

 

Utilization for the three months ended September 30, 2009 includes $12 million of payments for severance and other employee termination benefits and $4 million of special termination benefits reclassified to pension and other postretirement employee benefits, where such payments are made from the Company’s benefit plans.

 

Asset Impairments and Loss on Divestitures

 

The Company recorded asset impairments and loss on divestitures of $19 million during the three months ended September 30, 2008 in connection with the divestitures of its chassis operation in Swansea, UK and its Interiors operation in Halewood, UK. During the second quarter of 2008, the Company also recorded asset impairments and losses on divestitures of $7 million in connection with the sale of the Swansea, UK operation and $4 million for long-lived assets related to the Other product group that met the “held for sale” criteria under GAAP. During the first quarter of 2008, the Company completed the sale of its North American-based aftermarket underhood and remanufacturing operations and recorded total losses of $40 million in connection with the transaction.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. A summary of inventories is provided below:

 

 

 

Other current assets are summarized as follows:

 

 

Other non-current assets are summarized as follows:

 

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Property and equipment is stated at cost and is depreciated over the estimated useful lives of the assets, principally using the straight-line method. A summary of Property and equipment, net is provided below:

 

 

Depreciation and amortization expenses are summarized as follows:

 

 

The Company recorded approximately $13 million and $26 million of accelerated depreciation expense for the three and nine months ended September 30, 2009, respectively, representing the shortening of estimated useful lives of certain assets in connection with the Company’s restructuring activities.

 

 

The Company had $266 million and $220 million of equity in the net assets of non-consolidated affiliates at September 30, 2009 and December 31, 2008, respectively. The Company recorded equity in net income of non-consolidated affiliates of $26 million and $5 million for the three months ended September 30, 2009 and 2008, respectively. For the nine-month periods ended September 30, 2009 and 2008, the Company recorded $52 million and $35 million, respectively.

 

The following table presents summarized financial data for the Company’s non-consolidated affiliates. Yanfeng Visteon Automotive Trim Systems Co., Ltd (“Yanfeng”), of which the Company owns a 50% interest, is considered a significant non-consolidated affiliate. Summarized financial information reflecting

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

100% of the operating results of the Company’s equity investees is provided below for the three and nine-month periods ended September 30.

 

 

 

The Company’s share of net assets and net income is reported in the consolidated financial statements as “Equity in net assets of non-consolidated affiliates” on the consolidated balance sheets and “Equity in net income of non-consolidated affiliates” on the consolidated statements of operations. Included in the Company’s accumulated deficit is undistributed income of non-consolidated affiliates accounted for under the equity method of approximately $99 million and $104 million at September 30, 2009 and December 31, 2008, respectively.

 

 

Other current liabilities are summarized as follows:

 

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Other non-current liabilities are summarized as follows:

 

 

 

As of September 30, 2009, current deferred income of $35 million primarily relates to non-refundable settlement payments in connection with customer support agreements. Additionally, non-current deferred income of $37 million is primarily related to deferred gains on sale-leaseback transactions that will be recognized in the period that the Company’s continuing involvement ceases.

 

 

The Company’s short and long-term debt balances, including the fair value of related interest rate swaps are as follows:

 

 

On May 22, 2009, the Company terminated its European trade accounts receivable securitization facility. As a result, participating subsidiaries repurchased receivables previously sold and outstanding under the program and amounts borrowed under the facility totaling $42 million were repaid.

 

The fair value of the Company’s long-term debt that is not subject to compromise has been calculated based on quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities. The Company is unable to estimate the fair value of long-term debt of the Debtors that is subject to compromise at September 30, 2009, due to the uncertainties associated with the Chapter 11 Proceedings. Fair value of total debt was $206 million and $826 million as of September 30, 2009 and December 31, 2008, respectively.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

The components of the Company’s net periodic benefit costs for the three-month periods ended September 30, 2009 and 2008 were as follows:

 

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The components of the Company’s net periodic benefit costs for the nine-month periods ended September 30, 2009 and 2008 were as follows:

 

 

Curtailments and Settlements

 

Curtailment and settlement gains and losses are classified in the Company’s consolidated statements of operations as “Cost of sales” or “Selling, general and administrative expenses.” Qualifying curtailment and settlement losses related to the Company’s restructuring activities were reimbursable under the terms of the Escrow Agreement. The following curtailments and settlements were recorded during the three and nine-month periods ended September 30, 2009 and 2008:

 

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

Retirement Benefit Related Restructuring Expenses

 

In addition to retirement benefit expenses, the Company recorded $4 million and $24 million for the three and nine months ended September 30, 2009, respectively, for retirement benefit related restructuring charges. Such charges generally relate to special termination benefits, voluntary termination incentives and pension losses and are the result of various restructuring actions as described in Note 5 “Restructuring and Exit Activities.” Retirement benefit related restructuring charges are initially classified as restructuring expenses and related accruals are subsequently reclassified to retirement benefit liabilities.

 

Contributions

 

During January 2009, the Company reached an agreement with the Pension Benefit Guaranty Corporation (“PBGC”) pursuant to U.S. federal pension law provisions that permit the PBGC to seek protection when a plant closing results in termination of employment for more than 20 percent of employees covered by a pension plan (the “PBGC Agreement”). In connection with the multi-year improvement plan the Company closed its Connersville, Indiana and Bedford, Indiana facilities, which resulted in the separation of all active participants in the respective pension plan. Under the PBGC Agreement, the Company agreed to accelerate payment of a $10.5 million cash contribution, provide a $15 million letter of credit (“LOC”) and provide for a guarantee by certain affiliates of certain contingent pension obligations of up to $30 million. During September 2009 the Company did not make the required contribution to the plan, which triggered an LOC draw event under the PBGC Agreement and resulted in a LOC draw by the PBGC of less than $1 million.

 

During the nine-month period ended September 30, 2009, contributions to the Company’s U.S. retirement plans and postretirement health care and life insurance plans were $19 million and $21 million, respectively, and contributions to non-U.S. retirement plans were $20 million. The Company does not presently anticipate additional contributions to its U.S. retirement plans in 2009 while an additional $6 million of contributions to its postretirement health care and life insurance plans are expected. The Company also anticipates additional 2009 contributions to non-U.S. retirement plans of $6 million.

 

 

The Company’s provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against income (loss) before income taxes, excluding equity in net income of non-consolidated affiliates and the gain related to the deconsolidation of the UK Debtor 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 judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. The need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will continue to cause variability in the Company’s quarterly and annual effective tax rates. Full

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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 Company’s provision for income tax of $18 million and $63 million for the three-month and nine-month periods ended September 30, 2009 reflects income tax expense related to those countries where the Company is profitable, accrued withholding taxes, ongoing assessments related to the recognition and measurement of uncertain tax benefits, the inability to record a tax benefit for pre-tax losses in the U.S. and certain other jurisdictions to the extent not offset by other categories of income, and certain other non-recurring tax items. Included in the deconsolidation gain related to the UK Administration is $18 million of tax expense representing the elimination of disproportionate tax effects in other comprehensive income as all items of other comprehensive income related to Visteon UK Limited have been derecognized.

 

As of September 30, 2009 and June 30, 2009 the Company had $249 million and $246 million, respectively, of gross unrecognized tax benefits. Of this amount approximately $121 million represents the amount of unrecognized benefits that, if recognized, would impact the effective tax rate. This amount remained unchanged for the third quarter of 2009 as increases in unrecognized tax benefits attributable primarily to unfavorable foreign exchange impacts were offset by a reduction in uncertain tax benefits related to statute expirations of approximately $6 million.

 

The Company records interest and penalties related to uncertain tax positions as a component of income tax expense. Estimated interest and penalties related to the potential underpayment of income taxes represented a benefit of $2 million for the three months ended September 30, 2009. As of September 30, 2009, the Company had approximately $41 million of accrued interest and penalties related to uncertain tax positions.

 

It is reasonably possible that the amount of the Company’s unrecognized tax benefits may change within the next twelve months as a result of settlement of ongoing audits or for changes in judgment as new information becomes available related to positions expected to be taken in future tax returns, primarily related to transfer pricing initiatives, or from the closure of tax statutes. Given the number of years, jurisdictions and positions subject to examination, the Company is unable to estimate the full range of possible adjustments to the balance of unrecognized tax benefits. Further, substantially all of the Company’s unrecognized tax benefits relate to uncertain tax positions that are not currently under review by taxing authorities and therefore, the Company is unable to specify the future periods in which it may be obligated to settle such amounts. For those jurisdictions that are currently under examination, a reasonable estimate of the range of possible change cannot be made until further correspondence has been conducted with the relevant taxing authorities.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

The table below provides a reconciliation of the carrying amount of total shareholders’ deficit, including shareholders’ deficit attributable to Visteon and equity attributable to noncontrolling interests (“NCI”).