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 April 26, 2010, the Registrant had outstanding 130,320,880 shares of common stock, par value $1.00 per share.

 

Exhibit index located on page number 49.

 

 

VISTEON CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

INDEX

 

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

 

 

See accompanying notes to the consolidated financial statements.

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

(Unaudited)

 

 

See accompanying notes to the consolidated financial statements.

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

 

 

See accompanying notes to the consolidated financial statements.

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

 

 

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 28,500 employees and a network of manufacturing operations, technical centers, service centers 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 of reorganization to restructure their capital structure and operations. Confirmation of a plan of reorganization could materially change the amounts and classifications reported in the Company’s consolidated financial statements, which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization. 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 the 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, primarily comprised of receivables. No assurance can be provided that the Company will not be subject to future litigation and/or liabilities related to the UK Administration, including assertions by the UK Pensions Regulator.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSESSION)
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) assertions by the UK Pensions Regulator; and, (v) 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 continues to transact a significant amount of commercial activity with Ford. The financial statement impact of these commercial activities is summarized in the table below.

 

 

 

 

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. During the quarter ended March 31, 2009, the Company recorded a benefit of approximately $7 million related to amounts recorded in prior periods. The Company determined that the impact of these adjustments is not material to any period affected. 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.

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

 

 

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. The Company’s financial statements do not include any adjustments related to assets or liabilities that may be necessary should the Company not be able to continue as a going concern. 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. Given this uncertainty, there is substantial doubt about the Company’s ability to continue as a going concern. 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) comply with terms of DIP financing; (ii) comply with various orders entered by the Court in connection with the Chapter 11 Proceedings; (iii) maintain adequate cash on hand; (iv) generate sufficient cash from operations; (v) achieve confirmation of a plan of reorganization under the Bankruptcy Code; and (vi) achieve profitability following such confirmation.

 

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.

 

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

 

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.

 

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 quarter 2010 included $2 million of contractual reimbursement from Ford under the Amended Reimbursement Agreement for costs associated with the separation of Automotive Components Holdings, LLC (“ACH”) leased employees no longer required to provide such services.

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

 

 

Restricted Cash:  Restricted cash represents cash designated for uses other than current operations and includes approximately $80 million under the terms of the ABL Credit Agreement, $37 million pursuant to a cash collateral order of the Court, $13 million related to the Letter of Credit Reimbursement and Security Agreement and $5 million for other corporate purposes.

 

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance amending fair value disclosures for interim and annual reporting periods beginning after December 15, 2009. This guidance requires disclosures about transfers of financial instruments into and out of Level 1 and 2 designations and disclosures about purchases, sales, issuances and settlements of financial instruments with a Level 3 designation. The Company adopted this guidance with effect from January 1, 2010 without material impact on its consolidated financial statements.

 

In December 2009, the FASB amended the Accounting Standards Codification (“ASC”) to provide consolidation guidance that requires a more qualitative assessment of the primary beneficiary of a variable interest entity (“VIE”) based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The amended guidance also requires an ongoing reconsideration of the primary beneficiary. This guidance was adopted by the Company on a prospective basis as of January 1, 2010 without material impact on its consolidated financial statements.

 

In December 2009, the FASB amended the ASC to provide guidance on the accounting for transfers and servicing of financial assets. This guidance is effective for fiscal years that begin after November 15, 2009 and was adopted by the Company on a prospective basis as of January 1, 2010 without material impact on its 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.

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

 

 

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.

 

Section 365 of the Bankruptcy Code permits the Debtors to assume, assume and assign or reject certain pre-petition executory contracts subject to the approval of the Court and certain other conditions. Rejection constitutes a Court-authorized breach of the contract in question and, subject to certain exceptions, relieves the Debtors of their future obligations under such contract but creates a deemed pre-petition claim for damages caused by such breach or rejection. Parties whose contracts are rejected may file claims against the rejecting debtor for damages. Generally, the assumption, or assumption and assignment, of an executory contract requires a debtor to cure all prior defaults under such executory contract and to provide adequate assurance of future performance. Additional liabilities subject to compromise and resolution in the Chapter 11 Proceedings have been asserted as a result of damage claims created by the Debtors’ rejection of executory contracts.

 

To successfully emerge from chapter 11, in addition to obtaining exit financing, the Court must confirm a plan of reorganization, which will depend upon the timing and outcome of numerous ongoing matters in the Chapter 11 Proceedings. A plan of reorganization determines the rights and satisfaction of claims of various creditors and security holders, but the ultimate settlement of those claims will 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. At this time, it is not possible to predict with certainty the effect of the Chapter 11 Proceedings on the Company’s business.

 

Plan of Reorganization

 

On December 17, 2009, the Debtors filed a joint plan of reorganization and related disclosure statement with the Court. On March 15, 2010, the Debtors filed a first amended joint plan of reorganization (the “First Amended Plan”) and related first amended disclosure statement (the “First Amended Disclosure Statement”) with the Court.

 

The First Amended Plan and First Amended Disclosure Statement as filed with the Court outline a proposal for the settlement of claims against the estate of the Debtors based on an estimate of the overall enterprise value. Under the First Amended Plan, the term lenders’ entire secured claim would be converted to equity. Under the First Amended Plan, the term lenders will receive 85 percent of the common stock in a reorganized Visteon, holders of the Company’s 12.25 percent senior notes would receive their pro rata share of approximately 6 percent of the common stock, holders of the Company’s other unsecured notes and non-trade claims would receive their pro rata share of approximately 9 percent of the common stock, and trade creditors would receive cash in an amount equal to their pro rata share of $23.9 million. The First Amended Plan does not provide for any recovery to holders of the Company’s existing equity securities. A hearing to consider the First Amended Disclosure Statement is currently scheduled for May 12, 2010. However, the Company continues to have ongoing discussions with an ad hoc group of its pre-petition bondholders regarding alternative plans of reorganization that would be predicated on a backstopped rights offering for the equity of the reorganized company. The Company also has been contacted by groups of shareholders, that are seeking the appointment of an official committee of pre-petition equity holders and have also filed objections to certain of the Debtors’ motions before the Court as well as the First Amended Plan.

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

 

 

Chapter 11 Financing

 

The Debtors are currently funding post-petition operations under a temporary cash collateral order from the Court and a $150 million Senior Secured Super Priority Priming Debtor in Possession Credit and Guaranty Agreement (“DIP Credit Agreement”), under which the Company has borrowed $75 million and may borrow the remaining $75 million in one additional advance prior to maturity, subject to certain conditions. The Company’s non-debtor subsidiaries, primarily non-U.S. subsidiaries, have been excluded from the Chapter 11 Proceedings and are funding their operations through cash generated from operating activities supplemented by customer support agreements and local financing arrangements or through cash transfers from the Debtors subject to specific authorization from the Court.

 

There can be no assurance that cash on hand and other available funds will be sufficient to meet the Company’s reorganization or ongoing cash needs or that the Company will be successful in extending the duration of the temporary cash collateral order with the Court or that the Company will remain in compliance with all necessary terms and conditions of the DIP Credit Agreement or that the lending commitments under the DIP Credit Agreement will not be terminated by the lenders. Additionally, 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 currently outstanding security of the Company.

 

Customer Agreements

 

In connection with the Chapter 11 Proceedings, the Company has entered into various accommodation, support and other agreements with certain North American and European customers that provide for additional liquidity through cash surcharge payments, payments for research and engineering costs, accelerated payment terms, asset sales and other commercial arrangements.

 

Generally, in exchange for benefits under these agreements, the Company agreed to continue producing and delivering component parts to these customers during the term of the respective agreements. Additionally, under agreements with certain North America customers, the Company agreed to provide assistance in re-sourcing production to other suppliers; to build inventory banks, as necessary to support transition; to grant customers the option to purchase dedicated equipment and tooling owned by the Company; to grant a right of access to the Company’s facilities if the Company ceases production; to grant a security interest in certain operating assets that would be necessary for component part production; and, to provide limited release of certain commercial and other claims and causes of actions, subject to exceptions.

 

Revenue associated with payments from customers pursuant to these agreements is being recorded in relation to the delivery of associated products, assets and/or services in accordance with the terms of the underlying agreement, or over the estimated duration of the respective benefit to the customer, generally representing the average duration of remaining production on current vehicle platforms. The Company recorded $27 million of revenue associated with these settlement payments during the three months ended March 31, 2010, with $70 million deferred on the balance sheet at March 31, 2010.

 

Pursuant to support agreements with certain European customers, the Company 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.

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

 

 

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 statement of operations. Reorganization items included in the consolidated financial statements are as follows:

 

 

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 expected to 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 March 31, 2010 and December 31, 2009 are set forth below and represent the Company’s estimate of 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:

 

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

 

 

Substantially all of the Company’s pre-petition debt is in default, including $1.5 billion principal amount under the seven-year secured term loans due 2013; $862 million principal amount under various unsecured notes due 2010, 2014 and 2016; and $127 million of other secured and unsecured borrowings. Debt discounts of $8 million, deferred financing costs of $14 million and 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 consolidated statement of operations. Interest expense on a contractual basis would have been $53 million for the three months ended March 31, 2010.

 

Pre-petition Claims

 

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. As of March 31, 2010 approximately 3,300 proofs of claim totaling approximately $7.9 billion in claims against the Debtors have been filed in connection with the Chapter 11 Proceedings as follows:

 

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

 

 

 

 

The Debtors have not completed their evaluation of the approximately 1,950 claims remaining, totaling about $600 million, alleging rights to payment for financing, trade accounts payable and other matters. The Company continues to investigate these unresolved proofs of claim, and intends to file objections to the claims that are inconsistent with its books and records. Additional claims may be filed after the October 15, 2009 bar date, which could be allowed by the Court. Accordingly, the ultimate number and allowed amount of such claims are not presently known and cannot be reasonably estimated at this time. The resolution of such claims could result in a material adjustment to the Company’s financial statements. 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.

 

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-POSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

CONDENSED COMBINED DEBTORS-IN-POSSESSION
BALANCE SHEET

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSESSION)
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 from cash on hand, from cash generated from its ongoing operations, reimbursements pursuant to customer accommodation and support agreements, or through cash available under its existing debt agreements, subject to the terms of applicable covenants.

 

The following is a summary of the Company’s consolidated restructuring reserves and related activity as of and for the three months ended March 31, 2010.

 

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

 

 

2010 Restructuring Actions

 

During the first quarter of 2010, the Company recorded approximately $4 million in employee severance and termination benefits related to cost reduction actions taken to continue to streamline corporate administrative and support functions in connection with the Company’s restructuring efforts, impacting approximately 70 employees in the United States. Additionally, the Company recorded approximately $2 million in employee severance and termination benefit costs and $2 million in equipment relocation costs related to previously announced restructuring actions.

 

Utilization of $20 million includes $16 million of payments for severance and other employee termination benefits, $2 million of special termination benefits reclassified to pension and other postretirement employee benefit liabilities and $2 million related to equipment relocation costs.

 

2009 Restructuring Actions

 

During the first quarter of 2009, the Company recorded approximately $20 million in employee severance and termination benefit costs related to approximately 128 employees in the United States and 223 in other countries. These reductions were initiated in response to the continuation of recessionary economic conditions and related negative impact on the automotive sector and the Company’s results of operations and cash flows during the first quarter of 2009. The Company also recorded employee severance and termination benefit charges of $7 million under the previously announced multi-year improvement plan.

 

Asset Impairments and Loss on Divestitures

 

On March 8, 2010, the Company completed the sale of substantially all of the assets of Atlantic Automotive Components, L.L.C., (“Atlantic”), to JVIS Manufacturing LLC, an affiliate of Mayco International LLC. During 2009, Atlantic operated on a break-even basis on sales of approximately $35 million. The Company recorded losses of approximately $21 million in connection with the sale of Atlantic assets during the first quarter of 2010.

 

 

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:

 

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

 

 

Other current assets are summarized as follows:

 

 

Other non-current assets are summarized as follows:

 

 

 

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:

 

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

 

 

Depreciation and amortization expenses are summarized as follows:

 

 

 

The Company had $320 million and $294 million of equity in the net assets of non-consolidated affiliates at March 31, 2010 and December 31, 2009, respectively. The Company recorded equity in net income of non-consolidated affiliates of $30 million and $7 million for the three months ended March 31, 2010 and 2009, 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 100% of the operating results of the Company’s equity investees are provided below for the three-month periods ended March 31.

 

 

 

Other current liabilities are summarized as follows:

 

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

 

 

Other non-current liabilities are summarized as follows:

 

 

Current and non-current deferred income of $38 million and $32 million, respectively, relate to various customer accommodation, support and other agreements completed during 2009. Revenue associated with these agreements is being recorded in relation to the delivery of associated products, assets and/or services in accordance with the terms of the underlying agreement, or over the estimated duration of the respective benefit to the customer, generally representing the duration of remaining production on current vehicle platforms. The Company expects to record approximately $27 million, $19 million, $17 million, $6 million and $1 million of these deferred amounts in 2010, 2011, 2012, 2013 and 2014, respectively.

 

 

Pre-Petition Debt

 

As discussed in Note 4 “Voluntary Reorganization under Chapter 11 of the United States Bankruptcy Code,” due to the Chapter 11 Proceedings, substantially all of the Company’s pre-petition debt is in default and has been reclassified to “Liabilities subject to compromise” on the consolidated balance sheets at March 31, 2010 and December 31, 2009, including the following:

 

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

 

 

Current Capital Structure

 

As of March 31, 2010, the Company had $216 million and $10 million of debt outstanding classified as short-term debt and long-term debt, respectively. The Company’s short and long-term debt balances consist of the following:

 

 

Fair Value

 

The Company is unable to estimate the fair value of long-term debt of the Debtors that is subject to compromise at March 31, 2010 or December 31, 2009, due to the uncertainties associated with the Chapter 11 Proceedings. The fair value of the Company’s 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. Fair value of such debt was $227 million and $230 million as of March 31, 2010 and December 31, 2009, respectively.

 

 

In connection with a December 2009 ruling of the Court, the Company eliminated certain other postretirement employee benefits including Company-paid medical, prescription drug, dental and life insurance coverage, effective April 1, 2010, for current and future U.S. retirees, their spouses, surviving spouses, domestic partners and dependents, with the exception of participants covered by the current collective bargaining agreement (“CBA”) at the North Penn facility. This change resulted in a reduction in OPEB liabilities and an increase in Other comprehensive income of approximately $273 million establishing a new prior service cost base during the fourth quarter of 2009.

 

On February 18, 2010, the Court issued an order confirming the Debtors’ authority to enter into an agreement with the International Union United Automobile, Aerospace and Agricultural Implement Workers of America and its local union 1695, in connection with the closing of the Debtors’ North Penn facility located in Lansdale, Pennsylvania (the “Closure Agreement”). Pursuant to terms of the Closure Agreement, the North Penn CBA expired in February 2010 and the Company communicated its intent to eliminate Company-paid medical, prescription drug, dental and life insurance benefits for participants associated with the North Penn CBA effective June 1, 2010. This change resulted in a reduction in OPEB liabilities and an increase in Other comprehensive income of approximately $50 million establishing a new prior service cost base.

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

 

 

These reductions, in addition to reductions for prior plan amendments and actuarial gains and losses, are being amortized as a net decrease to future postretirement employee benefit expense over the remaining period of expected benefit. This amortization resulted in a decrease to postretirement employee benefit expense and Other comprehensive income of approximately $237 million during the three months ended March 31, 2010. Approximately $75 million will be amortized as a decrease to future postretirement employee benefit expense and Other comprehensive income during the three months ended June 30, 2010.

 

Benefit Expenses

 

The components of the Company’s net periodic benefit costs for the three months ended March 31, 2010 and 2009 are as follows:

 

 

Retirement Benefit Related Restructuring Expenses

 

In addition to retirement benefit expenses, the Company recorded $2 million and $11 million for the three months ended March 31, 2010 and 2009, respectively for retirement benefit related restructuring charges. Such charges generally relate to special termination benefits and voluntary termination incentives, resulting from various restructuring actions as described in Note 5 “Restructuring and Exit Activities.” Retirement benefit related restructuring charges are initially classified as restructuring expenses and are subsequently reclassified to retirement benefit expenses.

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

 

 

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.” The Company recorded curtailment gains of $10 million for the three months ended March 31, 2009 associated with the U.S. salaried pension and OPEB plans in connection with employee headcount reductions under previously announced restructuring actions. Additionally, the Company recorded pension curtailment losses of $6 million for the three months ended March 31, 2009 related to the reduction of future service in the UK pension plan in connection with employee headcount reductions in the UK.

 

Contributions

 

During the three-month period ended March 31, 2010, contributions to the Company’s U.S. OPEB plans were $7 million and contributions to non-U.S. retirement plans were $6 million. The Company anticipates additional contributions to its U.S. retirement plans and OPEB plans of $13 million and $10 million, respectively, during 2010. Of the $13 million for U.S. retirement plans, $12 million relates to liabilities subject to compromise and may not be paid in full. The Company also anticipates additional 2010 contributions to non-U.S. retirement plans of $12 million.

 

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 past restructuring actions 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 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 a letter of credit draw event under the PBGC Agreement and resulted in a draw by the PBGC for the full $15 million.

 

 

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 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 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.

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

 

 

The Company’s provision for income tax of $25 million for the three-month period ended March 31, 2010 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, and other non-recurring tax items.

 

Unrecognized Tax Benefits

 

The Company and its subsidiaries have operations in every major geographic region of the world and are subject to income taxes in the U.S. and numerous foreign jurisdictions. Accordingly, the Company files tax returns and is subject to examination by taxing authorities throughout the world, including such significant jurisdictions as Korea, India, Portugal, Spain, Czech Republic, Hungary, Mexico, China, Brazil, Germany and the United States. With few exceptions, the Company is no longer subject to U.S. federal tax examinations for years before 2006 or state and local, or non-U.S. income tax examinations for years before 2002.

 

The Company’s gross unrecognized tax benefits at March 31, 2010 were $186 million and the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate were approximately $72 million. The gross unrecognized tax benefits differ 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 will not impact the effective tax rate in current or future periods. The decrease in the total gross unrecognized tax benefit, including interest and penalties, during the quarter ending March 31, 2010 is primarily attributable to statute expirations in certain jurisdictions and favorable exchange impacts.

 

The Company’s continuing practice is to record interest and penalties related to uncertain tax positions as a component of income tax expense. As of March 31, 2010, the Company had $22 million accrued for interest and penalties, of which $3 million was a current period benefit.

 

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 both already taken and those expected to be taken in tax returns, primarily related to transfer pricing-related 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. However, the Company believes it is reasonably possible it will reduce the amount of its existing unrecognized tax benefits impacting the effective tax rate by $5 to $10 million due to the lapse of statute of limitations. 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.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSESSION)
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”).

 

 

Components of the Accumulated other comprehensive income (“AOCI”) category of Shareholders’ deficit are as follows:

 

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

 

 

Basic earnings per share of common stock is calculated by dividing reported net income by the average number of shares of common stock outstanding during the applicable period, adjusted for restricted stock. In addition to restricted stock, the calculation of diluted earnings per share takes into account the effect of dilutive potential common stock, such as stock warrants and stock options.

 

 

Stock options and stock warrants with exercise prices that exceed the average market price of the Company’s common stock have an anti-dilutive effect and therefore were excluded from the computation of diluted earnings per share. The number of stock options excluded from the computation of diluted earnings per share was 10 million for the three months ended March 31, 2010 and 12 million for the three-month period ended March 31, 2009. The number of stock warrants excluded from the computation of diluted earnings per share was 25 million for the three months ended March 31, 2010 and 2009.

 

 

Fair Value Hierarchy

 

Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. 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.

 

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

 

 

 

Financial Instruments

 

The Company is exposed to various market risks including, but not limited to, changes in foreign currency exchange rates. In part, the Company manages these risks through the use of derivative financial instruments. The Company’s use of derivative financial instruments is limited to hedging activities and such instruments are not used for speculative or trading purposes. The use of derivative financial instruments creates exposure to credit loss in the event of nonperformance by the counterparty to the derivative financial instruments. The Company limits this exposure by entering into agreements directly with a variety of major financial institutions with high credit standards that are expected to fully satisfy their obligations under the contracts. Additionally, the Company’s ability to utilize derivatives to manage risks is dependent on credit and market conditions.

 

Foreign Currency Exchange Rate 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. Where possible, 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 monthly and any natural offsets are considered prior to entering into a derivative financial instrument. The Company’s primary foreign currency exposures include the Euro, Korean Won, Czech Koruna, Hungarian Forint and Mexican Peso. Where possible, the Company utilizes a strategy of partial coverage for transactions in these currencies.

 

As of March 31, 2010 and December 31, 2009, the Company had forward contracts to hedge changes in foreign currency exchange rates with notional amounts of approximately $292 million and $289 million, respectively. Estimates of the fair values of these contracts are based on quoted market prices. The maximum length of time over which the Company hedges the variability in future cash flows for forecasted transactions is up to one year from the date of the forecasted transaction.

 

The Company’s foreign currency instruments are classified as Level 2, “Other Observable Inputs” in the fair value hierarchy and are measured at fair value on a recurring basis and represent an asset of $11 million at March 31, 2010. These financial instruments 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, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

 

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 as hedging instruments are included in the Company’s consolidated balance sheets at March 31, 2010 and December 31, 2009 as follows:

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

 

 

The impact of derivative financial instruments on the Company’s financial statements, as recorded in “Cost of sales,” for the three months ended March 31, 2010 and 2009 is as follows:

 

 

Concentrations of Credit Risk

 

Financial instruments, including cash equivalents, marketable securities, derivative contracts and accounts receivable, expose the Company to counterparty credit risk for non-performance. The Company’s counterparties for cash equivalents, marketable securities 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 counterparty, and through monitoring counterparty credit risks. The Company’s concentration of credit risk related to derivative contracts at March 31, 2010 was not significant.

 

With the exception of the customers below, the Company’s credit risk with any individual customer does not exceed ten percent of total accounts receivable at March 31, 2010 and December 31, 2009, respectively.

 

 

Management periodically performs credit evaluations of its customers and generally does not require collateral.

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

 

 

 

 

Guarantees

 

The Company has guaranteed approximately $30 million for lease payments related to its subsidiaries. In connection with the January 2009 PBGC Agreement, the Company agreed to provide a guarantee by certain affiliates of certain contingent pension obligations of up to $30 million.

 

Litigation and Claims

 

On May 28, 2009, the Debtors filed voluntary petitions in the Court seeking reorganization relief under the provisions of chapter 11 of the Bankruptcy Code. The Debtors’ chapter 11 cases have been assigned to the Honorable Christopher S. Sontchi and are being jointly administered as Case No. 09-11786. The Debtors continue to operate their business as debtors-in-possession under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court. Refer to Note 4, “Voluntary Reorganization under Chapter 11 of the United States Bankruptcy Code,” for details on the chapter 11 cases.

 

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.

 

Under section 365 of the Bankruptcy Code, the Debtors may assume, assume and assign or reject certain executory contracts and unexpired leases, subject to the approval of the Court and certain other conditions. In general, if the Debtors reject an executory contract or unexpired lease, it is treated as a pre-petition breach of the lease or contract in question and, subject to certain exceptions, relieves the Debtors of performing any future obligations. However, such a rejection entitles the lessor or contract counterparty to a pre-petition general unsecured claim for damages caused by such deemed breach and accordingly, the counterparty may file a claim against the Debtors for such damages. In addition, the Debtor’s plan of reorganization will determine the rights and satisfaction of claims of various creditors and security holders, 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. At this time, it is not possible to predict with certainty the effect of the Chapter 11 Proceedings on the Company’s business.

 

On March 31, 2009, Visteon UK Limited, a company organized under the laws of England and Wales and an indirect, wholly-owned subsidiary of the Company, filed for administration under the United Kingdom Insolvency Act of 1986 with the High Court of Justice, Chancery division in London, England. The UK Administration does not include the Company or any of the Company’s other subsidiaries. The UK Administration is discussed in Note 1, “Description of the Business and Basis of Presentation.”

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

 

 

In June of 2009, the UK Pensions Regulator advised the Administrators of the UK Debtor that it was investigating whether there were grounds for regulatory intervention under various provisions of the UK Pensions Act 2004 in relation to an alleged funding deficiency in respect of the UK Debtor pension plan. That investigation is ongoing and the Debtors have been cooperating with the UK Pensions Regulator. In October of 2009, the trustee of the UK Debtor pension plan filed proofs of claim against each of the Debtors asserting contingent and unliquidated claims pursuant to the UK Pensions Act 2004 and the UK Pensions Act 1995 for liabilities related to a funding deficiency of the UK Debtor pension plan of approximately $555 million as of March 31, 2009. The trustee of the Visteon Engineering Services Limited (“VES”) pension plan also submitted proofs of claim against each of the Debtors asserting contingent and unliquidated claims pursuant to the UK Pensions Act 2004 and the UK Pensions Act 1995 for liabilities related to an alleged funding deficiency of the VES pension plan of approximately $118 million as of March 31, 2009.

 

The Debtors dispute that any basis exists for the UK Pensions Regulator to seek contribution or financial support from any of the affiliated entities outside the UK with respect to their claims, and the Debtors believe that these claims will not ultimately be allowed. On April 9, 2010, the Debtors filed an objection to the UK Debtor Pension Trustees Limited’s proofs of claim filed against the Debtors, and a hearing on the objection is currently scheduled for May 12, 2010. If the UK Pensions Regulator were to issue a financial support direction or contribution notice against any of the Debtors with respect to the UK Debtor pension plan and/or the VES pension plan, the Debtors may be required to satisfy such claims. The claims asserted on account of the UK Debtor pension plan and VES pension plan are pre-petition general unsecured claims that, if allowed, would substantially dilute creditor recoveries under a confirmed plan of reorganization.

 

Several current and former employees of Visteon Deutschland GmbH (“Visteon Germany”) filed civil actions against Visteon Germany in various German courts beginning in August 2007 seeking damages for the alleged violation of German pension laws that prohibit the use of pension benefit formulas that differ for salaried and hourly employees without adequate justification. Several of these actions have been joined as pilot cases. In a written decision issued in April 2010, the Federal Labor Court issued a declaratory judgment in favor of the plaintiffs in the pilot cases. To date, more than 200 current and former employees have filed similar actions, and an additional 1,100 current and former employees are similarly situated. The Company has reserved approximately $20 million relating to these claims based on the Company’s best estimate as to the number and value of the claims that will be made in connection with the pension plan. However, the Company’s estimate is subject to many uncertainties which could result in Visteon Germany incurring amounts in excess of the reserved amount of up to approximately $10 million.

 

In December of 2009, the Court granted the Debtors’ motion in part authorizing them to terminate or amend certain post-employment benefits, including health care and life insurance. On December 29, 2009, the IUE-CWA, the Industrial Division of the Communications Workers of America, AFL-CIO, CLC, filed a notice of appeal of the Court’s order with the United States District Court for the District of Delaware. On March 30, 2010, the district court affirmed the Court’s order in all respects. On April 1, 2010, the IUE filed a notice of appeal, and subsequently a motion for expedited treatment of the appeal and for a stay pending appeal, with United States Court of Appeals for the Third Circuit. On April 13, 2010, the circuit court granted the motion to expedite and denied the motion for stay pending appeal. The Debtors are vigorously defending their decision to terminate certain post-employment benefits, including health care and life insurance, however, no assurance can be given that they will be successful.

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

 

 

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 product warranty and recall liability for the three months ended March 31, 2010 and 2009:

 

 

Environmental Matters

 

The Company is subject to the requirements of federal, state, local and foreign environmental and occupational safety and health laws and regulations. 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 and relating to various third-party superfund sites at which the Company or its predecessor has been named as a potentially responsible party. The Company is in various stages of investigation and cleanup at these sites and at March 31, 2010, had recorded an accrual of approximately $1 million for this environmental investigation and cleanup. 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. Although the Company believes its accrual is adequate based on current information, the Company cannot provide assurance that the eventual environmental investigation, cleanup costs and related liabilities will not exceed the amount of its current accrual.

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

 

 

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.

 

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, 2010 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.

 

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.

 

 

Segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision-maker, or a decision-making group, in deciding the allocation of resources and in assessing performance. The Company’s chief operating decision making group, comprised of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluates the performance of the Company’s segments primarily based on net sales, before elimination of inter-company shipments, gross margin and operating assets. Gross margin is defined as total sales less costs to manufacture and product development and engineering expenses. Operating assets include inventories and property and equipment utilized in the manufacture of the segments’ products.

 

The Company’s operating structure is organized by global product groups, including: Climate, Electronics and Interiors. These global product groups have financial and operating responsibility over the design, development and manufacture of the Company’s product portfolio. Within each of the global product groups, certain facilities manufacture a broader range of the Company’s total product line offering and are not limited to the primary product line. Global customer groups are responsible for the business development of the Company’s product portfolio and overall customer relationships. Certain functions such as procurement, information technology and other administrative activities are managed on a global basis with regional deployment. In addition to these global product groups, the Company also operates Visteon Services, a centralized administrative function to monitor and facilitate transactions primarily with ACH for the costs of leased employees and other services provided by the Company.

 

Overview of Segments

 

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

 

 

 

 

Segment Net Sales, Gross Margin and Operating Assets