UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2008, or

 

o

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 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 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   ü    Accelerated Filer          Non-Accelerated Filer          Smaller Reporting Company        

(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 24, 2008, the Registrant had outstanding 130,828,622 shares of common stock, par value $1.00 per share.

 

 

Exhibit index located on page number 44.

 

 

VISTEON CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

INDEX

 

 

 

To the Board of Directors and Shareholders

Visteon Corporation

 

We have reviewed the accompanying consolidated balance sheet of Visteon Corporation and its subsidiaries as of March 31, 2008 and the related consolidated statements of operations for each of the three-month periods ended March 31, 2008 and March 31, 2007 and the consolidated statements of cash flows for the three-month periods ended March 31, 2008 and March 31, 2007. These interim financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2007, and the related consolidated statements of operations, shareholders’ deficit and of cash flows for the year then ended (not presented herein), and in our report dated February 22, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2007, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

/s/ PricewaterhouseCoopers LLP

 

PricewaterhouseCoopers LLP

 

Detroit, Michigan

April 30, 2008

VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

 

See accompanying notes to the consolidated financial statements.

VISTEON CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to the consolidated financial statements.

VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

 

See accompanying notes to the consolidated financial statements.

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

 

Visteon Corporation (the “Company” or “Visteon”) is a leading global supplier of climate, interiors, electronics and other automotive systems, modules and components to global automotive original equipment manufacturers (“OEMs”). Headquartered in Van Buren Township, Michigan, Visteon has a workforce of approximately 40,000 employees and a network of manufacturing operations, technical centers, sales offices and joint ventures in every major geographic region of the world.

 

The Company was incorporated in Delaware in January 2000 as a wholly-owned subsidiary of Ford Motor Company (“Ford” or “Ford Motor Company”). Subsequently, Ford transferred the assets and liabilities comprising its automotive components and systems business to Visteon. The Company separated from Ford on June 28, 2000 when all of the Company’s common stock was distributed by Ford to its shareholders. On October 1, 2005, the Company sold Automotive Components Holdings, LLC, an indirect, wholly-owned subsidiary of the Company to Ford (“ACH Transactions”).

 

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 as adjusted for discontinued operations.

 

 

 

Additionally, as of March 31, 2008 and December 31, 2007, the Company transferred approximately $185 million and $154 million, respectively, of Ford receivables under a European receivables securitization program.

 

 

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.

 

These interim consolidated financial statements include all adjustments (consisting of normal recurring adjustments) that management believes are necessary for a fair presentation of the results of operations, financial position and cash flows of the Company for the interim periods presented. The Company’s management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the SEC. Interim results are not necessarily indicative of full year results.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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 50% or less but greater than 20% are accounted for using the equity method. The consolidated financial statements also include the accounts of certain entities in which the Company holds a controlling interest based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary.

 

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

 

Services revenues are recognized as services are rendered and associated costs of providing such services are recorded as incurred.

 

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

 

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

 

Fair Value Measurements:  The Company uses fair value measurements in the preparation of its financial statements, which utilize various inputs including those that can be readily observable, corroborated or generally unobservable. The Company utilizes market-based data and valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Additionally, the Company applies assumptions that market participants would use in pricing an asset or liability, including assumptions about risk.

 

Recent Accounting Pronouncements:  In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” This statement requires disclosure of (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of this statement on its consolidated financial statements.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” and Statement of Financial Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment to ARB No. 51.” These statements change the accounting and reporting for business combination transactions and minority interests in consolidated financial statements. These statements are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact of these statements on its consolidated financial statements.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This statement permits measurement of financial instruments and certain other items at fair value. The Company adopted this statement effective January 1, 2008 and has not elected the permitted fair value measurement provisions of this statement.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements.” This statement, which became effective January 1, 2008, defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements. The Company adopted the requirements of SFAS 157 as of January 1, 2008 without a material impact on its consolidated financial statements, as more fully disclosed in Note 17, “Fair Value Measurements.” In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. The Company has not applied the provisions of SFAS 157 to its nonfinancial assets and nonfinancial liabilities in accordance with FSP 157-2.

 

 

In March 2007, the Company entered into a Master Asset and Share Purchase Agreement (“MASPA”) to sell certain assets and liabilities associated with the Company’s chassis operations (the “Chassis Divestiture”). The Company’s chassis operations were primarily comprised of suspension, driveline and steering product lines and included facilities located in Dueren and Wuelfrath, Germany, Praszka, Poland and Sao Paulo, Brazil. Collectively, these operations recorded sales for the year ended December 31, 2006 of approximately $600 million. The Chassis Divestiture, while representing a significant portion of the Company’s chassis operations, did not result in the complete exit of any of the affected product lines.

 

Effective May 31, 2007, the Company ceased to produce brake components at its Swansea, UK facility, which resulted in the complete exit of the Company’s global suspension product line. Accordingly, the results of operations of the Company’s global suspension product line have been reclassified to “Loss from discontinued operations, net of tax” in the consolidated statements of operations for the three-month period ended March 31, 2007.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

A summary of the results of discontinued operations is provided in the table below.

 

 

 

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

 

Escrow Agreement

 

Pursuant to the Escrow Agreement, dated as of October 1, 2005, among the Company, Ford and Deutsche Bank Trust Company Americas, Ford paid $400 million into an escrow account for use by the Company to restructure its businesses. The Escrow Agreement provides that the Company will be reimbursed from the escrow account for the first $250 million of reimbursable restructuring costs, as defined in the Escrow Agreement, and up to one half of the next $300 million of such costs. Cash in the escrow account is invested, at the direction of the Company, in high quality, short-term investments and related investment earnings are credited to the account as earned. Investment earnings of $28 million became available to reimburse the Company’s restructuring costs following the use of the first $250 million of available funds. Investment earnings on the remaining $150 million will be available for reimbursement after full utilization of those funds.

 

The following table provides a reconciliation of amounts available in the escrow account.

 

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Approximately $24 million and $22 million of amounts receivable from the escrow account were classified in “Other current assets” in the Company’s consolidated balance sheets as of March 31, 2008 and December 31, 2007, respectively.

 

2008 Restructuring Actions

 

During the first quarter of 2008, the Company recorded restructuring expenses of approximately $46 million under the previously announced multi-year improvement plan, including the following significant actions:

 

 

Utilization for the three-months ended March 31, 2008 includes $47 million of payments for severance and other employee termination benefits, $4 million of special termination benefits reclassified to pension and other postretirement employee benefits, where such payments are made from the Company’s benefit plans and $2 million of contract termination, equipment relocation and other costs.

 

The Company currently estimates that the total cash cost associated with the multi-year improvement plan will be approximately $555 million. However, the Company continues to achieve targeted cost reductions associated with the multi-year improvement plan at a lower cost than expected due to higher levels of employee attrition and lower per employee severance cost resulting from changes to certain employee benefit plans. The Company anticipates that approximately $420 million of cash costs incurred under the multi-year improvement plan will be reimbursed from the escrow account pursuant to the terms of the Escrow Agreement. While the Company anticipates full utilization of funds available under the Escrow Agreement, any amounts remaining in the escrow account after December 31, 2012 will be disbursed to the Company pursuant to the terms of the Escrow Agreement. It is possible that actual cash restructuring costs could vary significantly from the Company’s current estimates resulting in unexpected costs in future periods. Generally, charges are recorded as elements of the plan are finalized and the timing of activities and the amount of related costs are not likely to change.

 

The Company has incurred $321 million in cumulative restructuring costs related to the multi-year improvement plan including $116 million, $115 million, $59 million and $31 million for the Other, Interiors, Climate and Electronics product groups, respectively. Substantially all restructuring expenses recorded to date relate to employee severance and termination benefit costs and are classified as “Restructuring expenses” on the consolidated statements of operations. As of March 31, 2008, the restructuring reserve balance of $109 million is entirely attributable to the multi-year improvement plan.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Restructuring Reserves

 

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, 2008.

 

 

 

Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that long-lived assets and intangible assets subject to amortization be reviewed for impairment when certain indicators of impairment are present. Impairment exists if estimated future undiscounted cash flows associated with long-lived assets are not sufficient to recover the carrying value of such assets. Generally, when impairment exists the long-lived assets are adjusted to their respective fair values. During the three-month periods ended March 31, 2008 and 2007, the Company recorded asset impairment charges of $21 million and $40 million, respectively, to adjust certain long-lived assets to their estimated fair values.

 

2008 Impairment and Loss on Divestiture

 

During the first quarter of 2008, the Company announced the sale of its North American-based aftermarket underhood and remanufacturing operations including facilities located in Sparta, Tennessee and Reynosa, Mexico (the “NA Aftermarket”). The NA Aftermarket manufactures starters and alternators, radiators, compressors and condensers and also remanufactures steering pumps and gears. These operations recorded sales for the year ended December 31, 2007 of approximately $133 million and generated a negative gross margin of approximately $16 million. During the first quarter of 2008, the Company determined that long-lived assets subject to the NA Aftermarket Divestiture met the “held for sale” criteria of SFAS 144. Accordingly, these assets were valued at the lower of carrying amount or fair value less cost to sell, which resulted in an asset impairment charge of approximately $21 million. The Company also recorded a $19 million loss on the disposition of the NA Aftermarket.

 

2007 Impairment Charges

 

During the first quarter of 2007, the Company determined that long-lived assets subject to the Chassis Divestiture met the “held for sale” criteria of SFAS 144. Accordingly, these assets were valued at the lower of carrying amount or fair value less cost to sell, which resulted in an asset impairment charge of approximately $17 million.

 

In consideration of the MASPA and the Company’s announced exit of the brake manufacturing business at its Swansea, UK facility, an asset impairment charge of $16 million was recorded to reduce the net book value of certain long-lived assets at the facility to their estimated fair value in the first quarter of 2007. The Company’s estimate of fair value was based on market prices, prices of similar assets, and other available information.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Additionally during the first quarter of 2007 the Company entered into an agreement to sell an Electronics building located in Japan. The Company determined that the building met the “held for sale” criteria of SFAS 144 and was recorded at the lower of carrying value or fair value less cost to sell, which resulted in an asset impairment charge of approximately $7 million.

 

 

Effective August 14, 2006, the Company entered into a European accounts receivable securitization facility (“European Securitization”) that extends until August 2011 and provides up to $325 million in funding from the sale of trade receivables originating from Company subsidiaries located in Germany, Portugal, Spain, France and the UK (the “Sellers”). Under the European Securitization, trade receivables originated by the Sellers and certain of their subsidiaries are transferred to Visteon Financial Centre P.L.C. (the “Transferor”). The Transferor is a bankruptcy-remote qualifying special purpose entity. Trade receivables transferred from the Sellers are funded through cash obtained from the issuance of variable loan notes to third-party lenders and through subordinated loans obtained from a wholly-owned subsidiary of the Company, which represent the Company’s retained interest in the trade receivables transferred.

 

Transfers under the European Securitization, for which the Company receives consideration other than a beneficial interest, are accounted for as “true sales” under the provisions of Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” and are removed from the balance sheet. Transfers under the European Securitization, for which the Company receives a beneficial interest are not removed from the balance sheet and total $491 million and $434 million as of March 31, 2008 and December 31, 2007, respectively. Such amounts are recorded at fair value and are subordinated to the interests of third-party lenders. Securities representing the Company’s retained interests are accounted for as trading securities under Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities.”

 

Availability of funding under the European Securitization depends primarily upon the amount of trade receivables reduced by outstanding borrowings under the program and other characteristics of those trade receivables that affect their eligibility (such as bankruptcy or the grade of the obligor, delinquency and excessive concentration). As of March 31, 2008, approximately $267 million of the Company’s transferred trade receivables were considered eligible for borrowing under this facility, $105 million was outstanding and $162 million was available for funding. The Company recorded losses of $2 million and $1 million for the three-months ended March 31, 2008 and 2007, respectively, related to trade receivables sold under the European Securitization.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

The table below provides a reconciliation of changes in interests in accounts receivable transferred for the period.

 

 

 

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

 

 

 

Other current assets are summarized as follows:

 

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Other non-current assets are summarized as follows:

 

 

 

The Company had $240 million and $218 million of equity in the net assets of non-consolidated affiliates at March 31, 2008 and December 31, 2007, respectively. The Company recorded equity in net income of non-consolidated affiliates of $15 million and $9 million for the three-months ended March 31, 2008 and 2007, respectively.

 

The following table presents summarized financial data for the Company’s non-consolidated affiliates. The amounts included in the table below represent 100% of the results of operations of the Company’s non-consolidated affiliates accounted for under the equity method. 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 data for the three-month periods ended March 31 are as follows:

 

 

The Company’s share of net assets and net income is reported in the consolidated financial statements as “Equity in net assets of non-consolidated affiliates” on the consolidated balance sheets and “Equity in net income of non-consolidated affiliates” on the consolidated statements of operations. Included in the Company’s accumulated deficit is undistributed income of non-consolidated affiliates accounted for under the equity method of approximately $115 million and $99 million at March 31, 2008 and December 31, 2007, respectively.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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

 

 

Depreciation and amortization expenses are summarized as follows:

 

 

The Company recorded approximately $15 million and $10 million of accelerated depreciation expense during the three-month periods ended March 31, 2008 and 2007, respectively, representing the shortening of estimated useful lives of certain assets (primarily machinery and equipment) in connection with the Company’s restructuring activities.

 

 

Other current liabilities are summarized as follows:

 

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Other non-current liabilities are summarized as follows:

 

 

 

Short-term and long-term debt including the fair value of related interest rate swaps are as follows:

 

 

Fair value of total debt was $2,245 million and $2,542 as of March 31, 2008 and December 31, 2007, respectively.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The components of the Company’s net periodic benefit costs for the three-months ended March 31, 2008 and 2007 are as follows:

 

 

Curtailments and Settlements

 

During the first quarter of 2008 the Company recorded curtailment gains of $4 million related to elimination of employee benefits associated with a U.S. other postretirement benefit (“OPEB”) plan in connection with employee headcount reductions under previously announced restructuring actions.

 

During the first quarter of 2007 the Company recorded curtailment losses of $10 million and a curtailment gain of $6 million reflecting the reduction in expected years of future service in certain employee retirement benefit plans. Additionally, during the first quarter of 2007 the Company recorded settlement losses of $17 million related to employee retirement benefit obligations under Canadian retirement plans for employees of the Markham, Ontario facility which was closed in 2002.

 

Retirement Benefit Related Restructuring Expenses

 

In addition to retirement benefit expenses, the Company recorded $4 million and $2 million for the three-months ended March 31, 2008 and 2007, 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 4 “Restructuring Activities”. Retirement benefit related restructuring charges are initially classified as restructuring expenses and are subsequently reclassified to retirement benefit expenses.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Contributions

 

During the three-month period ended March 31, 2008, contributions to the Company’s U.S. retirement plans and postretirement health care and life insurance plans were $5 million and $8 million, respectively, and contributions to non-U.S. retirement plans were $11 million. The Company anticipates additional contributions to its U.S. retirement plans and postretirement health care and life insurance plans of $13 million and $28 million, respectively, in 2008. The Company also anticipates additional 2008 contributions to non-U.S. retirement plans of $63 million.

 

Other

 

In accordance with the adoption of Statement of Financial Accounting Standards No. 158 (“SFAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, 106, and 132(R)”, the Company re-measured plan assets and obligations as of January 1, 2007. As a result, the Company recorded a reduction to the pension liability of approximately $120 million, a reduction of the OPEB liability of approximately $90 million and an increase to accumulated other comprehensive income of approximately $210 million. The Company also adjusted the January 1, 2007 retained earnings balance by approximately $34 million, representing the net periodic benefit costs for the period between September 30, 2006 and January 1, 2007 that would have been recognized on a delayed basis during the first quarter of 2007 absent the change in measurement date.

 

 

Provision for Income Taxes

 

The Company’s provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against loss from continuing operations before income taxes and minority interests, 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’s provision for income tax of $51 million for the three-month period ended March 31, 2008 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 and certain non-recurring and other discrete tax items.

 

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, which include the UK and Germany, will be maintained until sufficient positive evidence exists to reduce or eliminate them.

 

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, Canada, Germany and the United States. With few exceptions, the Company is no longer subject to U.S. federal tax examinations for years before 2004 or state and local, or non-U.S. income tax examinations for years before 2000.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The Company’s gross unrecognized tax benefits at March 31, 2008 were approximately $254 million and the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate were approximately $133 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. During the first quarter of 2008, the Company increased its gross unrecognized tax benefits by approximately $25 million primarily as a result of certain positions expected to be taken in future tax returns, of which, $13 million would impact the effective tax rate if the unrecognized tax benefits were recognized.

 

It is reasonably possible that the amount of the Company’s unrecognized tax benefits may change within the next twelve months as a result of settlement of ongoing audits or for changes in judgment as new information becomes available related to positions expected to be taken in future tax returns, primarily related to transfer pricing initiatives. An estimate of the range of reasonably possible outcomes cannot be made at this time. 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 the Company is unable to specify the future periods in which it may be obligated to settle such amounts.

 

The Company records interest and penalties related to uncertain tax positions as a component of income tax expense. Estimated interest and penalties related to the potential underpayment of income taxes totaled $3 million for the three-months ended March 31, 2008. As of March 31, 2008, the Company had approximately $37 million of accrued interest and penalties related to uncertain tax positions.

 

 

Comprehensive loss, net of tax is summarized below:

 

 

Accumulated other comprehensive income is comprised of the following:

 

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Basic net loss per share of common stock is calculated by dividing reported net loss 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 net loss per share takes into account the effect of dilutive potential common stock, such as stock warrants and stock options.

 

 

Stock warrants to purchase 25 million shares of common stock and stock options to purchase approximately 13 million and 14 million shares of common stock as of March 31, 2008 and 2007, respectively, were not included in the computation of diluted loss per share because the effect of including them would have been anti-dilutive for the three-months ended March 31, 2008 and 2007.

 

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value, which includes a hierarchy based on the quality of inputs used to measure fair value and provides specific disclosure requirements based on the hierarchy.

 

Fair Value Hierarchy

 

SFAS 157 requires the categorization of financial assets and liabilities, 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. The various levels of the SFAS 157 fair value hierarchy are described as follows:

 

 

VISTEON CORPORATION AND SUBSIDIARIES
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SFAS 157 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

 

Recurring Fair Value Measurements

 

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2008:

 

 

Financial instruments whose fair values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the fair value measurement are considered to be Level 3 assets or liabilities. Changes in the fair value of the Company’s Level 3 assets for the three-month period ended March 31, 2008 were not material.

 

Valuation Methods

 

Interest rate swaps and foreign currency hedge instruments — 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 counterparty 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.

 

Interests in accounts receivable transferred — These financial assets result from the transfer of trade accounts receivable under the European Securitization. These securities are valued under an income approach, which requires inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the assumptions a market participant would use in pricing the asset or liability and include consideration of time value and counterparty non-performance risk.

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Guarantees

 

The Company has guaranteed approximately $19 million of debt capacity held by subsidiaries, and $102 million for lifetime lease payments held by consolidated subsidiaries.

 

Litigation and Claims

 

In February 2005, a shareholder lawsuit was filed in the U.S. District Court for the Eastern District of Michigan against the Company and certain current and former officers of the Company. In July 2005, the Public Employees’ Retirement System of Mississippi was appointed as lead plaintiff in this matter. In September 2005, the lead plaintiff filed an amended complaint, which alleges, among other things, that the Company and its independent registered public accounting firm, PricewaterhouseCoopers LLP, made misleading statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. The named plaintiff seeks to represent a class consisting of purchasers of the Company’s securities during the period between June 28, 2000 and January 31, 2005. Class action status has not yet been certified in this litigation. On August 31, 2006, the defendants’ motion to dismiss the amended complaint for failure to state a claim was granted. The plaintiffs have appealed this decision.

 

The Company and its current and former directors and officers intend to contest the foregoing lawsuit vigorously. However, at this time the Company is not able to predict with certainty the final outcome of the foregoing lawsuit or its potential exposure with respect to such lawsuit. In the event of an unfavorable resolution of this matter, the Company’s earnings and cash flows in one or more periods could be materially affected to the extent any such loss is not covered by insurance or applicable accruals.

 

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, 2008 and 2007:

 

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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, 2008, had recorded an accrual of approximately $8 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.

 

Other Contingent Matters

 

In addition to the matters discussed above, various other 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; and intellectual property rights. Some of the foregoing matters may involve compensatory, punitive or antitrust or other treble damage claims in very large amounts, or demands for equitable relief, sanctions, or other relief.

 

Contingencies are subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Accruals have been established by the Company for matters where losses are deemed probable and reasonably estimable. It is possible, however, that some of the matters 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, 2008 or that are in excess of established accruals. 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.

 

 

Statement of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosures about Segments of an Enterprise and Related Information,” requires the Company to disclose certain financial and descriptive information about segments of its business. 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 operating structure is comprised of the following: Climate, Electronics, Interiors and Other. 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

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

manufacture a broader range of the Company’s total product line offering and are not limited to the primary product line. Regional customer groups are responsible for the marketing, sales and service of the Company’s product portfolio to its customer base. 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.

 

The Company’s chief operating decision making group, comprised of the Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) 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.

 

Overview of Segments

 

 

VISTEON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Net Sales, Gross Margin and Operating Assets

 

A summary of financial information by segment is provided below:

 

 

Reconciling Item

 

Certain adjustments are necessary to reconcile segment information to the Company’s consolidated amounts. Corporate reconciling items are related to the Company’s technical centers, corporate headquarters and other administrative and support functions.

 

Reclassification

 

Segment information for the quarterly period ended March 31, 2007 and as of December 31, 2007 has been recast to reflect the Company’s Mobile Electronics and Philippines operations in the Electronics and Interiors product groups, respectively. These operations were previously reflected in the Other product group and have been reclassified consistent with the Company’s current management reporting structure.

 

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations, financial condition, and cash flows of Visteon Corporation (“Visteon” or the “Company”). MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission and the financial statements and accompanying notes to the financial statements included elsewhere herein. The financial data presented herein are unaudited, but in the opinion of management reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of such information.

 

Executive Summary

 

Visteon Corporation is a leading global supplier of climate, interiors, electronics and other automotive systems, modules and components to global automotive original equipment manufacturers (“OEMs”). The Company sells to all the of the world’s largest vehicle manufacturers including BMW, Chrysler LLC, Daimler AG, Fiat, Ford, General Motors, Honda, Hyundai / Kia, Nissan, Peugot, Renault, Toyota and Volkswagen. The Company has a broad network of manufacturing, technical engineering and joint venture operations in every major geographic region of the world, supported by approximately 40,000 employees dedicated to the design, development, manufacture and support of its product offering and its global customers, and conducts its business across five segments: Climate, Interiors, Electronics, Other and Services.

 

The automotive industry remained challenging during the three-month period ended March 31, 2008, particularly in North America and Europe, with continued market share pressures concentrated with U.S. vehicle manufacturers. Additionally, continued tightening in the global credit markets has made access to liquidity difficult and costly. During the first quarter of 2008, the Company maintained its focus on executing its previously announced multi-year improvement plan designed to restructure the business, improve operations and grow the business.

 

Restructure the Business

 

In connection with the multi-year improvement plan, the Company identified 30 facilities for closure, divestiture or other actions designed to improve operations and profitability. During the first quarter of 2008 the Company completed the closure of an Interiors facility located in Bellignat, France. The Company also continued to implement actions designed to fundamentally reorganize and streamline its administrative functions and reduce the related cost, including resource relocation to more competitive cost locations.

 

As of March 31, 2008, cumulatively, the Company had closed 10 facilities, had sold 6 facilities and had completed other improvement actions at 3 facilities under the multi-year improvement plan. As a result of these actions, the Company has recognized cumulative savings of approximately $225 million since the inception of the multi-year improvement plan. The Company continues to evaluate alternative courses of action related to the remaining 11 facilities, including the possibility of divestiture, closure or renegotiated commercial and/or labor arrangements. However, there is no assurance that a transaction or other arrangement will occur in the near term or at all. The Company’s ultimate course of action for these facilities will be dependent upon that which provides the greatest long-term return to shareholders.

 

Improve Operations

 

The Company continued its efforts to improve base operations, which have been focused on quality, safety, investments and cost efficiencies. During the first quarter of 2008, Visteon was the recipient of a variety of customer and industry awards, including a 2008 Automotive News PACE Honorable Mention for its innovative light pipe technology, which debuted on the 2008 Cadillac CTS.

During the three-months ended March 31, 2008, the Company completed the sale of its non-core North American-based aftermarket underhood and remanufacturing operations, including facilities located in Sparta, Tennessee and Reynosa, Mexico (the “NA Aftermarket”). The NA Aftermarket manufactured starters and alternators, radiators, compressors and condensers and also remanufactured steering pumps and gears. The NA Aftermarket generated negative gross margin of approximately $16 million on sales of $133 million for the year ended December 31, 2007. This divestiture transaction allows the Company to improve operations by focusing efforts and resources on strategic product lines, including advanced climate, interiors and electronics products.

 

Grow the Business

 

The Company continued to achieve new business wins during the three-months ended March 31, 2008 from a diverse group of customers. The new business wins were primarily related to the Climate and Interior businesses and are geographically spread across Europe and Asia. The Company was also awarded significant renewals of existing contracts during the quarter with minimal incumbent losses.

 

Summary Financial Results for the Quarterly Period Ended March 31, 2008

 

Financial results for the three-month period ended March 31, 2008 are summarized as follows:

 

 

During the first quarter of 2008, the Company recorded product sales of $2.74 billion compared to $2.76 billion for the same period in 2007, representing a decrease of approximately $20 million. Plant divestitures and closures decreased sales by $340 million, but were partially offset by favorable currency of $181 million and increased sales volumes, primarily in Asia. While the distribution of the Company’s sales has remained consistent across its product groups, product sales on a regional basis continued to shift during the three-months ended March 31, 2008. North American product sales decreased year-over-year resulting in a 5% reduction of total product sales. This decline was primarily driven by a decline in Ford production of 55,000 units, a 14,000 unit decline at Nissan, and plant closures. Europe and South America product sales decreased year-over-year resulting in a 1% reduction of total product sales. This decline was driven primarily by the 2007 Chassis Divestiture, partially offset by favorable currency. Asia increased total product sales by 6%, which was primarily due to new business and Hyundia/Kia sales volumes.

 

The Company’s gross margin was $195 million in the first quarter of 2008, compared with $117 million in the first quarter of 2007, representing an increase of $78 million or 67%. The increase in gross margin included favorable currency, the non-recurrence of certain one-time items in the first quarter of 2007, and net cost efficiencies achieved through manufacturing, purchasing, and ongoing restructuring efforts. These increases were partially offset by a reduction in gross margin related to manufacturing facilities that have been closed or divested.

Results of Operations

 

Three-Months Ended March 31, 2008 and 2007

 

 

Net Sales

 

Net sales decreased $28 million during the three-months ended March 31, 2008 when compared to the same period of 2007, including a $19 million decrease in product sales and a $9 million decrease in services revenues. The decrease was due to divestitures and plant closures of $340 million and customer price reductions, which were partially offset by favorable currency of $181 million and higher sales volumes of $142 million primarily due to net new business and increased Hyundia/Kia vehicle production volumes.

 

Net sales for Climate were $874 million for the three-months ended March 31, 2008, compared with $822 million for the same period of 2007, representing an increase of $52 million or 6%. Vehicle production volume and mix was favorable $84 million, primarily related to the Company’s Asia operations, which were a result of additional Hyundai/Kia demand. Favorable currency increased sales by $42 million. These increases were partially offset by lower sales resulting from the closure of the Company’s Connersville, Indiana facility of $53 million and customer price reductions.

 

Net sales for Electronics were $968 million for the three-months ended March 31, 2008, compared to $901 million for the same period of 2007, representing an increase of $67 million or 7%. This increase was due to favorable currency of $81 million and vehicle production volume and mix of $42 million in Europe primarily related to higher volumes with Ford, VW, BMW, and PSA customers. These increases were partially offset by lower North America sales volumes related to Ford, the impact of past customer sourcing actions, lower South America sales and customer price reductions.

 

Net sales for Interiors were $841 million and $783 million for the three-month periods ended March 31, 2008 and 2007, respectively, for an increase of $58 million or 7%. Favorable currency increased sales by $56 million and vehicle production volume and mix was favorable $38 million consisting of higher Hyundai/Kia sales in Asia. These increases were partially offset by lower Ford and Nissan sales in North America, lower Nissan/Renault and PSA sales in Europe, closure of the Company’s Chicago, Illinois facility of $43 million and customer price reductions.

 

Net sales for Other were $199 million in the first quarter of 2008, compared with $413 million in the first quarter of 2007, representing a decrease of $214 million or 52%. The decrease was due to divestitures and plant closures of $223 million, primarily related to the Chassis Divestiture, the Visteon Powertrain Control Systems India (“VPCSI”) divestiture, and NA Aftermarket divestiture.

Services revenues primarily relate to information technology, engineering, administrative and other business support services provided by the Company to ACH, under the terms of various agreements with ACH. Such services are generally provided at an amount that approximates cost. Total services revenues were $121 million for the three- months ended March 31, 2008, compared with $130 million for the same period of 2007. The decrease in services revenue represents lower ACH utilization of the Company’s services in connection with the terms of various agreements.

 

Gross Margin

 

The Company’s gross margin increased $78 million or 67% for the three-months ended March 31, 2008. The increase in gross margin included $34 million related to net cost efficiencies achieved through manufacturing and purchasing improvement efforts and restructuring activities, $30 million related to favorable currency, $24 million related to the non-recurrence of employee benefit curtailment and settlement expenses, $13 million related to the sale of land and buildings in the UK and $5 million related to vehicle production volumes. These increases were partially offset by a $27 million reduction related to plant closures and divestitures.

 

Gross margin for Climate of $83 million for the three-months ended March 31, 2008 represents an increase of $43 million when compared to $40 million for the same period of 2007. This increase includes $14 million resulting from increased vehicle production volumes and favorable currency, $9 million of net cost performance achieved through manufacturing and purchasing improvement efforts and restructuring activities, $13 million for land, building and other asset sales, $5 million related to the non-recurrence of accelerated depreciation in 2007 and $2 million of OPEB benefits.

 

Gross margin for Electronics was $93 million, compared with $63 million, representing an increase of $30 million or 48%. Net cost efficiencies achieved through manufacturing and purchasing improvement efforts and restructuring activities resulted in an increase in gross margin of $23 million and favorable vehicle production volumes and currency further increased gross margin by $16 million. Accelerated depreciation attributable to the Company’s restructuring efforts reduced gross margin $9 million.

 

Gross margin for Interiors was $14 million for the quarterly period ended March 31, 2008, compared with $6 million for the same period of 2007, for an increase of $8 million. The increase includes $4 million related to net cost efficiencies achieved through manufacturing and purchasing improvement efforts and restructuring activities, and $3 million related to vehicle production volumes and currency.

 

Gross margin for Other was $4 million in the first quarter of 2008, compared with $23 million in the first quarter of 2007, representing a decrease of $19 million, primarily due to divestitures and plant closures.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $148 million in the first quarter of 2008, compared with $169 million in the first quarter of 2007, representing a decrease of $21 million or 12%. The decrease in expense primarily resulted from $15 million in savings attributable to the Company’s ongoing restructuring activities. Other net cost reductions of $6 million include lower European securitization costs and lower bad debt costs.

Restructuring Expenses and Reimbursement from Escrow Account

 

The following is a summary of the Company’s consolidated restructuring reserves and related activity for the three-months ended March 31, 2008. The Company’s restructuring expenses are primarily related to employee severance and termination benefit costs.