Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
________________
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016,
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 001-15827
VISTEON CORPORATION
(Exact name of registrant as specified in its charter)
State of Delaware
38-3519512
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One Village Center Drive, Van Buren Township, Michigan
48111
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (800)-VISTEON
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No__
Indicate by check mark whether the registrant: has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No __
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ü  Accelerated filer  __   Non-accelerated filer __   Smaller reporting company  __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No ü
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ü No__
As of October 20, 2016, the registrant had outstanding 34,012,831 shares of common stock.
Exhibit index located on page number 59.


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Visteon Corporation and Subsidiaries
Index

Part I - Financial Information
Page
 
Item 1 - Consolidated Financial Statements
 
Consolidated Statements of Comprehensive Income (Unaudited)
 
Consolidated Balance Sheets (Unaudited)
 
Consolidated Statements of Cash Flows (Unaudited)
 
Notes to Consolidated Financial Statements (Unaudited)
 
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
 
Item 4 - Controls and Procedures
Part II - Other Information
 
Item 1 - Legal Proceedings
 
Item 1A - Risk Factors
 
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 6 - Exhibits
Signatures
Exhibit Index

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Part I
Financial Information

Item 1.
Consolidated Financial Statements
 
VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2016
 
2015
 
2016
 
2015
Sales
$
770

 
$
808

 
$
2,345

 
$
2,436

Cost of sales
665

 
703

 
2,010

 
2,120

Gross margin
105

 
105

 
335

 
316

Selling, general and administrative expenses
53

 
59

 
163

 
182

Restructuring expense
5

 
3

 
22

 
18

Interest expense
6

 
3

 
14

 
15

Interest income
1

 
1

 
4

 
2

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

 
(3
)
 
3

 
8

Loss on debt extinguishment

 

 

 
5

Gain on sale of non-consolidated affiliates, net
1

 

 
1

 
62

Other expense, net
13

 
7

 
17

 
15

Income before income taxes
30

 
31

 
127

 
153

Provision for income taxes
5

 
10

 
27

 
43

Net income from continuing operations
25

 
21

 
100

 
110

Income (loss) from discontinued operations, net of tax
7

 
(11
)
 
(15
)
 
2,194

Net income
32

 
10

 
85

 
2,304

Net income attributable to non-controlling interests
4

 
5

 
12

 
41

Net income attributable to Visteon Corporation
$
28

 
$
5

 
$
73

 
$
2,263

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
    Continuing operations
$
0.62

 
$
0.39

 
$
2.47

 
$
2.17

    Discontinued operations
0.21

 
(0.27
)
 
(0.42
)
 
50.58

    Basic earnings per share attributable to Visteon Corporation
$
0.83

 
$
0.12

 
$
2.05

 
$
52.75

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
    Continuing operations
$
0.61

 
$
0.38

 
$
2.44

 
$
2.12

    Discontinued operations
0.20

 
(0.26
)
 
(0.41
)
 
49.43

    Diluted earnings per share attributable to Visteon Corporation
$
0.81

 
$
0.12

 
$
2.03

 
$
51.55

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Comprehensive income (loss)
$
35

 
$
(18
)
 
$
106

 
$
2,305

Comprehensive income (loss) attributable to Visteon Corporation
$
31

 
$
(19
)
 
$
96

 
$
2,277


See accompanying notes to the consolidated financial statements.

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VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
 
(Unaudited)
 
 
 
September 30
 
December 31
 
2016
 
2015
ASSETS
Cash and equivalents
$
850

 
$
2,728

Short-term investments

 
47

Restricted cash
4

 
8

Accounts receivable, net
497

 
502

Inventories, net
176

 
187

Other current assets
200

 
581

Total current assets
1,727

 
4,053

 
 
 
 
Property and equipment, net
342

 
351

Intangible assets, net
137

 
133

Investments in non-consolidated affiliates
47

 
56

Other non-current assets
120

 
88

Total assets
$
2,373

 
$
4,681

 
 
 
 
LIABILITIES AND EQUITY
Distribution payable
$
15

 
$
1,751

Short-term debt, including current portion of long-term debt
24

 
37

Accounts payable
429

 
482

Accrued employee liabilities
108

 
132

Other current liabilities
293

 
370

Total current liabilities
869

 
2,772

 
 
 
 
Long-term debt
347

 
346

Employee benefits
256

 
268

Deferred tax liabilities
25

 
21

Other non-current liabilities
82

 
75

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock (par value $0.01, 50 million shares authorized, none outstanding at September 30, 2016 and December 31, 2015)

 

Common stock (par value $0.01, 250 million shares authorized, 55 million and 55 million shares issued, and 34 million and 40 million shares outstanding at September 30, 2016 and December 31, 2015, respectively)
1

 
1

Additional paid-in capital
1,246

 
1,345

Retained earnings
1,267

 
1,194

Accumulated other comprehensive loss
(167
)
 
(190
)
Treasury stock
(1,699
)
 
(1,293
)
Total Visteon Corporation stockholders’ equity
648

 
1,057

Non-controlling interests
146

 
142

Total equity
794

 
1,199

Total liabilities and equity
$
2,373

 
$
4,681


See accompanying notes to the consolidated financial statements.

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VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS1 
(Dollars in Millions)
(Unaudited)
 
Nine Months Ended
September 30
 
2016
 
2015
Operating Activities
 
 
 
Net income
$
85

 
$
2,304

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Depreciation and amortization
62

 
147

Equity in net income of non-consolidated affiliates, net of dividends remitted
(2
)
 

Non-cash stock-based compensation
6

 
7

Loss (gain) on Climate Transaction
2

 
(2,332
)
Gain on sale of non-consolidated affiliates, net
(1
)
 
(62
)
Losses on divestitures and impairments
4

 
17

Loss on debt extinguishment

 
5

Other non-cash items
15

 
4

Changes in assets and liabilities:
 
 
 
Accounts receivable
15

 
(7
)
Inventories
15

 
(29
)
Accounts payable
(45
)
 
48

Accrued income taxes
(39
)
 
135

Other assets and other liabilities
(79
)
 
37

Net cash provided from operating activities
38

 
274

Investing Activities
 
 
 
Capital expenditures
(56
)
 
(151
)
Climate Transaction withholding tax refund
356

 

Proceeds from Climate Transaction

 
2,664

Short-term investments
47

 
(52
)
Loans to non-consolidated affiliates, net of repayments
(8
)
 
(9
)
Proceeds from asset sales and business divestitures
15

 
92

Payments for acquisition and divestiture of businesses
(15
)
 
(19
)
Other

 
6

Net cash provided from investing activities
339

 
2,531

Financing Activities
 
 
 
Short-term debt, net
(11
)
 
(1
)
Principal payments on debt
(2
)
 
(250
)
Distribution payments
(1,736
)
 

Repurchase of common stock
(500
)
 
(500
)
Dividends paid to non-controlling interests

 
(31
)
Exercised warrants and stock options

 
24

Stock based compensation tax withholding payments
(11
)
 

Other

 
(1
)
Net cash used by financing activities
(2,260
)
 
(759
)
Effect of exchange rate changes on cash and equivalents
6

 
(13
)
Net (decrease) increase in cash and equivalents
(1,877
)
 
2,033

Cash and equivalents at beginning of the period
2,729

 
827

Cash and equivalents at end of the period
$
852

 
$
2,860

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

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VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Description of Business

Visteon Corporation (the "Company" or "Visteon") is a global automotive supplier that designs, engineers and manufactures innovative electronics products for nearly every original equipment vehicle manufacturer ("OEM") worldwide including Ford, Nissan, Renault, Mazda, BMW, General Motors and Honda. Visteon is headquartered in Van Buren Township, Michigan and has an international network of manufacturing operations, technical centers and joint venture operations, supported by approximately 10,000 employees, dedicated to the design, development, manufacture and support of its product offerings and its global customers. The Company's manufacturing and engineering footprint is principally located outside of the U.S., with a heavy concentration in low-cost geographic regions. Visteon delivers value for its customers and stockholders through its technology-focused core vehicle cockpit electronics business. The Company's cockpit electronics product portfolio includes audio systems, information displays, instrument clusters, head up displays, infotainment systems, and telematics solutions. The Company's vehicle cockpit electronics business is comprised of and reported under the Electronics segment. In addition to the Electronics segment, the Company has residual operations in South America and Europe previously associated with the former Interiors and Climate businesses, not subject to discontinued operations classification, that comprise Other. A summary of transactions impacting the Company's businesses is provided below.

Exit of Climate Business

On June 9, 2015, Visteon Corporation and its wholly owned subsidiary, VIHI, LLC (collectively, “Visteon”) completed the sale to Hahn & Co. Auto Holdings Co., Ltd. and Hankook Tire Co., Ltd. (together, the “Purchasers”) of all of its shares of Halla Visteon Climate Control Corporation, a Korean corporation (“HVCC”), for approximately $3.4 billion, or KRW 52,000 per share, after adjusting for the 2014 dividend paid by HVCC to Visteon (the “Climate Transaction”), pursuant to and in accordance with the Share Purchase Agreement, dated as of December 17, 2014, among Visteon and the Purchasers. See Note 4 "Discontinued Operations" for additional disclosures. The Company received net cash proceeds of approximately $2.7 billion and recognized a pretax gain of approximately $2.3 billion in connection with the closing of the Climate Transaction in the second quarter 2015. The results of operations for the Climate business have been classified as income (loss) from discontinued operations, net of tax in the consolidated statements of comprehensive income for the three and nine month periods ended September 30, 2015.

On July 18, 2016, the Company reached an agreement to sell its South Africa climate operations, with 2015 annual sales of $9 million as reported in Other in the Company’s segment footnote.  The sale is expected to close during 2016 for proceeds of approximately $2 million.  Assets and liabilities associated with these operations met the "held for sale" criteria at September 30, 2016 and are classified as "Other current assets" or "Other current liabilities" in the consolidated balance sheets. The Company recorded a charge during the third quarter of 2016 associated with this agreement of approximately $11 million related to foreign currency translation amounts recorded in accumulated other comprehensive loss. 

Exit of Interiors Business

During 2014, the Company divested the majority of its global Interiors business (the "Interiors Divestiture"). Subsequently, Visteon completed the sale of its Interiors operations in Thailand on February 2, 2015. Remaining operations subject to the Interiors Divestiture are located in Argentina and Brazil and are expected to close during 2016. Assets and liabilities associated with these operations continue to meet the "held for sale" criteria at September 30, 2016 and are classified as "Other current assets" or "Other current liabilities" in the consolidated balance sheets. The Company expects to record losses in connection with the Argentina and Brazil portions of the Interiors Divestiture in future periods upon closing, which are estimated to be approximately $20 million.
See Note 4 "Discontinued Operations" for additional disclosures.

On December 1, 2015, Visteon completed the sale and transfer of its equity ownership in Visteon Deutschland GmbH, which operated the Berlin, Germany interiors plant ("Germany Interiors Divestiture"). The Company contributed cash, of approximately $141 million, assets of $27 million, and liabilities of $198 million including pension related liabilities. The Company will make a final contribution payment of approximately $33 million in the fourth quarter of 2016 which is included in the Company's consolidated balance sheet as "Other current liabilities" as of September 30, 2016.

NOTE 2. Summary of Significant Accounting Policies

The unaudited consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These interim consolidated financial statements include all adjustments

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(consisting of normal recurring adjustments, except as otherwise disclosed) that management believes are necessary for a fair presentation of the results of operations, financial position and cash flows of the Company for the interim periods presented. Interim results are not necessarily indicative of full-year results.

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

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

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

At September 30, 2016, the Company’s investment in YFVIC is $24 million. In addition, at September 30, 2016, the Company has receivables due from YFVIC, including trade receivables and other advances of $25 million, subordinated loans receivable of $22 million and payables due to YFVIC of $15 million. At December 31, 2015, the Company’s investment in YFVIC was $23 million and it had receivables due from YFVIC, including trade receivables and other advances of $36 million, a subordinated loan receivable of $10 million and payables due to YFVIC of $17 million. At September 30, 2016, the Company’s maximum exposure to loss in YFVIC is $94 million, which includes assets described above and a $23 million loan guarantee. During the nine months ended September 30, 2016, Visteon loaned YFVIC and affiliates approximately $12 million, expected to be repaid within five years.

During the third quarter of 2016, the Company agreed to sell its 50% interest in an equity investment for approximately $7 million. The Company has recorded a loss in the investment of $5 million during the three and nine months ended September 30, 2016 related to this transaction, classified as "Gain on sale of non-consolidated affiliates, net" in the Company's consolidated statements of comprehensive income.

On July 22, 2016, the Company sold a cost method investment to a third party for proceeds of approximately $11 million. The Company recorded a pre-tax gain of $6 million during the three and nine months ended September 30, 2016, classified as "Gain on sale of non-consolidated affiliates, net" in the Company's consolidated statements of comprehensive income.

In June 2015, the Company completed the sale of its 12.5% ownership interest in Yangfeng Visteon Jinqiao Automotive Trim Systems Co., Ltd. ("Jinqiao"), a Chinese automotive supplier for proceeds of approximately $91 million and recorded a pre-tax gain of $62 million during the nine months ended September 30, 2015, classified as "Gain on sale of non-consolidated affiliates, net" in the Company's consolidated statements of comprehensive income.

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

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











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Other Expense, Net: Other expense, net includes the following:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Millions)
Foreign currency translation charge
$
11

 
$

 
$
11

 
$

Loss on asset contribution
2

 

 
2

 

Transformation initiatives

 
5

 
3

 
23

Transaction hedging and exchange losses (gains)

 

 
1

 
(19
)
Integration costs

 
2

 
1

 
11

Recoverable taxes

 

 
(1
)
 

 
$
13

 
$
7

 
$
17

 
$
15


During the three and nine months ended September 30, 2016, the Company recorded a charge of approximately $11 million related to foreign currency translation amounts recorded in accumulated other comprehensive loss associated with the agreement to sell the Company's South Africa climate operations. In connection with the closure of the Climate facility in Argentina, the Company entered an agreement to contribute land and building with a net book value of $2 million to the local municipality.

Transformation initiatives include information technology separation costs and financial and advisory services incurred in connection with the execution of the Company's comprehensive value creation plan and certain severance costs associated with the acquisition of substantially of the global automotive electronics business of Johnson Controls Inc. (the "Electronics Acquisition") and the Climate Transaction. Transaction hedging and exchange gains for the nine months ended September 30, 2015 of $19 million, relate to Climate Transaction proceeds hedging and exchange impacts.

Cash and Equivalents: The Company considers all highly liquid investments purchased with a maturity of three months or less, including short-term time deposits, commercial paper, repurchase agreements and money market funds to be cash equivalents. As of September 30, 2016 the Company's cash balances are invested in a diversified portfolio of cash and cash equivalents including money market funds, commercial paper rated A2/P2 and above with maturity under three months, time deposits and other short-term cash investments, which mature under three months with highly rated banking institutions. The cost of such funds approximates fair value based on the nature of the investment.

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

Restricted Cash: Restricted cash represents amounts designated for uses other than current operations and includes $3 million related to the Letter of Credit Facility, and $1 million related to cash collateral for other corporate purposes at September 30, 2016.

Investments in Affiliates: The Company recorded equity in net income of affiliates of less than $1 million and $3 million for the three month periods ended September 30, 2016 and 2015 respectively. For the nine month periods ended September 30, 2016 and 2015, the Company recorded $3 million and $8 million, respectively. Investments in affiliates were $47 million and $56 million at September 30, 2016 and December 31, 2015, respectively. At September 30, 2016 and December 31, 2015, investments in affiliates accounted for under the equity method totaled $42 million and $45 million, respectively, while investments in affiliates accounted for under the cost method were $5 million at September 30, 2016 and $11 million at December 31, 2015. The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis. If the Company determines that such a decline has occurred, an impairment loss is recorded, which is measured as the difference between carrying value and fair value.

Product Warranty and Recall: Amounts accrued for product warranty and recall claims are based on management’s best estimates of the amounts that will ultimately be required to settle such items. The Company’s estimates for product warranty and recall obligations are developed with support from its sales, engineering, quality and legal functions and include due consideration of contractual arrangements, past experience, current claims and related information, production changes, industry and regulatory developments and various other considerations. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued or beyond what the Company may recover from its suppliers. During the nine months ended September 30, 2016, the Company recorded $7 million

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for specific cause actions representing customer actions related to defective supplier parts and related software. Additional amounts of $6 million for such customer actions are expected to be recovered from contractually responsible parties, and are therefore, included in the Company's consolidated balance sheets as "Accounts receivable, net" and "Other current liabilities" without an impact to the Company's consolidated statements of comprehensive income. The following table provides a reconciliation of changes in the product warranty and recall claims liability:
 
Nine Months Ended September 30
 
2016
 
2015
 
(Dollars in Millions)
Beginning balance
$
38

 
$
20

Accruals for products shipped
12

 
11

Changes in estimates
4

 
(1
)
Specific cause actions
7

 
9

Recoverable warranty/recalls
6

 
5

Foreign currency
1

 
(3
)
Settlements
(13
)
 
(12
)
Ending balance
$
55

 
$
29


Recently Issued Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-9, "Revenue from Contracts with Customers", which is the new comprehensive revenue recognition standard that will supersede existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. This ASU allows for both retrospective and prospective methods of adoption. In July 2015, the FASB approved a one-year deferral of the effective date of the standard. As such, the new standard will become effective for annual and interim periods beginning after December 15, 2017 with early adoption on the original effective date permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements and anticipates changes to the revenue recognition of customer owned tooling and engineering recoveries. The Company expects to adopt this standard during the first quarter 2018.

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

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

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718)": Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, these amendments are not expected to significantly impact net income, earnings per share, and the statement of cash flows. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)": Classification of certain cash receipts and cash payments. The ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU will be applied using a retrospective

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transition method to each period presented. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

NOTE 3. Business Acquisition

On July 8, 2016 Visteon acquired AllGo Embedded Systems Private Limited, a leading developer of embedded multimedia system solutions to global vehicle manufacturers, for a purchase price of $17 million ("AllGo Purchase") including $2 million of contingent consideration to be paid over the next year if certain technology milestones are achieved. In addition, the purchase agreement includes contingent payments of $5 million if key employees remain employed through July 2019. The AllGo Purchase is expected to add greater scale and depth to the Company's infotainment software capabilities. The operating results for the business acquired have been included in the Electronics segment from the date of acquisition. During the nine months ended September 30, 2016, the Company incurred acquisition-related costs of approximately $1 million. These amounts were recorded as incurred and have been classified as "Other expenses,net" within the Company's consolidated statements of comprehensive income.

The AllGo purchase was accounted for as a business combination, with the purchase price allocated on a preliminary basis as of July 2016. The preliminary purchase price allocation, which is subject to change and may be subsequently adjusted to reflect final valuation results, is shown below:
 
 
(Dollars in Millions)

 
 
 
Purchase price
 
$
17

 
 
 
Assets Acquired:
 
 
Accounts receivable
 
$
1

Intangible assets
 
7

Goodwill
 
12

        Total assets acquired
 
$
20

 
 
 
Liabilities Assumed:
 
 
Deferred tax liabilities
 
3

        Total liabilities assumed
 
$
3


Assets acquired and liabilities assumed were recorded at estimated fair values based on management's estimates, available information, and reasonable and supportable assumptions. Additionally, the Company utilized a third-party to assist with certain estimates of fair values.

Fair values for intangible assets were based on the income approach including excess earnings and relief from royalty methods. These fair value measurements are classified within level 3 of the fair value hierarchy. The preliminary purchase price allocations may be subsequently adjusted to reflect final valuation results.

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

NOTE 4. Discontinued Operations

The operations subject to the Interiors Divestiture and Climate Transaction met conditions required to qualify for discontinued operations reporting. Accordingly, the results of operations for Interiors operations subject to the Interiors Divestiture have been reclassified to income (loss) from discontinued operations, net of tax in the consolidated statements of comprehensive income for the three and nine month periods ended September 30, 2016 and 2015. The nine month period ended September 30, 2015 also included the results of operations for the Climate transaction, sold during the second quarter of 2015.


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Discontinued operations are summarized as follows:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Millions)
Sales
$
14

 
$
16

 
$
34

 
$
2,184

Cost of sales
20

 
21

 
48

 
2,021

Gross margin
(6
)
 
(5
)
 
(14
)
 
163

Selling, general and administrative expenses
2

 
1

 
4

 
76

Loss (gain) on Climate Transaction

 

 
2

 
(2,332
)
Loss and impairment on Interiors Divestiture

 
1

 
2

 
17

Restructuring expense

 

 

 
2

Interest expense, net

 

 

 
2

Equity in net income of non-consolidated affiliates

 

 

 
6

Other expense, net
1

 
3

 
2

 
8

(Loss) income from discontinued operations before income taxes
(9
)
 
(10
)
 
(24
)
 
2,396

(Benefit) provision for income taxes
(16
)
 
1

 
(9
)
 
202

Income (loss) from discontinued operations, net of tax
7

 
(11
)
 
(15
)
 
2,194

Net income attributable to non-controlling interests

 

 

 
24

Net income (loss) from discontinued operations attributable to Visteon
$
7

 
$
(11
)
 
$
(15
)
 
$
2,170


During the nine months ended September 30, 2016, the Company recorded $8 million of income tax expense associated with adverse currency impacts in connection with the Korean capital gains withholding tax recovered during the first quarter of 2016.  During the third quarter of 2016, the Company recorded a $17 million income tax benefit to reflect change in estimates associated with the filing of the Company’s U.S. tax returns that resulted in a reduction in U.S. income tax related to the 2015 Climate Transaction. 

During the nine month periods ended September 30, 2015, the Company received $3.4 billion of gross proceeds and recorded a $2.3 billion in pre-tax gain associated with the Climate Transaction. The gain is summarized below (dollars in millions):
 
 
 
Gross proceeds
(1)
$
3,423

   Korea withholding tax
(2)
(377
)
   Professional fees
(3)
(20
)
   Korea security transaction tax
(4)
(17
)
   Divested cash balances
(5)
(345
)
Net cash provided from investing activities
 
2,664

Net assets divested, excluding cash balances
(5)
(557
)
Information technology separation and service obligations
(6)
(53
)
Employee related charges
(7)
(45
)
Electronics business repurchase obligation
(8)
(50
)
Professional fees
(3)
(4
)
Korea withholding tax recoverable
(2)
377

  Net gain on Climate Transaction
 
$
2,332


(1) Gross proceeds of $3,423 million were received in connection with the Climate Transaction, translated at a spot rate of 1121.5 KRW to USD on June 9, 2015. Impacts of related hedging activities and exchange on proceeds conversion into USD are included in the Company's consolidated statements of comprehensive income as "Other expense, net" for the three and nine month periods ended September 30, 2015.

(2) In connection with the transaction, the Company recorded a tax recoverable of $377 million for Korean capital gains tax withheld by the Purchasers and paid to the Korean government.  This amount reduced proceeds classified as net cash provided from investing activities within the Company's consolidated statements of cash flows for the nine months ended September

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30, 2015. In January 2016, the Company recovered the entire amount of the Korean capital gains withholding tax, adjusted for currency and exchange impacts, of $356 million.

(3) Professional fees of $24 million, representing fees paid to financial advisors, were based on a percentage of the gross proceeds, partially offset by previously paid retainer fees of $4 million, for a net payment of $20 million reducing proceeds classified as net cash provided from investing activities within the Company's consolidated statements of cash flows for the nine months ended September 30, 2015.

(4) Security transaction taxes of $17 million were remitted to the Korean government as of the transaction close, reducing proceeds classified as net cash provided from investing activities within the Company's consolidated statements of cash flows for the nine months ended September 30, 2015.

(5) Net assets of $902 million, including assets, liabilities, accumulated other comprehensive income and non-controlling interests, were divested in connection with the Climate Transaction. Divested assets included $345 million of cash balances, reflected as a reduction of transaction proceeds classified as net cash provided from investing activities within the Company's consolidated statements of cash flows for the nine months ended September 30, 2015.

(6) In connection with the Climate Transaction, the Company has entered an agreement pursuant to which Visteon will provide information technology ongoing and separation services for HVCC to fully operate as an independent entity with estimated costs of approximately $53 million. The information technology liability is included in the Company's consolidated balance sheets as "Other current liabilities" as of September 30, 2016 and December 31, 2015.

(7) Employee related charges of $45 million include bonus payments, the Company's assumption of incentive plan liabilities, and impacts of employment change in control provisions. Bonus payments of $30 million are classified in the Company's net cash provided from operating activities within the Company's consolidated statements of cash flows for the nine months ended September 30, 2015. Amounts remaining to be paid are included in the Company's consolidated balance sheets as "Accrued employee liabilities" as of September 30, 2016 and December 31, 2015.

(8) In connection with the Climate Transaction, the Company has entered an agreement to purchase certain electronics operations located in India, expected to close in 2016. The Company has recorded a repurchase obligation of $50 million, representing the estimated purchase price of the subject business. The Company continues to consolidate the business, with net assets of approximately $22 million as of September 30, 2016, based on the Company’s continued controlling financial interest.  The Company’s controlling financial interest was evaluated based on continued operating control and obligation to fund losses or benefit from earnings.  The business is included in a legal entity currently owned by HVCC and therefore the Electronics business assets are not available for general corporate purposes.  The repurchase obligation is included in the Company’s consolidated balance sheets as “Other current liabilities” as of September 30, 2016 and December 31, 2015.























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Table of Contents

As of September 30, 2016 and December 31, 2015, held for sale balances include assets and liabilities associated with operations subject to the Interiors Divestiture located in Argentina and Brazil and climate operations pending sale in South Africa.

Held for sale balances, classified as "Other current assets" and "Other current liabilities" on the consolidated balance sheets are summarized as follows:
 
September 30
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
ASSETS HELD FOR SALE
Cash and equivalents
$
2

 
$
1

Accounts receivable, net
13

 
9

Inventories, net
6

 
4

Other current assets
2

 
3

Total current assets held for sale
23

 
17

 
 
 
 
Total assets held for sale
$
23

 
$
17

 
 
 
 
LIABILITIES HELD FOR SALE
Accounts payable
$
9

 
$
6

Employee benefits
3

 
2

Other current liabilities
1

 
1

Total current liabilities held for sale
13

 
9

 
 
 
 
Total liabilities held for sale
$
13

 
$
9


The Company has combined cash flows from discontinued operations with cash flows from continuing operations within the operating, investing and financing categories within the consolidated statements of cash flows. Cash and non-cash items for certain operating and investing activities related to discontinued operations for the nine months ended September 30, 2016 and 2015 are as follows:
 
Nine Months Ended
September 30
 
2016
 
2015
 
(Dollars in Millions)
Depreciation and amortization
$

 
$
85

Asset impairments and losses on divestiture
$
2

 
$
16

Capital expenditures
$
2

 
$
81


NOTE 5. Restructuring Activities

During the three and nine months ended September 30, 2016, the Company recorded $5 million and $22 million of restructuring expenses, net of reversals. Given the economically-sensitive and highly competitive nature of the automotive electronics industry, the Company continues to closely monitor current market factors and industry trends taking action as necessary, including but not limited to, additional restructuring actions. However, there can be no assurance that any such actions will be sufficient to fully offset the impact of adverse factors on the Company or its results of operations, financial position and cash flows.

Electronics

During the first quarter of 2016, the Company announced a restructuring program to transform the Company's engineering organization and supporting functional areas to focus on execution and technology. The organization will be comprised of regional engineering, product management and advanced technologies, and global centers of competence. During the three and nine months ended September 30, 2016, the Company has recorded approximately $1 million and $13 million, respectively, of restructuring

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expenses under this program, associated with approximately 100 employees, of which $7 million remains accrued as of September 30, 2016. The Company expects to record additional restructuring costs related to this program as the underlying plan is finalized.

In connection with the Electronics Acquisition the Company commenced a restructuring program designed to achieve annual cost savings through transaction synergies. During the three and nine months ended September 30, 2015, the Company recorded $2 million and $14 million, respectively, of severance and termination benefits under this program associated with approximately 400 employees. As of September 30, 2016, $4 million remains accrued for this program and charges are considered substantially complete.

The Company previously announced a restructuring program designed to reduce fixed costs and to improve operational efficiency by addressing certain under-performing operations. In connection with that program, the Company announced plans to realign its corporate and administrative functions directly to their corresponding operational beneficiary. The Company recorded $1 million and $4 million for restructuring expenses during the three and nine months ended September 30, 2015, respectively, primarily related to severance and termination benefits. As of September 30, 2016, this program is considered substantially complete.

Other

During the three and nine months ended September 30, 2016, the Company recorded $4 million and $11 million, respectively, of restructuring expenses, related to severance and termination benefits, in connection with the wind-down of certain operations in South America, of which $11 million remains accrued as of September 30, 2016. The Company expects to record additional restructuring costs related to this program as the underlying plan is finalized.

As of September 30, 2016, the Company retained approximately $2 million of restructuring reserves as part of the Interiors Divestiture associated with a previously announced program for the fundamental reorganization of operations at a facility in Brazil.

Restructuring Reserves

Restructuring reserve balances of $33 million and $38 million at September 30, 2016 and December 31, 2015, respectively, are classified as "Other current liabilities" on the consolidated balance sheets. The Company anticipates that the activities associated with the current restructuring reserve balance will be substantially complete by the end of 2017. The Company’s consolidated restructuring reserves and related activity are summarized below, including amounts associated with discontinued operations.
 
Electronics
 
Other
 
Total
 
(Dollars in Millions)
December 31, 2015
$
33

 
$
5

 
$
38

   Expense
11

 

 
11

   Utilization
(13
)
 

 
(13
)
   Reversals
(1
)
 

 
(1
)
   Foreign currency
1

 

 
1

March 31, 2016
31

 
5

 
36

   Expense
1

 
7

 
8

   Utilization
(5
)
 

 
(5
)
   Reversals
(1
)
 

 
(1
)
   Foreign currency
(1
)
 

 
(1
)
June 30, 2016
25

 
12

 
37

   Expense
1

 
4

 
5

   Utilization
(7
)
 
(2
)
 
(9
)
September 30, 2016
$
19

 
$
14

 
$
33


Utilization represents payments for severance and other employee termination benefits and special termination benefits reclassified to pension and other postretirement employee benefit liabilities, where such payments are made from the Company’s benefit plans.



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Table of Contents

NOTE 6. Inventories

Inventories consist of the following components:
 
September 30
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Raw materials
$
97

 
$
90

Work-in-process
44

 
53

Finished products
35

 
44

 
$
176

 
$
187


NOTE 7. Other Assets

Other current assets are comprised of the following components:
 
September 30
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Recoverable taxes
$
75

 
$
425

Prepaid assets and deposits
36

 
28

Joint venture receivables
33

 
44

Assets held for sale
23

 
17

Notes receivable
17

 
21

Contractually reimbursable engineering costs
8

 
34

Foreign currency hedges
2

 
6

Other
6

 
6

 
$
200

 
$
581

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

Other non-current assets are comprised of the following components:
 
September 30
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Deferred tax assets
$
35

 
$
34

Recoverable taxes
34

 
21

Long term notes receivable
26

 
13

Contractually reimbursable engineering costs
9

 
4

Other
16

 
16

 
$
120

 
$
88

Current and non-current contractually reimbursable engineering costs of $8 million and $9 million, respectively, at September 30, 2016 and $34 million and $4 million, respectively, at December 31, 2015, are related to pre-production design and development costs incurred pursuant to long-term supply arrangements that are contractually guaranteed for reimbursement by customers. The Company expects to receive cash reimbursement payments of approximately $3 million during the remainder of 2016, $6 million in 2017, and $8 million in 2018 and thereafter.


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Table of Contents

NOTE 8. Property and Equipment, net

Property and equipment, net consists of the following:
 
September 30
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Land
$
18

 
$
15

Buildings and improvements
69

 
64

Machinery, equipment and other
411

 
353

Construction in progress
35

 
75

 
533

 
507

Accumulated depreciation
(208
)
 
(170
)
 
325

 
337

Product tooling, net of amortization
17

 
14

 
$
342

 
$
351


Property and equipment is depreciated principally using the straight-line method of depreciation over the related asset's estimated useful life. Generally, buildings and improvements are depreciated over a 40-year estimated useful life, leasehold improvements are depreciated on a straight-line basis over the initial lease term period, and machinery, equipment and other are depreciated over estimated useful lives ranging from 3 to 15 years. Product tooling is amortized using the straight-line method over the estimated life of the tool, generally not exceeding six years. Depreciation and amortization expenses for property and equipment, excluding discontinued operations, are summarized as follows:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Millions)
Depreciation
$
16

 
$
17

 
$
49

 
$
49

Amortization
1

 

 
2

 
2

 
$
17

 
$
17

 
$
51

 
$
51


NOTE 9. Intangible Assets, net

Intangible assets, net at September 30, 2016 and December 31, 2015, are comprised of the following:
 
 
 
September 30, 2016
 
December 31, 2015
 
Estimated Weighted Average Useful Life (years)
 
Gross Carrying Value    
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value    
 
Accumulated Amortization
 
Net Carrying Value
 
 
 
(Dollars in Millions)
Definite-Lived:
 
 
Developed technology
7
 
$
41

 
$
24

 
$
17

 
$
39

 
$
20

 
$
19

Customer related
10
 
87

 
24

 
63

 
84

 
17

 
67

Other
32
 
8

 
1

 
7

 
8

 
1

 
7

Subtotal
 
 
136

 
49

 
87

 
131

 
38

 
93

Indefinite-Lived:
 
 
Goodwill
 
 
50

 

 
50

 
40

 

 
40

    Total
 
 
$
186

 
$
49

 
$
137

 
$
171

 
$
38

 
$
133

In connection with the AllGo Purchase, the Company recorded intangible assets including patented and unpatented technology of $2 million and customer related assets of $5 million. These definite lived intangible assets are being amortized using the straight-

16


Table of Contents

line method over their estimated useful lives of 10 years for patented technology, 12 years for unpatented technology and 7 to 12 years for customer related assets. Additionally, the Company recorded goodwill of $12 million for the excess of the purchase price over the net of the fair values of the identifiable assets and liabilities acquired.
The Company recorded approximately $4 million and $11 million of amortization expense related to definite-lived intangible assets for the three and nine months ended September 30, 2016. The Company currently estimates annual amortization expense to be $14 million for 2016, $12 million each year from 2017 through 2019, and $11 million for 2020. Indefinite-lived intangible assets are not amortized but are tested for impairment at least annually, or earlier when events and circumstances indicate that it is more likely than not that such assets have been impaired.

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

 
$
67

 
$
7

 
$
40

 
$
133

Additions
2

 
5

 

 
12

 
19

Foreign currency

 
(2
)
 

 
(2
)
 
(4
)
Amortization
(4
)
 
(7
)
 

 

 
(11
)
September 30, 2016
$
17

 
$
63

 
$
7

 
$
50

 
$
137


Additions represent the fair value of intangibles associated with the AllGo Purchase, disclosed in Note 3 "Business Acquisition."

NOTE 10. Other Liabilities

Other current liabilities are summarized as follows:
 
September 30
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Electronics operations repurchase commitment
$
50

 
$
50

Product warranty and recall accruals
40

 
26

Restructuring reserves
33

 
38

Contribution payable
33

 
33

Rent and royalties
30

 
33

Joint venture payables
17

 
18

Liabilities held for sale
13

 
9

Dividends payable
12

 
6

Foreign currency translation loss
11

 

Deferred income
10

 
11

Information technology separation and service obligations
7

 
37

Non-income taxes payable
6

 
20

Foreign currency hedges
5

 
1

Income taxes payable
4

 
63

Other
22

 
25

 
$
293

 
$
370


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


17


Table of Contents

In connection with the Germany Interiors Divestiture, the Company will make a final contribution payment of approximately $33 million by December 2016.

As of September 30, 2016 and December 31, 2015 liabilities held for sale of $13 million and $9 million, respectively, represent liabilities associated with operations subject to the Interiors Divestiture located in Argentina and Brazil. See Note 4 "Discontinued Operations" for additional disclosures.

On July 18, 2016, the Company reached an agreement to sell its South Africa climate operations.  The sale is expected to close during 2016 for proceeds of approximately $2 million.  The Company recorded a charge of approximately $11 million related to foreign currency translation amounts recorded in accumulated other comprehensive loss, and classified as "Other liabilities" until the transaction close date.

Information technology separation and service obligations were established in connection with the Climate Transaction and Interiors Divestiture, representing ongoing and separation services for the divested businesses to operate as independent entities. As of September 30, 2016 and December 31, 2015 remaining obligations totaled $7 million and $37 million, respectively.

Other non-current liabilities are summarized as follows:
 
September 30
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Income tax reserves
$
22

 
$
25

Deferred income
16

 
15

Product warranty and recall accruals
15

 
12

Non-income tax reserves
10

 
10

Other
19

 
13

 
$
82

 
$
75


NOTE 11. Debt

The Company’s short and long-term debt consists of the following:
 
September 30
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Short-Term Debt:
 
 
 
Current portion of long-term debt
$
1

 
$
3

Short-term borrowings
23

 
34

 
$
24

 
$
37

Long-Term Debt:
 
 
 
Term debt facility
$
345

 
$
345

Other
2

 
1

 
$
347

 
$
346


As of December 31, 2015 previously issued debt issuance costs were reclassified as a reduction of the corresponding debt liability in accordance with ASU No. 2015-3, "Simplifying the Presentation of Debt Issuance Cost". These costs approximated $1 million as of September 30, 2016 and December 31, 2015.

Short-Term Debt

Short-term borrowings are primarily related to the Company's non-U.S. consolidated joint ventures and are payable in USD, Chinese Yuan, Indian Rupee and Thai Baht. The Company had international affiliate short-term borrowings of $23 million and $34 million as of September 30, 2016 and December 31, 2015 respectively. Availability under outstanding affiliate credit facilities as of September 30, 2016 is approximately $34 million.



18


Table of Contents

Long-Term Debt

The Credit Agreement, dated as of April 9, 2014 and as amended by Waiver and Amendment No. 1 dated as of March 25, 2015 (the “Credit Agreement”), by and among the Company, as borrower, each lender from time to time party thereto, each letter of credit issuer from time to time party thereto and Citibank, N.A., as administrative agent, provides for (i) an aggregate principal of $350 million (the “Term Facility”) and (ii) a $200 million revolving credit facility (the “Revolving Facility”). The Term Facility matures on April 9, 2021 and the Revolving Facility matures on April 9, 2019. The Credit Agreement requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, including financial covenants and contains customary events of default. The Company was in compliance with such covenants as of September 30, 2016.

Other Long-Term Debt

The Company had $2 million and $1 million of other long-term debt outstanding as of September 30, 2016 and December 31, 2015, respectively, primarily related to information technology software leases.

NOTE 12. Employee Benefit Plans

Defined Benefit Plans

The Company's net periodic benefit costs for all defined benefit plans for the three month periods ended September 30, 2016 and 2015 were as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Millions)
Costs Recognized in Income:
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
1

 
$
1

Interest cost
7

 
8

 
3

 
6

Expected return on plan assets
(10
)
 
(11
)
 
(3
)
 
(4
)
Amortization of losses and other

 

 

 
1

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

 
$
4


The Company's net periodic benefit costs for all defined benefit plans for the nine month periods ended September 30, 2016 and 2015 were as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Millions)
Costs Recognized in Income:
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
2

 
$
14

Interest cost
21

 
25

 
9

 
18

Expected return on plan assets
(31
)
 
(32
)
 
(9
)
 
(15
)
Settlements and curtailments

 

 
1

 

Amortization of losses and other

 

 

 
6

Net pension (income) expense
$
(10
)
 
$
(7
)
 
$
3

 
$
23


During the nine months ended September 30, 2016, cash contributions to the Company's U.S. and non-U.S. defined benefit pension plan were $9 million. The Company expects to make cash contributions to its defined benefit pension plans of $13 million in 2016. The Company’s expected 2016 contributions may be revised.

On April 28, 2016, the Company purchased a non-participating annuity contract for all participants of the Canada non-represented plan. The annuity purchase covered 52 participants and resulted in the use of $5 million of plan assets for pension benefit obligation settlements of approximately $5 million. In connection with the annuity purchase, the Company recorded a settlement loss of approximately $1 million during the three months ended June 30, 2016.

2016 Discount Rate for Estimated Service and Interest Cost: Through December 31, 2015, the Company recognized service and interest cost components of pension expense using a single weighted average discount method representing the constant annual

19


Table of Contents

rate required to discount all future benefit payments related to past service. During the fourth quarter of 2015, the Company changed the method used to estimate service and interest components of net periodic benefit cost for pension benefits for its U.S. and certain non-U.S. plans. The Company has elected to utilize a disaggregated discount rate approach resulting in different amounts of interest cost compared to the traditional single weighted-average discount rate approach because of different weightings given to each subset of payments.

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

Defined Contribution Plans

Most U.S. salaried employees and certain non-U.S. employees are eligible to participate in defined contribution plans by contributing a portion of their compensation, which is partially matched by the Company. For the U.S. defined contribution plan, the Company matches 100% of contributions on the first 6% of pay contributed. The expense related to matching contributions was approximately $2 million and $2 million for the three months ended September 30, 2016 and 2015, respectively. The expense related to matching contributions was approximately $6 million and $8 million for the nine months ended September 30, 2016 and 2015, respectively.

NOTE 13. Income Taxes

During the three and nine month periods ended September 30, 2016, the Company recorded a provision for income tax on continuing operations of $5 million and $27 million, respectively, which includes income tax expense in countries where the Company is profitable, withholding taxes, changes in uncertain tax benefits, and the inability to record a tax benefit for pretax losses and/or recognize tax expense for pretax income in certain jurisdictions (including the U.S.) due to valuation allowances. Pretax losses from continuing operations in jurisdictions where valuation allowances are maintained and no income tax benefits are recognized totaled $38 million and $31 million, for the nine months ended September 30, 2016 and 2015, respectively, resulting in an increase in the Company's effective tax rate in those years. As described further below, the Company's estimated annual effective tax rate is updated each quarter and was favorably impacted by incorporating certain transfer pricing adjustments between the U.S. and Japan consistent with the anticipated transfer pricing methodology expected to be agreed upon pursuant to the Company's impending bilateral advance pricing agreement ("APA") submission between those two countries.

The Company provides for U.S. and non-U.S. income taxes and non-U.S. withholding taxes on the projected future repatriations of the earnings from its non-U.S. operations that are not considered permanently reinvested at each tier of the legal entity structure.
During the nine month period ended September 30, 2016 and 2015, the Company recognized expense primarily related to non-U.S. withholding taxes, of $3 million and $4 million, respectively, reflecting the Company's forecasts which contemplate numerous financial and operational considerations that impact future repatriations.

The Company's provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against income before income taxes, excluding equity in net income of non-consolidated affiliates for the period. Effective tax rates vary from period to period as separate calculations are performed for those countries where the Company's operations are profitable and whose results continue to be tax-effected and for those countries where full deferred tax valuation allowances exist and are maintained. In determining the estimated annual effective tax rate, the Company analyzes various factors, including forecasts of projected annual earnings, taxing jurisdictions in which the pretax income and/or pretax losses will be generated, the ability to use tax credits and net operating loss carryforwards, and available tax planning strategies. The Company’s estimated annual effective tax rate is updated each quarter and may be significantly impacted by changes to the mix of forecasted earnings by tax jurisdiction. The tax impact of adjustments to the estimated annual effective tax rate are recorded in the period such estimates are revised. The Company is also required to record the tax impact of certain other non-recurring tax items, including changes in judgments about valuation allowances and uncertain tax positions, and changes in tax laws or rates, in the interim period in which they occur, rather than included in the estimated annual effective tax rate.
The need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s quarterly and annual effective tax rates. Full valuation allowances against deferred tax assets in the U.S. and applicable foreign countries will be maintained until sufficient positive evidence exists to reduce or eliminate them. The factors considered by management in its determination of the probability of the realization of the deferred tax assets include, but are not limited to, recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If, based upon the weight of available evidence, it is

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more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. In regards to the full valuation allowance recorded against the U.S. net deferred tax assets, significant judgment is applied in determining whether a carryback opportunity related to the 2015 tax year provides an incremental source of taxable income to support partial realization of the U.S. net deferred tax assets, which includes estimating the amount of future tax losses that would be available to carryback.
Unrecognized Tax Benefits

Gross unrecognized tax benefits at September 30, 2016 and December 31, 2015, including amounts attributable to discontinued operations, were $33 million and $37 million, respectively. Of these amounts approximately $18 million and $29 million at September 30, 2016 and December 31, 2015, respectively, represent the amount of unrecognized benefits that, if recognized, would impact the effective tax rate. The gross unrecognized tax benefit differs from that which would impact the effective tax rate due to uncertain tax positions embedded in other deferred tax attributes carrying a full valuation allowance. Since the uncertainty is expected to be resolved while a full valuation allowance is maintained, these uncertain tax positions should not impact the effective tax rate in current or future periods. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense and related amounts accrued at September 30, 2016 and December 31, 2015 were $4 million and $3 million, respectively.

The $4 million net decrease in gross unrecognized tax benefits reflects $7 million in decreases primarily related to settling tax assessments from the Korean tax authorities related to underpayment of withholding taxes, and favorable developments in connection with an ongoing audit in Hungary. These decreases were partially offset by increases for audit developments in Mexico and anticipated transfer pricing-related exposures worldwide totaling $3 million.
The $11 million net decrease in the unrecognized tax benefits, that, if recognized, would impact the effective tax rate, reflects the $7 million settlement and $1 million net increase for ongoing audit developments described above, and $5 million in decreases related primarily to change in estimates associated with the filing of the Company’s U.S. tax returns that resulted in a reduction in U.S. income tax after utilizing available tax attributes related to the 2015 Climate Transaction.

With few exceptions, the Company is no longer subject to U.S. federal tax examinations for years before 2012 or state and local, or non-U.S. income tax examinations for years before 2003 although U.S. net operating losses carried forward into open tax years technically remain open to adjustment. Although it is not possible to predict the timing of the resolution of all ongoing tax audits with accuracy, it is reasonably possible that certain tax proceedings in Europe, Asia, Mexico and the U.S. could conclude within the next twelve months and result in a significant increase or decrease in the balance of gross unrecognized tax benefits. Given the number of years, jurisdictions and positions subject to examination, the Company is unable to estimate the full range of possible adjustments to the balance of unrecognized tax benefits. The long-term portion of uncertain income tax positions (including interest) in the amount of $22 million is included in Other non-current liabilities on the consolidated balance sheet.
A reconciliation of the beginning and ending amount of unrecognized tax benefits including amounts attributable to discontinued operations is as follows:
 
Nine Months Ended
September 30, 2016
 
(Dollars in Millions)
Beginning balance
$
37

Tax positions related to current period:
 
Additions
2

Tax positions related to prior periods:
 
Additions
1

Settlements with tax authorities
(7
)
Ending balance
$
33


During 2012, Brazil tax authorities issued tax assessment notices to Visteon Sistemas Automotivos (“Sistemas”) related to the sale of its chassis business to a third party, which required a deposit in the amount of $15 million during 2013 necessary to open a judicial proceeding against the government in order to suspend the debt and allow Sistemas to operate regularly before the tax authorities after attempts to reopen an appeal of the administrative decision failed. Adjusted for currency impacts and accrued

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interest, the deposit amount is approximately $15 million, as of September 30, 2016. The Company believes that the risk of a negative outcome is remote once the matter is fully litigated at the highest judicial level. These appeal payments, as well as income tax refund claims associated with other jurisdictions, total $16 million as of September 30, 2016, and are included in Other non-current assets on the consolidated balance sheet.

NOTE 14. Stockholders’ Equity and Non-controlling Interests

Changes in equity for the three months ended September 30, 2016 and 2015 are as follows:
 
2016
 
2015
 
Visteon
 
NCI
 
Total
 
Visteon
 
NCI
 
Total
 
(Dollars in Millions)
Three Months Ended September 30
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
616

 
$
148

 
$
764

 
$
2,688

 
$
162

 
$
2,850

Net income from continuing operations
21

 
4

 
25

 
16

 
5

 
21

Net income (loss) from discontinued operations
7

 

 
7

 
(11
)
 

 
(11
)
Net income
28

 
4

 
32

 
5

 
5

 
10

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
3

 

 
3

 
(23
)
 
(4
)
 
(27
)
    Benefit plans

 

 

 
2

 

 
2

    Unrealized hedging gain (loss)

 

 

 
(3
)
 

 
(3
)
    Total other comprehensive income (loss)
3

 

 
3

 
(24
)
 
(4
)
 
(28
)
Stock-based compensation, net
1

 

 
1

 
1

 

 
1

Warrant exercises

 

 

 
15

 

 
15

Dividends to non-controlling interests

 
(6
)
 
(6
)
 

 

 

Ending balance
$
648

 
$
146

 
$
794

 
$
2,685

 
$
163

 
$
2,848


Changes in equity for the nine months ended September 30, 2016 and 2015 are as follows:
 
2016
 
2015
 
Visteon
 
NCI
 
Total
 
Visteon
 
NCI
 
Total
 
(Dollars in Millions)
Nine Months Ended September 30
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,057

 
$
142

 
$
1,199

 
$
865

 
$
956

 
$
1,821

Net income from continuing operations
88

 
12

 
100

 
93

 
17

 
110

Net (loss) income from discontinued operations
(15
)
 

 
(15
)
 
2,170

 
24

 
2,194

Net income
73

 
12

 
85

 
2,263

 
41

 
2,304

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
26

 
(2
)
 
24

 
(23
)
 
(16
)
 
(39
)
    Benefit plans
1

 

 
1

 
35

 
1

 
36

    Unrealized hedging gain (loss)
(4
)
 

 
(4
)
 
2

 
2

 
4

    Total other comprehensive income (loss)
23

 
(2
)
 
21

 
14

 
(13
)
 
1

Stock-based compensation, net
(5
)
 

 
(5
)
 
13

 

 
13

Warrant exercises

 

 

 
30

 

 
30

Share repurchase
(500
)
 

 
(500
)
 
(500
)
 

 
(500
)
Business divestitures

 

 

 

 
(785
)
 
(785
)
Dividends to non-controlling interests

 
(6
)
 
(6
)
 

 
(36
)
 
(36
)
Ending balance
$
648

 
$
146

 
$
794

 
$
2,685

 
$
163

 
$
2,848






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Share Repurchase Program
On June 16, 2015, the Company announced an accelerated stock buyback ("ASB") program with a third-party financial institution to purchase shares of common stock for an aggregate purchase price of $500 million, as the first of announced shareholder return actions. Under the program, the Company paid the financial institution $500 million and received an initial delivery of 3,712,297 shares of common stock using a reference price of $107.75. The program concluded in December 2015 and the Company received an additional 1,058,965 shares. The final settlement price for all shares delivered under this 2015 ASB program was $104.79.
During the fourth quarter of 2015, the Company entered into an agreement with a third party financial institution to purchase up to $150 million of Visteon common stock in accordance with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934 ("10b5-1 Share Repurchase Program"). During the period of the program, which concluded on March 1, 2016, the Company paid approximately $105 million to repurchase 1,607,849 shares at an average price of $65.05.   

On March 1, 2016, the Company entered into another ASB program with a third-party financial institution to purchase shares of common stock for an aggregate purchase price of $395 million. Under the program, the Company paid the financial institution $395 million and received an initial delivery of 4,370,678 shares of common stock using a reference price of $72.30. The program was concluded in October 2016 and the Company received additional 1,211,979 shares. In total, the Company purchased 5,582,657 shares at an average price of $70.75 under this ASB program.

The Company anticipates that additional repurchases of common stock, if any, would occur from time to time in open market transactions or in privately negotiated transactions depending on market and economic conditions, share price, trading volume, alternative uses of capital and other factors.

Distribution

On December 9, 2015, the Company declared a special distribution of $43.40 per share of its common stock outstanding as of January 15, 2016, or approximately $1.75 billion in the aggregate. On January 22, 2016 approximately $1.74 billion was paid, the remaining $15 million will be paid over a two-year period upon vesting and settlement of restricted stock units and performance-based share units previously granted to the Company's employees. These amounts were classified as "Distribution payable" on the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015. The special cash distribution was funded from Climate Transaction proceeds.

Non-Controlling Interests
Non-controlling interests in the Visteon Corporation economic entity are as follows:
 
September 30
 
December 31
 
2016
 
2015
 
(Dollars in Millions)
Yanfeng Visteon Automotive Electronics Co., Ltd.
$
106

 
$
100

Shanghai Visteon Automotive Electronics, Co., Ltd.
38

 
41

Other
2

 
1

 
$
146

 
$
142



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Table of Contents

Accumulated Other Comprehensive (Loss) Income
Changes in Accumulated other comprehensive (loss) income (“AOCI”) and reclassifications out of AOCI by component include:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Millions)
Changes in AOCI:
 
 
 
 
 
 
 
Beginning balance
$
(170
)
 
$
(261
)
 
$
(190
)
 
$
(299
)
Other comprehensive income (loss) before reclassification, net of tax
2

 
(25
)
 
24

 
(67
)
Amounts reclassified from AOCI
1

 
1

 
(1
)
 
(3
)
Climate divestiture

 

 

 
84

Ending balance
$
(167
)
 
$
(285
)
 
$
(167
)
 
$
(285
)
 
 
 
 
 
 
 
 
Changes in AOCI by Component:
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
  Beginning balance
$
(132
)
 
$
(138
)
 
$
(155
)
 
$
(138
)
Other comprehensive income before reclassification, net of tax (a)
3

 
(23
)
 
26

 
(86
)
Climate divestiture (b)

 

 

 
63

  Ending balance
(129
)
 
(161
)
 
(129
)
 
(161
)
Benefit plans
 
 
 
 
 
 
 
  Beginning balance
(35
)
 
(123
)
 
(36
)
 
(156
)
  Other comprehensive income before reclassification, net of tax (a)

 

 

 
8

  Amounts reclassified from AOCI (c)

 
2

 
1

 
7

Climate divestiture (b)

 

 

 
20

  Ending balance
(35
)
 
(121
)
 
(35
)
 
(121
)
Unrealized hedging (loss) gain
 
 
 
 
 
 
 
  Beginning balance
(3
)
 

 
1

 
(5
)
  Other comprehensive income (loss) before reclassification, net of tax (d)
(1
)
 
(2
)
 
(2
)
 
11

  Amounts reclassified from AOCI
1

 
(1
)
 
(2
)
 
(10
)
Climate divestiture (b)

 

 

 
1

  Ending balance
(3
)
 
(3
)
 
(3
)
 
(3
)
Total AOCI
$
(167
)
 
$
(285
)
 
$
(167
)
 
$
(285
)
(a) There were no income tax effects for the three and nine month periods ending September 30, 2016 and 2015, due to the recording of valuation allowance.
(b) Amounts are included in Income (loss) from discontinued operations, net of tax, on the consolidated statements of comprehensive income.
(c) Amount included in the computation of net periodic pension cost. (See Note 12, "Employee Benefit Plans" for additional details.)
(d) Net tax tax benefit of $1 million are related to unrealized hedging (loss) gain for both the three months ended September 30, 2016 and 2015. Net tax benefit of $0 million and net tax expense of $2 million are related to unrealized hedging gain for the nine months ended September 30, 2016 and 2015, respectively.

Stock Warrants

During the three and nine months ended September 30, 2015, the Company received payments of $15 million and $30 million related to approximately 266,000 and 569,000 warrants, respectively, converted to shares of common stock at an exercise price of $58.80 per share.

NOTE 15. Earnings Per Share

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

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Table of Contents

The table below provides details underlying the calculations of basic and diluted earnings (loss) per share:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2016
 
2015
 
2016
 
2015
 
(In Millions, Except Per Share Amounts)
Numerator:
 
 
 
 
 
 
 
Net income from continuing operations attributable to Visteon
$
21

 
$
16

 
$
88

 
$
93

Income (loss) from discontinued operations, net of tax
7

 
(11
)
 
(15
)
 
2,170

Net income attributable to Visteon
$
28

 
$
5

 
$
73

 
$
2,263

Denominator:
 
 
 
 
 
 
 
Average common stock outstanding - basic
34.0

 
40.5

 
35.6

 
42.9

Dilutive effect of performance based share units and other
0.4

 
0.9

 
0.4

 
1.0

Diluted shares
34.4

 
41.4

 
36.0

 
43.9