Visteon 10-Q Q2 2014
Table of Contents



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 June 30, 2014,
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 July 31, 2014, the registrant had outstanding 43,983,847 shares of common stock.
Exhibit index located on page number 55.


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Index

Part I - Financial Information
Page
 
 
 
 
 
 
 
 
 
 
 
 
 



2


Table of Contents

Part I
Financial Information

Item 1.
Consolidated Financial Statements

VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2014
 
2013
 
2014
 
2013
Sales
$
1,782

 
$
1,610

 
$
3,500

 
$
3,196

Cost of sales
1,588

 
1,447

 
3,127

 
2,883

Gross margin
194

 
163

 
373

 
313

Selling, general and administrative expenses
84

 
77

 
165

 
150

Interest expense
8

 
10

 
18

 
23

Interest income
2

 
2

 
4

 
5

Equity in net income of non-consolidated affiliates
11

 
42

 
13

 
86

Loss on debt extinguishment
23

 

 
23

 

Restructuring expenses
13

 
2

 
14

 
21

Other expenses (income)
14

 
(3
)
 
20

 
8

Income from continuing operations before income taxes
65

 
121

 
150

 
202

Provision for income taxes
41

 
39

 
72

 
36

Net income from continuing operations
24

 
82

 
78

 
166

(Loss) income from discontinued operations, net of tax
(165
)
 
4

 
(171
)
 
4

Net (loss) income
(141
)
 
86

 
(93
)
 
170

Net income attributable to non-controlling interests
14

 
21

 
43

 
36

Net (loss) income attributable to Visteon Corporation
$
(155
)
 
$
65

 
$
(136
)
 
$
134

 
 
 
 
 
 
 
 
Basic (loss) earnings per share
 
 
 
 
 
 
 
    Continuing operations
$
(0.04
)
 
$
1.24

 
$
0.51

 
$
2.60

    Discontinued operations
(3.31
)
 
0.06

 
(3.40
)
 
0.04

Basic (loss) earnings per share attributable to Visteon Corporation
$
(3.35
)
 
$
1.30

 
$
(2.89
)
 
$
2.64

 
 
 
 
 
 
 
 
Diluted (loss) earnings per share
 
 
 
 
 
 
 
    Continuing operations
$
(0.04
)
 
$
1.23

 
$
0.49

 
$
2.57

    Discontinued operations
(3.31
)
 
0.06

 
(3.30
)
 
0.04

Diluted (loss) earnings per share attributable to Visteon Corporation
$
(3.35
)
 
$
1.29

 
$
(2.81
)
 
$
2.61

 
 
 
 
 
 
 
 
Comprehensive (loss) income:
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(107
)
 
$
50

 
$
(80
)
 
$
90

Comprehensive (loss) income attributable to Visteon Corporation
$
(131
)
 
$
38

 
$
(124
)
 
$
79


See accompanying notes to the consolidated financial statements.

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VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
 
June 30
 
December 31
 
2014
 
2013
ASSETS
Cash and equivalents
$
1,285

 
$
1,677

Restricted cash
12

 
25

Accounts receivable, net
1,129

 
1,227

Inventories, net
462

 
472

Assets held for sale
432

 

Other current assets
305

 
352

Total current assets
3,625

 
3,753

 
 
 
 
Property and equipment, net
1,280

 
1,414

Intangible assets, net
416

 
447

Investments in non-consolidated affiliates
160

 
228

Other non-current assets
168

 
185

Total assets
$
5,649

 
$
6,027

 
 
 
 
LIABILITIES AND EQUITY
Short-term debt, including current portion of long-term debt
$
127

 
$
106

Accounts payable
1,036

 
1,207

Accrued employee liabilities
152

 
202

Liabilities held for sale
344

 

Other current liabilities
274

 
287

Total current liabilities
1,933

 
1,802

 
 
 
 
Long-term debt
801

 
624

Employee benefits
418

 
440

Deferred tax liabilities
128

 
137

Other non-current liabilities
148

 
151

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock (par value $0.01, 50 million shares authorized, none outstanding at June 30, 2014 and December 31, 2013)

 

Common stock (par value $0.01, 250 million shares authorized, 54 million and 54 million shares issued, 44 million and 48 million shares outstanding at June 30, 2014 and December 31, 2013, respectively)
1

 
1

Stock warrants
6

 
6

Additional paid-in capital
1,236

 
1,291

Retained earnings
820

 
956

Accumulated other comprehensive loss

 
(12
)
Treasury stock
(752
)
 
(322
)
Total Visteon Corporation stockholders’ equity
1,311

 
1,920

Non-controlling interests
910

 
953

Total equity
2,221

 
2,873

Total liabilities and equity
$
5,649

 
$
6,027


See accompanying notes to the consolidated financial statements.

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VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 1 
(Dollars in Millions)
(Unaudited)
 
Six Months Ended June 30
 
2014
 
2013
Operating Activities
 
 
 
Net (loss) income
$
(93
)
 
$
170

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Impairment of long-lived assets
173

 

Depreciation and amortization
130

 
132

Loss on debt extinguishment
23

 

Equity in net income of non-consolidated affiliates, net of dividends remitted
5

 
(82
)
Stock-based compensation
6

 
11

Other non-cash items
5

 
(5
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(78
)
 
(87
)
Inventories
(18
)
 
(43
)
Accounts payable
21

 
183

Accrued income taxes
12

 
(56
)
Other assets and other liabilities
(59
)
 
(65
)
Net cash provided from operating activities
127

 
158

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(127
)
 
(114
)
Proceeds from asset sales and business divestitures
60

 
39

Other
(4
)
 

Net cash used by investing activities
(71
)
 
(75
)
 
 
 
 
Financing Activities
 
 
 
Short-term debt, net
35

 
43

Proceeds from issuance of debt, net of issuance costs
590

 
204

Repurchase of long-term notes
(419
)
 

Repurchase of common stock
(500
)
 
(125
)
Dividends paid to non-controlling interests
(45
)
 
(22
)
Other
3

 
(4
)
Net cash (used by) provided from financing activities
(336
)
 
96

Effect of exchange rate changes on cash and equivalents
2

 
(21
)
Net (decrease) increase in cash and equivalents
(278
)
 
158

Cash and equivalents at beginning of period
1,677

 
825

Cash and equivalents at end of period
$
1,399

 
$
983


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 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. Basis of Presentation

Description of Business: Visteon Corporation (the “Company” or “Visteon”) is a global supplier of automotive systems, modules and components to global automotive original equipment manufacturers (“OEMs”). Headquartered in Van Buren Township, Michigan, Visteon has a workforce of approximately 24,000 employees and a network of manufacturing operations, technical centers and joint ventures in every major geographic region of the world with its operations organized by global product lines including Climate, Electronics and Interiors.

Interim Financial Statements: The unaudited consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These interim consolidated financial statements include all adjustments (consisting of normal recurring adjustments, except as otherwise disclosed) that management believes are necessary for a fair presentation of the results of operations, financial position and cash flows of the Company for the interim periods presented. Interim results are not necessarily indicative of full-year results.

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.

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.

Restricted Cash: Restricted cash represents amounts designated for uses other than current operations and includes $10 million of collateral for the Letter of Credit Facility with US Bank National Association, and $2 million related to cash collateral for other corporate purposes at June 30, 2014.

Recent Accounting Pronouncements: In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-8, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". This ASU changes the requirements for reporting discontinued operations to disposals of components of an entity that represent strategic shifts that have a major effect on an entity’s operations and financial results. The standard also expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not qualify for discontinued operations reporting. The guidance is effective for interim and annual periods beginning after December 15, 2014, and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this ASU on its consolidated financial statements and did not early adopt this standard for purposes of the discontinued operations disclosed in Note 2.

In May 2014, the FASB issued ASU No. 2014-9, "Revenue from Contracts with Customers", which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

NOTE 2. Interiors Transaction

Overview

On May 1, 2014, the Company entered into a Master Purchase Agreement (the “Purchase Agreement”) pursuant to which, Visteon will reorganize substantially all of its global Interiors business under a newly-formed holding company (the “Reorganization”)

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and will sell all of the equity of that holding company (the “Interiors Transaction”) in exchange for the assumption of certain pension and other liabilities related to the Company's Interiors business and the payment of nominal cash consideration. Visteon agreed to contribute up to $95 million (the "Cash Contribution") to the Interiors business and the Purchase Agreement includes net working capital adjustments whereby the Cash Contribution will be effectively adjusted based on the actual net working capital levels as of the closing date. Visteon also agreed to support the buyer in establishing external credit facilities. To the extent that $90 million of external credit facilities are not available to the Interiors business by the date of closing, Visteon is required to provide a seller-backed revolving credit facility in the amount of any shortfall. Draws under any such seller-backed facility will only be available if certain of the external credit facilities are fully drawn, and any draws on the seller-backed facility generally must be repaid prior to the repayment of the external credit facilities. The seller-backed facility will have a maturity of three years and will have a default rate of interest for any interest and/or principal payment defaults.

The closing of the Interiors Transaction is expected to occur by December 31, 2014 and is subject to various conditions, including the completion of the Reorganization, regulatory and antitrust approvals, receipt of other third party consents and approvals and other closing conditions. As part of the Reorganization, Visteon will separate the portion of its Interiors business conducted through its facilities in Chennai and Pune, India into a new legal entity, which will be transferred to the holding company and sold to the buyer as part of the Interiors Transaction. Due to the time required to effect such separation under Indian law, the consummation of the Indian portion of the Interiors Transaction may occur subsequent to the closing of the balance of the Interiors Transaction.

Interiors Assets and Liabilities Held for Sale

The Company determined that assets and liabilities subject to the Interiors Transaction met the "held for sale" criteria during the quarterly period ended June 30, 2014. As the fair value of the assets and liabilities subject to the Interiors Transaction was less than the carrying value, the long-lived assets were reduced to zero, which resulted in an impairment loss of $173 million. The Company expects to record additional losses in connection with the Interiors Transaction upon closing, which are estimated to range from $150 million to $200 million, including the Cash Contribution, net working capital adjustments, and other contractual obligations resulting from the closing. Additionally, the held for sale Interiors assets and liabilities were reclassified in the Consolidated Balance Sheets to Assets held for sale or Liabilities held for sale, respectively, as the sale of such assets and liabilities is expected to close by December 31, 2014. Assets and liabilities held for sale are summarized as follows:
Assets
 
June 30 2014
 
Liabilities
 
June 30 2014
 
 
(Dollars in Millions)
 
 
 
(Dollars in Millions)
 
 
 
 
 
 
 
Cash and equivalents
 
$
114

 
Short-term debt
 
$
31

Restricted cash
 
14

 
Accounts payable
 
211

Accounts receivable, net
 
199

 
Accrued employee liabilities
 
45

Inventories, net
 
30

 
Long-term debt
 
1

Other assets
 
75

 
Employee benefits
 
17

Total assets held for sale
 
$
432

 
Other liabilities
 
39

 
 
 
 
Total liabilities held for sale
 
$
344


The short-term debt held for sale includes an arrangement, through a subsidiary in France, to sell accounts receivable with recourse on an uncommitted basis. The Company is required to repay any amounts outstanding under this facility as of the transaction close date.

Interiors Discontinued Operations

The operations subject to the Interiors Transaction met conditions required to qualify for discontinued operations reporting. Accordingly, the results of operations for Interiors business subject to the Interiors Transaction have been reclassified to (Loss) income from discontinued operations, net of tax in the consolidated statements of comprehensive (loss) income for the three and six-month periods ended June 30, 2014 and June 30, 2013. While the Interiors Transaction represents the substantial majority of the Company's Interiors operations, other operations previously reported within the Company's Interiors reporting segment were excluded from the scope of the Interiors Transaction. These other operations have been classified within the Other reportable segment. The Company's goal is to complete the disposal of its remaining Interiors business during 2014. Due to certain liabilities and capital requirements of the remaining business, Visteon may be required to contribute cash to such business in connection with any disposition and such amounts could be material.

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Discontinued operations are summarized as follows:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Sales
$
258

 
$
282

 
$
522

 
$
552

Cost of sales
229

 
260

 
477

 
526

Gross margin
29

 
22

 
45

 
26

Selling, general and administrative expenses
14

 
14

 
27

 
27

Long-lived asset impairment
173

 

 
173

 

Other expenses
9

 
4

 
14

 
10

(Loss) income from discontinued operations before income taxes
(167
)
 
4

 
(169
)
 
(11
)
(Benefit from) provision for income taxes
(2
)
 

 
2

 
(15
)
(Loss) income from discontinued operations, net of tax
(165
)
 
4

 
(171
)
 
4

Net (loss) income attributable to non-controlling interests
(12
)
 
1

 
(11
)
 
2

Net (loss) income from discontinued operations attributable to Visteon
$
(153
)
 
$
3

 
$
(160
)
 
$
2


NOTE 3. Yanfeng Transactions
 
On August 12, 2013, Visteon entered into a Master Agreement (the “Master Agreement”) with Huayu Automotive Systems Company Limited (“HASCO”), Yanfeng Visteon Automotive Trim Systems Co., Ltd. (“Yanfeng”) and Yanfeng Visteon Automotive Electronics Co., Ltd. (“YFVE”), pursuant to which, among other things, Visteon and HASCO agreed to modify their existing interests in automobile interiors and electronics joint ventures in the People’s Republic of China, including Yanfeng and YFVE.
On December 17, 2013, Visteon completed the sale of its 50% ownership interest in Yanfeng for cash proceeds of $928 million (before applicable taxes). On November 7, 2013, Visteon made a cash payment of $58 million to subscribe to an additional 11% ownership interest in YFVE, increasing Visteon's direct ownership interest in YFVE from a non-controlling 40% direct ownership interest to a controlling 51% direct ownership interest. From that date, the financial position, results of operations and cash flows of YFVE have been consolidated into the Company's financial statements as part of the Electronics business unit.

During the first quarter of 2014 and in accordance with the Master Agreement, YFVE completed the sale of its ownership interests in certain joint ventures to Yanfeng Visteon Electronics (China) Investment Co., Ltd. ("YFVIC") for cash proceeds of $33 million. No gains or losses were recorded on these transactions by YFVE due to the Company's 50% ownership interest in YFVIC. Differences between carrying value and proceeds on these investments, if any, have been deferred as a basis adjustment to the Company's investment in YFVIC.
          
NOTE 4. Non-Consolidated Affiliates

The Company recorded equity in the net income of non-consolidated affiliates of $11 million and $42 million for the three-month periods ended June 30, 2014 and 2013, respectively. For the six-month periods ended June 30, 2014 and 2013, the Company recorded $13 million and $86 million, respectively. Investments in non-consolidated affiliates were $160 million and $228 million at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014, non-consolidated affiliates accounted for under the equity method totaled $121 million and non-consolidated affiliates accounted for under the cost method totaled $39 million. Effective December 17, 2013 and in accordance with the Master Agreement, the Company, among other things, completed the sale of its 50% ownership interest in Yanfeng and changed from the equity method to the cost method of accounting for certain Yanfeng related Interiors joint ventures, including Yanfeng Visteon Jinqiao Automotive Trim Systems Co., Ltd.

The Company monitors its investments in the net assets of non-consolidated 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. In April 2014, Visteon completed the sale of its 50% ownership stake in Duckyang, a Korean automotive interiors joint venture for total cash of $31 million.


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NOTE 5. Restructuring Expenses

The Company previously announced a $100 million 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 restructure three European Interiors facilities, to consolidate its Climate operations and to realign its corporate and administrative functions directly to their corresponding operational beneficiary. Through June 30, 2014, the Company recorded approximately $95 million of restructuring expenses under this program. The Company expects to record additional costs related to this program in future periods as underlying plans are finalized.

During the second quarter of 2014, the Company recorded $17 million of restructuring expenses related to employee and severance termination benefits, including amounts associated with discontinued operations, including the following activities.
The closure of a Climate facility located in Quilmes, Argentina. In connection with the closure, the Company recorded $10 million of restructuring expenses, primarily related to severance and termination benefits associated with approximately 270 employees, which remains accrued as of June 30, 2014.
The closure of a Climate facility located in Port Elizabeth, South Africa. In connection with the closure, the Company recorded $2 million of restructuring expenses, primarily related to severance and termination benefits associated with approximately 90 employees, which remains accrued as of June 30, 2014.
In connection with the previously announced restructuring of three Interiors facilities in France, the Company recorded an additional $5 million of restructuring expenses. This amount remains accrued as of June 30, 2014, as part of the Other product group, in addition to $8 million associated with previously announced programs including the fundamental reorganization of operations at a facility in Brazil.

During the first quarter of 2013, the Company recorded $20 million of restructuring expenses, net of reversal, primarily related to severance and termination benefits associated with approximately 140 employees, including $14 million in connection with the reorganization of the Company's Climate operations in France and $6 million related to the transformation of its corporate and administrative functions. The Company recorded $2 million of additional restructuring expenses associated with these programs during the first quarter of 2014.

Restructuring reserve balances of $26 million and $29 million at June 30, 2014 and December 31, 2013, respectively, are classified as Other current liabilities on the consolidated balance sheets. The Company anticipates that the activities associated with these reserves will be substantially completed by the end of 2014. The following is a summary of the Company’s restructuring reserves and related activity, including amounts attributable to discontinued operations, for the six months ended June 30, 2014:
 
Climate
 
Other
 
Corporate
 
Total
 
(Dollars in Millions)
Balance at December 31, 2013
$
1

 
$
25

 
$
3

 
$
29

Expenses
1

 

 
1

 
2

Utilization
(1
)
 
(6
)
 
(3
)
 
(10
)
Balance at March 31, 2014
$
1

 
$
19

 
$
1

 
$
21

Expenses
12

 
5

 

 
17

Utilization

 
(11
)
 
(1
)
 
(12
)
Balance at June 30, 2014
$
13

 
$
13

 
$

 
$
26


Given the economically-sensitive and highly competitive nature of the automotive 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.


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NOTE 6. Other Expenses (Income)

Other expenses (income) consist of the following:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Transformation costs
$
8

 
$
2

 
$
14

 
$
13

Provision for losses on recoverable taxes
8

 

 
8

 

Gain on sale of equity interest
(2
)
 
(5
)
 
(2
)
 
(5
)
 
$
14

 
$
(3
)
 
$
20

 
$
8


Transformation Activities

Business transformation costs of $8 million and $14 million were incurred during the three-month and six-month periods ended June 30, 2014, respectively, related to financial and advisory services associated with continued execution of the Company's comprehensive value creation plan, including the following activities:
Climate consolidation - During the first quarter of 2013, Visteon completed the sale of certain subsidiaries and intellectual property of its global climate business to Halla Climate Control Corporation, a majority-owned subsidiary of the Company, for approximately $410 million. With effect from February 1, 2013, this combined climate business has been operating under the name of Halla Visteon Climate Control Corporation ("HVCC"). HVCC is headquartered in South Korea.
Electronics optimization - On January 13, 2014, Visteon reached an agreement to acquire the automotive electronics business of Johnson Controls for cash of $265 million and the acquisition was completed on July 1, 2014. During the fourth quarter of 2013, the Company made a cash payment of $58 million to subscribe to an additional 11% ownership interest in YFVE, resulting in a controlling 51% direct ownership interest. Additionally, the Company invested $48 million during the fourth quarter of 2013, in a non-consolidated electronics holding company owned 50% by Visteon and 50% by Yanfeng.
Interiors strategy - On May 1, 2014, the Company entered a Master Purchase Agreement to sell substantially all of its global Interiors operations for nominal cash consideration. Transformation costs associated with the Interiors strategy have been classified as discontinued operations for the three and six-month periods ended June 30, 2014 and 2013, respectively. In April 2014, Visteon completed the sale of its 50% ownership stake in Duckyang, a Korean automotive interiors joint venture for total cash of $31 million. On December 17, 2013, Visteon completed the sale of its 50% ownership interest in Yanfeng, a significant interiors equity investee, for cash proceeds of $928 million (before applicable taxes). The Company's goal is to complete the disposal of its remaining Interiors business during 2014. Due to certain liabilities and capital requirements of the remaining business, Visteon may be required to contribute cash to such business in connection with any disposition and such amounts could be material.

Provision for Losses on Recoverable Taxes

The Company recorded $8 million during the three months ended June 30, 2014 to adjust recoverable value-added taxes to net realizable value attributable to business exit activities.

Gain on Sale of Equity Interest

In April 2014, the Company completed the sale of its 50% ownership interest in Duckyang Industry Co., Ltd. ("Duckyang"), a Korean automotive interiors supplier. In connection with the transaction, the Company received total cash of approximately $31 million, including $6 million of dividends. The Company recorded a pre-tax gain of approximately $2 million on this transaction during the three months ended June 30, 2014.

In June 2013, the Company completed the sale of its 20% equity interest in Dongfeng Visteon Automotive Trim Systems Co., Ltd. ("Dongfeng") for proceeds of approximately $20 million and recognized a gain of $5 million during the three months ended June 30, 2013.


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Table of Contents

NOTE 7. Inventories

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:
 
June 30
 
December 31
 
2014
 
2013
 
(Dollars in Millions)
Raw materials
$
217

 
$
204

Work-in-process
165

 
191

Finished products
102

 
104

Valuation reserves
(22
)
 
(27
)
 
$
462

 
$
472


NOTE 8. Property and Equipment

Property and equipment, net consists of the following:
 
June 30
 
December 31
 
2014
 
2013
 
(Dollars in Millions)
Land
$
149

 
$
162

Buildings and improvements
278

 
301

Machinery, equipment and other
1,237

 
1,309

Construction in progress
134

 
145

Total property and equipment
1,798

 
1,917

Accumulated depreciation
(589
)
 
(580
)
 
1,209

 
1,337

Product tooling, net of amortization
71

 
77

Property and equipment, net
$
1,280

 
$
1,414


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 expense for property and equipment, inclusive of amounts attributable to discontinued operations, is as follows:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Depreciation
$
49

 
$
52

 
$
99

 
$
106

Amortization
2

 
3

 
5

 
5

 
$
51

 
$
55

 
$
104

 
$
111



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Table of Contents

NOTE 9. Intangible Assets

Intangible assets, net are summarized as follows:
 
Estimated Weighted Average Useful Life (years)
 
June 30, 2014
 
December 31, 2013
 
 
Gross Carrying Value    
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value    
 
Accumulated Amortization
 
Net Carrying Value
 
 
 
(Dollars in Millions)
Definite-Lived
 
 
Developed technology
8
 
$
214

 
$
100

 
$
114

 
$
219

 
$
88

 
$
131

Customer related
10
 
214

 
57

 
157

 
214

 
45

 
169

Other
39
 
30

 
9

 
21

 
32

 
9

 
23

Subtotal
 
 
$
458

 
$
166

 
$
292

 
$
465

 
$
142

 
$
323

Indefinite-Lived
 
 
Goodwill
 
 
 
 
 
 
$
96

 
 
 
 
 
$
97

Trade names
 
 
 
 
 
 
28

 
 
 
 
 
27

Subtotal
 
 
 
 
 
 
124

 
 
 
 
 
124

    Total
 
 
 
 
 
 
$
416

 
 
 
 
 
$
447


The Company recorded approximately $13 million and $26 million of amortization expense related to definite-lived intangible assets for the three-month and six-month periods ended June 30, 2014, respectively. The Company currently estimates annual amortization expense to be $50 million for 2014, $49 million for 2015, $49 million for 2016, $47 million for 2017 and $41 million for 2018. Indefinite-lived intangible assets, including goodwill and trade names 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.

Goodwill is summarized by product group in the table below.
 
Climate
 
Electronics
 
Total
 
(Dollars in Millions)
Balance at December 31, 2013
$
46

 
$
51

 
$
97

Foreign currency and other

 
(1
)
 
(1
)
Balance at March 31, 2014
$
46

 
$
50

 
$
96

Foreign currency and other

 

 

Balance at June 30, 2014
$
46

 
$
50

 
$
96



12


Table of Contents

NOTE 10. Debt

The Company’s short and long-term debt consists of the following:
 
June 30 2014
 
December 31 2013
 
(Dollars in Millions)
Short-term debt
 
 
 
Current portion of Term Facility
$
6

 
$

Current portion of other long-term debt
12

 
2

Short-term borrowings
109

 
104

Total short-term debt
$
127

 
$
106

 
 
 
 
Long-term debt
 
 
 
6.75% Senior notes due April 15, 2019
$

 
$
396

Term Facility due April 9, 2021
585

 

HVCC USD term loan due May 30, 2016
100

 
100

HVCC KRW term loan due May 30, 2016
99

 
95

Other
17

 
33

Total long-term debt
$
801

 
$
624


On April 9, 2014, the Company entered into a new credit agreement (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 (the “Administrative Agent”), which provides for (i) delayed draw term loans in an aggregate principal of $600 million (the “Term Facility”) and (ii) a $200 million revolving credit facility (the “Revolving Facility”). The Company and certain of its subsidiaries have granted a security interest in substantially all of their respective property, subject to certain limitations.

At the Company’s option, loans under the Term Facility and Revolving Facility may be maintained from time to time at an interest rate equal to the applicable rate (“Applicable Rate”) plus the applicable domestic rate (“Base Rate”) or the LIBOR-based rate (“Eurodollar Rate”). The Base Rate shall be a fluctuating rate per annum equal to the highest of (i) the rate equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published by the Federal Reserve Bank of New York on the following Business Day, plus 0.50%; (ii) the rate established by the Administrative Agent as its “prime rate” at its principal U.S. office and (iii) the Eurodollar Rate (which, for the purposes of establishing the Base Rate, shall not be less than 0.75%) plus 1%. The Eurodollar Rate shall be equal to the quotient obtained by dividing (a) the ICE Benchmark Administration Limited LIBOR Rate by (b) the difference between 1.00 and the reserve percentage under regulations issued from time to time by the Board of Governors of the Federal Reserve System of the United States for determining the maximum reserve requirement with respect to Eurocurrency funding. The Applicable Rate varies based on certain corporate credit ratings at the time of borrowing, and ranges from 1.00% to 1.75% for Base Rate loans and 2.00% to 2.75% for Eurodollar Rate loans.

Up to $75 million of the Revolving Facility is available for the issuance of letters of credit, and any such issuance of letters of credit will reduce the amount available for loans under the Revolving Facility. Up to $20 million of the Revolving Facility is available for swing line advances, and any such swing line advances will reduce the amount available for loans under the Revolving Facility. The Company may request increases in the limits under the Term Facility and the Revolving Facility and may request the addition of one or more term loan facilities under the Credit Agreement.

The Term Facility shall mature on April 9, 2021 (the “Term Facility Maturity Date”), and the Revolving Facility shall mature on April 9, 2019 (the “Revolving Facility Maturity Date”). Loans made under the Term Facility are due and payable in full on the Term Facility Maturity Date. Loans made under the Revolving Facility are due and payable in full on the Revolving Facility Maturity Date. Outstanding borrowings may be prepaid without penalty (other than borrowings made for the purpose of reducing the effective interest rate margin or weighted average yield of the loans) in $100,000 increments over $500,000 for loans maintained under the Base Rate and in $250,000 increments over $1,000,000 for loans maintained under the Eurodollar Rate. In the event the Company makes a prepayment of the term loans in connection with a repricing transaction at any time prior to the six month anniversary of the closing date, the Company must pay a prepayment premium equal to 1.0% of the principal amount of term loans prepaid or repaid to the applicable lenders under the Term Facility. There are mandatory prepayments of principal in connection with: (i) excess cash flow sweeps (in the amount of 50%, with step downs to 25% and 0% of the excess cash flow, depending on

13


Table of Contents

the then-applicable leverage), (ii) certain asset sales or other dispositions (including as a result of casualty or condemnation), (iii) certain refinancings of indebtedness and (iv) over-advances under the Revolving Facility. The Company is also required to repay quarterly 0.25% of the initial term loan drawn.

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 Term Facility and the Revolving Facility require that, as of the last day of any four consecutive fiscal quarters of the Company last ended (commencing as of June 30, 2014), the Company maintain a total net leverage ratio no greater than 3.00:1.00 (the “Financial Maintenance Covenant”). During any period when the Company’s corporate and family ratings meet certain specified ratings, certain of the negative covenants shall be suspended and the Financial Maintenance Covenant shall only be tested with respect to the Revolving Facility. As of June 30, 2014, the Company was in compliance with the Financial Maintenance Covenant.

All obligations under the Credit Agreement and obligations in respect of certain cash management services and swap agreements with the lenders and their affiliates are unconditionally guaranteed by certain of the Company’s subsidiaries. In connection with the Credit Agreement, on April 9, 2014, (i) the Company, certain of its subsidiaries and the Administrative Agent entered into a Security Agreement (the “Security Agreement”), (ii) certain subsidiaries of the Company and the Administrative Agent entered into a Guaranty Agreement (the “Guaranty Agreement”) and (iii) the Company, certain of its subsidiaries and the Administrative Agent entered into an Intellectual Property Security Agreement (the “Intellectual Property Security Agreement” and, together with the Security Agreement and the Guaranty Agreement, the “Security Documents”). Pursuant to the Security Documents, all obligations under the Credit Agreement are secured by a first-priority perfected lien (subject to certain exceptions) in substantially all of the property of the Company and the subsidiaries party to the Security Agreement, subject to certain limitations.

In connection with signing of the Credit Agreement, on April 9, 2014, the Company terminated its $130 million revolving loan credit agreement dated October 1, 2010.

On June 23, 2014, the Company drew the $600 million term loan, net of an original issue discount of $9 million. As of June 30, 2014, $600 million was outstanding under the Term Facility, and there were no outstanding borrowings under the Revolving Facility.

6.75% Senior Notes Due April 15, 2019

The Company's 6.75% senior notes due April 15, 2019 (the"Senior Notes"), were issued under an Indenture (the “Indenture”) among the Company, the subsidiary guarantors named therein, and The Bank of New York Mellon Trust Company, N.A., as trustee. The Indenture and the form of Senior Notes provide, among other things, that prior to April 15, 2014, the Company had the option to redeem up to 10% of the Senior Notes during any 12-month period from the issue date until April 15, 2014, for a 103% redemption price, plus accrued and unpaid interest to the redemption date. On April 10, 2014, the Company exercised this right and redeemed $50 million, or 10%, of its Senior Notes. Additionally, the Company had the option to redeem a portion or all of the Senior Notes beginning on April 15, 2014, for a 105.063% redemption price, plus accrued and unpaid interest to the redemption date. On April 9, 2014, the Company exercised this right and issued a call notice and redeemed the remaining $350 million of its Senior Notes on May 9, 2014. The Company recorded a $23 million loss on extinguishment of debt in the three months ended June 30, 2014 related to the premium paid on the debt redemption and unamortized original issue discount, debt fees and other debt issue costs associated with the Senior Notes.

HVCC Term Loans

During the first quarter of 2013, HVCC entered into and fully drew on two unsecured bilateral term loan credit agreements with aggregate available borrowings of approximately $195 million. As of June 30, 2014, the U.S. dollar ("USD") equivalent of these agreements was $199 million. Both credit agreements mature in May 2016, and are subject to financial covenants requiring total debt to EBITDA of not greater than 3.2x and a net interest coverage test of more than 3x. The Company was in compliance with such covenants at June 30, 2014.

Short-term debt

Short-term borrowings are primarily related to the Company's non-U.S. operations and are payable in various currencies. As of June 30, 2014, the Company had international affiliate short-term borrowings of $109 million, approximately $83 million of which is related to HVCC. As of December 31, 2013, the Company had international affiliate short-term borrowings of $104 million, approximately $68 million of which is related to HVCC. These borrowings are payable in both USD and non-U.S. currencies including, but not limited to, the Euro, Korean Won, Turkish Lira, and Chinese Yuan.

14


Table of Contents

Short-term borrowings at December 31, 2013 include an arrangement, through a subsidiary in France, to sell accounts receivable with recourse on an uncommitted basis. The amount of financing available is dependent on the amount of receivables less customary reserves. The Company pays a 25 basis points servicing fee on all receivables sold, as well as a financing fee of three-month Euribor plus 95 basis points on the advanced portion. Outstanding borrowings under the facility at June 30, 2014 were $31 million with $47 million of receivables pledged as security, both of which were classified as held for sale. At December 31, 2013, there were $31 million outstanding borrowings under the facility with $52 million of receivables pledged as security.

NOTE 11. Employee Benefit Plans

Defined Benefit Plans

The Company's net periodic benefit costs for the three-month periods ended June 30, 2014 and 2013 were as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Costs Recorded in Income
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
6

 
$
6

Interest cost
13

 
12

 
6

 
7

Expected return on plan assets
(16
)
 
(15
)
 
(4
)
 
(5
)
Net pension (income) expense
$
(3
)
 
$
(3
)
 
$
8

 
$
8


The Company's net periodic benefit costs for the six-month periods ended June 30, 2014 and 2013 were as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Costs Recorded in Income
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
12

 
$
12

Interest cost
25

 
24

 
12

 
14

Expected return on plan assets
(31
)
 
(31
)
 
(8
)
 
(10
)
Amortization of actuarial losses

 

 
1

 
1

Net pension (income) expense
$
(6
)
 
$
(7
)
 
$
17

 
$
17


During the six-month period ended June 30, 2014, the Company made cash contributions to non-U.S. defined benefit pension plans of $13 million. During 2014, the Company expects to make additional cash contributions to its U.S. and non-U.S. defined benefit pension plans of $5 million and $29 million, respectively. The Company’s expected 2014 contributions may be revised.

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. The expense related to matching contributions was approximately $3 million and $2 million for the three-month periods ended June 30, 2014 and 2013, respectively. The expense related to matching contributions was approximately $8 million and $6 million for the six-month periods ended June 30, 2014 and 2013, respectively.

Annuity Purchase

On July 16, 2014, the Company entered into an agreement to transfer certain U.S. pension assets to Prudential Insurance Company of America, to settle approximately $350 million of its U.S. outstanding pension obligation. The Company expects to record a settlement gain estimated to be approximately $20 million during the three months ending September 30, 2014.

15


Table of Contents

NOTE 12. Income Taxes

During the three and six-month periods ended June 30, 2014, the Company recorded income tax provisions of $41 million and $72 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 pre-tax losses in the U.S. and certain other jurisdictions to the extent not offset by other categories of income. Pre-tax losses from continuing operations in jurisdictions where valuation allowances are maintained and no income tax benefits are recognized totaled $64 million and $31 million, for the three months ended June 30, 2014 and 2013, respectively, resulting in an increase in the Company's effective tax rate in those years. The Company provides for U.S. and non-U.S. income taxes and non-U.S. withholding taxes on the projected future repatriations of the earnings from its non-U.S. operations that are not considered permanently reinvested at each tier of the legal entity structure. During the three-month periods ended June 30, 2014 and 2013, the Company recognized expense of $2 million and $8 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. 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 effects of changes in tax laws or rates, in the interim period in which they occur.

The need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will continue to cause variability in the Company's quarterly and annual effective tax rates. Full valuation allowances against deferred tax assets in the U.S. and applicable foreign countries will be maintained until sufficient positive evidence exists to reduce or eliminate them. 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 adjusted historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded.

Unrecognized Tax Benefits

Gross unrecognized tax benefits were $83 million at June 30, 2014, and $73 million at December 31, 2013, of which approximately $39 million and $30 million, respectively, represent the amount of unrecognized tax 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. During the three-month period ended June 30, 2014, the Company increased its gross unrecognized tax benefits to reflect the remeasurement of prior year uncertain tax positions as a result of completed reviews with updated financial and other measurement criteria in connection with certain incentives received by the Company's affiliates in Asia. The Company records interest and penalties on uncertain tax positions as a component of income tax expense and related amounts accrued at June 30, 2014 and December 31, 2013 were $27 million and $23 million, respectively.

With few exceptions, the Company is no longer subject to U.S. federal tax examinations for years before 2009 or state and local, or non-U.S. income tax examinations for years before 2003. 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 Asia (including Korea) 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.










16


Table of Contents

A reconciliation of unrecognized tax benefits, including amounts attributable to discontinued operations, is as follows:
 
Six Months Ended June 30, 2014
 
(Dollars in Millions)
Beginning balance
$
73

    Additions to tax positions related to current period
4

    Additions to tax positions related to prior periods
7

    Settlements with tax authorities
(1
)
Ending balance
$
83


During 2012, South Korean tax authorities commenced a review of the Company's South Korean affiliates (including Halla) for tax years 2007 through 2012, and issued formal notice of assessments, including penalties, of approximately $25 million for alleged underpayment of withholding tax on dividends paid and other items, including certain management service fees charged by Visteon. The Company's South Korean affiliates have paid approximately $25 million to the tax authorities in 2013 and 2012, as required under South Korean tax regulations, to pursue the appeals process. The Company believes that it is more likely than not that it will receive a favorable ruling when all of the available appeals have been exhausted.

During 2012, Brazilian tax authorities issued tax assessment notices to Visteon Sistemas Automotivos (“Sistemas”) of approximately $15 million related to the sale of its chassis business to a third party. During 2013, after attempts to reopen an appeal of the administrative decision failed, Sistemas opened a judicial proceeding against the government to address the notice which required a deposit in the amount of the assessment in order to suspend the debt and allow Sistemas to operate regularly before the tax authorities. The Company believes that the risk of a negative outcome is remote once the matter is fully litigated at the highest judicial level. These appeal payments in South Korea and Brazil, as well as contingent income tax refund claims associated with other jurisdictions, including applicable accrued interest income, totaled $48 million as of June 30, 2014, and were included in Other non-current assets on the consolidated balance sheet.

NOTE 13. Stockholders’ Equity and Non-controlling Interests

Changes in equity attributable to Visteon and equity attributable to non-controlling interests ("NCI") for the three months ended June 30, 2014 and 2013 are as follows:
 
2014
 
2013
 
Visteon
 
NCI
 
Total
 
Visteon
 
NCI
 
Total
 
(Dollars in Millions)
Three Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity beginning balance
$
1,931

 
$
912

 
$
2,843

 
$
1,306

 
$
733

 
$
2,039

Net income from continuing operations
(2
)
 
26

 
24

 
62

 
20

 
82

Net (loss) income from discontinued operations
(153
)
 
(12
)
 
(165
)
 
3

 
1

 
4

Net (loss) income
(155
)
 
14

 
(141
)
 
65

 
21

 
86

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
17

 
7

 
24

 
(23
)
 
(10
)
 
(33
)
    Benefit plans

 

 

 
1

 
2

 
3

    Unrealized hedging gains
7

 
3

 
10

 
(5
)
 
(1
)
 
(6
)
    Total other comprehensive income (loss)
24

 
10

 
34

 
(27
)
 
(9
)
 
(36
)
Stock-based compensation, net
11

 

 
11

 
5

 

 
5

Warrant exercises

 

 

 
3

 

 
3

Share repurchase
(500
)
 

 
(500
)
 

 

 

Dividends declared to non-controlling interests

 
(26
)
 
(26
)
 

 

 

Stockholders' equity ending balance
$
1,311

 
$
910

 
$
2,221

 
$
1,352

 
$
745

 
$
2,097




17



Changes in equity attributable to Visteon and equity attributable to non-controlling interests ("NCI") for the six months ended June 30, 2014 and 2013 are as follows:
 
2014
 
2013
 
Visteon
 
NCI
 
Total
 
Visteon
 
NCI
 
Total
 
(Dollars in Millions)
Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity beginning balance
$
1,920

 
$
953

 
$
2,873

 
$
1,385

 
$
756

 
$
2,141

Net income from continuing operations
24

 
54

 
78

 
132

 
34

 
166

Net (loss) income from discontinued operations
(160
)
 
(11
)
 
(171
)
 
2

 
2

 
4

Net (loss) income
(136
)
 
43

 
(93
)
 
134

 
36

 
170

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency translation adjustments
6

 
(1
)
 
5

 
(54
)
 
(20
)
 
(74
)
    Benefit plans
1

 

 
1

 
10

 

 
10

    Unrealized hedging gains
5

 
2

 
7

 
(11
)
 
(5
)
 
(16
)
    Total other comprehensive income (loss)
12

 
1

 
13

 
(55
)
 
(25
)
 
(80
)
Stock-based compensation, net
15

 

 
15

 
10

 

 
10

Warrant exercises

 

 

 
3

 

 
3

Share repurchase
(500
)
 

 
(500
)
 
(125
)
 

 
(125
)
Dividends declared to non-controlling interests

 
(87
)
 
(87
)
 

 
(22
)
 
(22
)
Stockholders' equity ending balance
$
1,311

 
$
910

 
$
2,221

 
$
1,352

 
$
745

 
$
2,097


Non-controlling Interests

NCI in the Visteon Corporation economic entity are as follows:
 
June 30
 
December 31
 
2014
 
2013
 
(Dollars in Millions)
HVCC
$
777

 
$
777

YFVE
104

 
139

Visteon Interiors Korea, Ltd.
14

 
22

Other
15

 
15

Total non-controlling interests
$
910

 
$
953


On June 30, 2014, HVCC agreed to purchase the automotive thermal and emissions product line of Cooper-Standard Automotive Inc., a subsidiary of Cooper-Standard Holdings Inc., to expand its thermal energy management product portfolio and further diversify its customer base. The cash transaction, valued at $46 million and subject to adjustment and certain regulatory and other approvals, is targeted for completion in the third quarter of 2014.

HVCC, a 70% owned subsidiary of Visteon, declared a dividend of $97 million during the three months ended March 31, 2014, of which, $29 million was attributable to NCI in HVCC. During 2014 and in connection with the Master Agreement, YFVE, a 51% owned subsidiary of Visteon, declared a dividend of $89 million, of which, $44 million was attributable to NCI in YFVE. HVCC Beijing, an 80% owned subsidiary of HVCC, declared and paid a dividend of $60 million during 2014, of which, $12 million was attributable to non-controlling ownership interests. HVCC Nanchang, an 80% owned subsidiary of HVCC, declared a dividend of $10 million during 2014, of which, $2 million was attributable to non-controlling ownership interests.

Stock Options

During the three and six month periods ended June 30, 2014, the Company received payments of $8 million and $10 million related to the exercise of 98,337 and 121,942 stock options, respectively.




Share Repurchase Program

Since July 2012, the Company's board of directors has authorized a total of $1.175 billion in share repurchases. On May 8, 2014, 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. Under the program, the Company paid the financial institution $500 million and received an initial delivery of 3,394,157 shares of common stock using a reference price of $92.07, and an additional delivery of 1,129,001 shares of common stock following the conclusion of the hedge period which determined a certain minimum amount of shares guaranteed under a portion of the program that had a maximum per share price of $100.54. The final settlement will be generally based on the volume-weighted average price of the Company's common stock over a period of up to approximately 12 months, less a negotiated discount, 50 percent of which will be subject to a maximum per share price. As of June 30, 2014, $375 million remained authorized and available for repurchase through December 31, 2015. 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.

Accumulated Other Comprehensive Income (loss)

Changes in Accumulated other comprehensive income (loss) (“AOCI”) and reclassifications out of AOCI by component includes:
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Changes in AOCI:
 
 
 
 
 
 
 
Beginning balance
$
(24
)
 
$
(118
)
 
$
(12
)
 
$
(90
)
Other comprehensive income (loss) before reclassification, net of tax
35

 
(27
)
 
22

 
(50
)
Amounts reclassified from AOCI
(11
)
 

 
(10
)
 
(5
)
Ending balance
$

 
$
(145
)
 
$

 
$
(145
)
 
 
 
 
 
 
 
 
Changes in AOCI by component:
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
  Beginning balance
$
(48
)
 
$
(20
)
 
$
(37
)
 
$
11

Other comprehensive income (loss) before reclassification, net of tax
17

 
(22
)
 
6

 
(52
)
  Amounts reclassified from AOCI (a)

 
(1
)
 

 
(2
)
  Ending balance
(31
)
 
(43
)
 
(31
)
 
(43
)
Benefit plans
 
 
 
 
 
 
 
  Beginning balance
26

 
(99
)
 
25

 
(108
)
  Other comprehensive income before reclassification, net of tax (b)

 
1

 

 
9

  Amounts reclassified from AOCI (c)

 

 
1

 
1

  Ending balance
26

 
(98
)
 
26

 
(98
)
Unrealized hedging gains (loss)
 
 
 
 
 
 
 
  Beginning balance
(2
)
 
1

 

 
7

  Other comprehensive income (loss) before reclassification, net of tax (d)
18

 
(6
)
 
16

 
(7
)
  Amounts reclassified from AOCI (e)
(11
)
 
1

 
(11
)
 
(4
)
  Ending balance
5

 
(4
)
 
5

 
(4
)
AOCI ending balance
$

 
$
(145
)
 
$

 
$
(145
)
(a) Amount included in Other expenses in Consolidated Statements of Comprehensive (Loss) Income.
(b) Net tax expense of $0 million and $1 million are related to benefit plans for the three months ended June 30, 2014 and 2013, respectively. Net tax expense of $0 million and $3 million are related to benefit plans for the six months ended June 30, 2014 and 2013, respectively.
(c) Amount included in the computation of net periodic pension cost. See Note 11 Employee benefit plans for additional details.
(d) Net tax expense (benefit) of $3 million and $(2) million are related to unrealized hedging gains (loss) for the three months ended June 30, 2014 and 2013, respectively. Net tax expense (benefit) of $2 million and $(5) million are related to unrealized hedging gains (loss) for the six months ended June 30, 2014 and 2013, respectively.
(e) Amount is included in Cost of sales in Consolidated Statements of Comprehensive (Loss) Income.



Table of Contents

NOTE 14. Earnings Per Share

The Company uses the two-class method in computing basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income attributable to Visteon, after deducting undistributed income allocated to participating securities, 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 after deducting undistributed income allocated to participating securities. 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.

The table below provides details underlying the calculations of basic and diluted (loss) earnings per share:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2014
 
2013
 
2014
 
2013
 
(In Millions, Except Per Share Amounts)
Numerator:
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(2
)
 
$
62

 
$
24

 
$
132

(Loss) income from discontinued operations
(153
)
 
3

 
(160
)
 
2

Net (loss) income attributable to Visteon Corporation
$
(155
)
 
$
65

 
$
(136
)
 
$
134

Denominator:
 
 
 
 
 
 
 
Average common stock outstanding - basic
46.2

 
50.0

 
47.1

 
50.8

Dilutive effect of warrants and performance stock units

 
0.5

 
1.3

 
0.5

Diluted shares
46.2

 
50.5

 
48.4

 
51.3

 
 
 
 
 
 
 
 
Basic and Diluted (Loss) Earnings Per Share Data:
 
 
 
 
 
 
 
Basic (loss) earnings per share attributable to Visteon:
 
 
 
 
 
 
 
Continuing operations
$
(0.04
)
 
$
1.24

 
$
0.51

 
$
2.60

Discontinued operations
(3.31
)
 
0.06

 
(3.40
)
 
0.04

Basic (loss) earnings per share attributable to Visteon
$
(3.35
)
 
$
1.30

 
$
(2.89
)
 
$
2.64

Diluted (loss) earnings per share attributable to Visteon:
 
 
 
 
 
 
 
Continuing operations
$
(0.04
)
 
$
1.23

 
$
0.49

 
$
2.57

Discontinued operations
(3.31
)
 
0.06

 
(3.30
)
 
0.04

Diluted (loss) earnings per share attributable to Visteon
$
(3.35
)
 
$
1.29

 
$
(2.81
)
 
$
2.61


The effect of certain common stock equivalents including warrants, performance-based share units, and stock options were excluded from the computation of weighted average diluted shares outstanding as inclusion of such items would be anti-dilutive, summarized
below. All common stock equivalents were dilutive in the six months ended June 30, 2014.
 
Three Months Ended June 30
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2014
 
2013
 
2013
 
(In Millions, Except Per Share Amounts)
Number of warrants
0.5
 
 
1.5
    Exercise price
$58.80
 
$—
 
$58.80
Number of performance stock units
0.8
 
 
Number of stock options
 
0.3
 
0.3
    Exercise price
$

-
$

 
$
44.55

-
$
74.08

 
$
44.55

-
$
74.08



20


Table of Contents

NOTE 15. Fair Value Measurements and Financial Instruments

Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs.

The three-levels of the fair value hierarchy are as follows:
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

The Company's fair value of debt excluding debt included in Liabilities held for sale was approximately $924 million and $755 million at June 30, 2014 and December 31, 2013, respectively. Fair value estimates were based on quoted market prices or current rates for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities. Accordingly, the Company's debt is classified as Level 1, "Market Prices" and Level 2, "Other Observable Inputs" in the fair value hierarchy, respectively.

Financial Instruments

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

As of June 30, 2014 and December 31, 2013, the Company had forward contracts to hedge changes in foreign currency exchange rates with notional amounts of approximately $457 million and $625 million, respectively. Fair value estimates of these contracts are based on quoted market prices and other observable inputs. A portion of these instruments have been designated as cash flow hedges with the effective portion of the gain or loss reported in the AOCI component of Stockholders’ equity in the Company’s consolidated balance sheets. The ineffective portion of these instruments is recorded as Cost of sales in the Company’s consolidated statements of comprehensive (loss) income.

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













21


Table of Contents

Financial Statement Presentation

The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. Derivative financial instruments designated and non-designated as hedging instruments are included in the Company’s consolidated balance sheets at June 30, 2014 and December 31, 2013, as follows:
 
 
Assets
 
  Liabilities
Risk Hedged
 
Classification
 
June 30 2014
 
December 31 2013
 
Classification
 
June 30 2014
 
December 31 2013
 
 
(Dollars in Millions)
Designated
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
 
Other current assets
 
$
12

 
$
4

 
Other current assets
 
$
1

 
$

Foreign currency
 
Other current liabilities
 

 
2

 
Other current liabilities
 

 
4

Non-designated
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
 
Other current assets
 
6

 
3

 
Other current assets
 

 
1

 
 
 
 
$
18

 
$
9

 
 
 
$
1

 
$
5

 
 
Gross Amount Recognized
 
Gross Amount Offset in the Statement of Financial Position
 
Net Amount Presented in the Statement of Financial Position
 
 
June 30
 
December 31
 
June 30
 
December 31
 
June 30
 
December 31
Foreign currency derivatives
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in Millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
    Designated
 
$
12

 
$
4

 
$
1

 
$

 
$
11

 
$
4

    Non-designated
 
6

 
3

 

 
1

 
6

 
2

 
 
$
18

 
$
7

 
$
1

 
$
1

 
$
17

 
$
6

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
    Designated
 
$

 
$
4

 
$

 
$
2

 
$

 
$
2

 
 
$

 
$
4

 
$

 
$
2

 
$

 
$
2


Gains and losses on derivative financial instruments recorded in Cost of sales for the three and six-month periods ended June 30, 2014 and 2013, were as follows:
 
Recorded in AOCI, net of tax
 
Reclassified from AOCI into Income
 
Recorded in Income
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
(Dollars in Millions)
Three Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
$
7

 
$
(5
)
 
$
11

 
$
(1
)
 
$

 
$

Non-designated cash flow hedges

 

 

 

 
1

 

 
$
7

 
$
(5
)
 
$
11

 
$
(1
)
 
$
1

 
$

Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
$
5

 
$
(11
)
 
$
11

 
$
4

 
$

 
$

Non-designated cash flow hedges

 

 

 

 
(1
)
 
1

 
$
5

 
$
(11
)
 
$
11

 
$
4

 
$
(1
)
 
$
1






22


Table of Contents

Concentrations of Credit Risk

Financial instruments including cash equivalents, marketable securities, derivative contracts, and accounts receivable, expose the Company to counter-party credit risk for non-performance. The Company’s counterparties for cash equivalents, marketable securities and derivative contracts are banks and financial institutions that meet the Company’s requirement of high credit standing. The Company’s counterparties for derivative contracts are investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counter-party and through monitoring counter-party credit risks. The Company’s concentration of credit risk related to derivative contracts at June 30, 2014 and December 31, 2013, is not material. With the exceptions below, the Company’s credit risk with any individual customer does not exceed ten percent of total accounts receivable at June 30, 2014 and December 31, 2013, respectively.
 
June 30 2014
 
December 31 2013
Ford and its affiliates
24%
 
20%
Hyundai Mobis Company
15%
 
15%
Hyundai Motor Company
10%
 
9%
Management periodically performs credit evaluations of its customers and generally does not require collateral.

Items Measured at Fair Value on a Non-recurring Basis

In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a non-recurring basis. As further described in Note 2, "Interiors Transaction", the fair value of the assets and liabilities subject to the Interiors Transaction was less than the carrying value. As a result, the long-lived assets were reduced to zero and an impairment loss of $173 million was recorded in the three and six month periods ended June 30, 2014. As the impairment was determined using other observable inputs, the fair value measurements are classified within Level 2 of the fair value hierarchy.

NOTE 16. Commitments and Contingencies

Litigation and Claims

In 2003, the Local Development Finance Authority of the Charter Township of Van Buren, Michigan (the “Township”) issued approximately $28 million in bonds maturing in 2032, the proceeds of which were used at least in part to assist in the development of the Company’s U.S. headquarters located in the Township. During January 2010, the Company and the Township entered into a settlement agreement (the “Settlement Agreement”) that, among other things, reduced the taxable value of the headquarters property to current market value and facilitated certain claims of the Township in the Company’s chapter 11 proceedings. The Settlement Agreement also provided that the Company would continue to negotiate in good faith with the Township in the event that property tax payments was inadequate to permit the Township to meet its payment obligations with respect to the bonds. In September 2013, the Township notified the Company in writing that it is estimating a shortfall in tax revenues of between $25 million and $36 million, which could render it unable to satisfy its payment obligations under the bonds, but made no specific monetary demand of the Company. The Company disputes the factual and legal assertions made by the Township and intends to vigorously defend the matter should the Township seek to commence a legal proceeding against the Company. The Company is not able to estimate the possible loss or range of loss in connection with this matter.

On March 29, 2012, the Korean Supreme Court ruled that regular bonuses should be included for purposes of calculating the ordinary wage of applicable employees, which was contrary to previous legal precedent and the position of the Korean Ministry of Employment and Labor. On December 18, 2013, the Korean Supreme Court issued an en banc decision clarifying that (i) regular bonuses should be included for purposes of calculating such ordinary wage, and (ii) certain incentive pay and family allowances may also be included for purposes of calculating such ordinary wage if they were paid to employees as consideration for the labor actually provided by them. The court also indicated that employers could be excused from liability for excluding such regular bonuses from ordinary wages where an express or implied management-labor agreement or practice to exclude such amounts existed and to require such payment would cause “serious managerial difficulty.” The Company is evaluating the potential financial impact of these new court rulings, and is not able to determine at this time whether it will have a material impact on the results of operations and cash flows of its South Korean subsidiaries. In addition, on May 24, 2013, Halla Visteon Climate Control Union in Korea, representing 891 hourly employees of HVCC, filed a legal petition with Seoul Southern District Court, claiming unpaid statutory benefits for the past three years based on the initial Supreme Court ruling. The plaintiffs have informed the court on that

23


Table of Contents

they intend to submit a revised claim amount based on the Supreme Court en banc decision. The Company is in the process of evaluating these claims, but at this time is not able to estimate the possible loss or range of loss in connection with this matter.

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

Toyota Industries Corporation ("TICO") filed a patent infringement claim with the Seoul Central District Court on March 18, 2014, requesting HVCC to discontinue production of its RS compressors and dispose of inventories and manufacturing facilities. HVCC received the original of TICO's claim submission on March 31, 2014, and is planning to file for a patent invalidation trial before the Korean Intellectual Property Tribunal in response.  The first court hearing was held in June 2014, and the next hearing is scheduled for August 2014. The Company is in the process of evaluating these claims, but at this time is not able to estimate the possible loss or range of loss in connection with this matter.

The Company's operations in Brazil are subject to highly complex labor, tax, customs and other laws. While the Company believes that it is in compliance with such laws, it is periodically engaged in litigation regarding the application of these laws. As of June 30, 2014, the Company maintained accruals of approximately $10 million for claims aggregating approximately $161 million. The amounts accrued represent claims that are deemed probable of loss and are reasonably estimable based on the Company's assessment of the claims and prior experience with similar matters.

Several current and former employees of Visteon Deutschland GmbH (“Visteon Germany”) filed civil actions against Visteon Germany in various German courts beginning in August 2007, seeking damages for the alleged violation of German pension laws that prohibit the use of pension benefit formulas that differ for salaried and hourly employees without adequate justification. Several of these actions have been joined as pilot cases. In a written decision issued in April 2010, the Federal Labor Court issued a declaratory judgment in favor of the plaintiffs in the pilot cases. To date, more than 750 current and former employees have filed similar actions or have inquired as to or been granted additional benefits, and an additional 600 current and former employees are similarly situated. The Company's remaining reserve for unsettled cases is approximately $8 million and is based on the Company’s best estimate as to the number and value of the claims that will be made in connection with the pension plan. However, the Company’s estimate is subject to many uncertainties which could result in Visteon Germany incurring amounts in excess of the reserved amount of up to approximately $9 million.

On May 28, 2009, the Company filed voluntary petitions in the Court seeking reorganization relief under the provisions of chapter 11 of the Bankruptcy Code and continued to operate as debtors-in-possession until emergence on October 1, 2010. Substantially all pre-petition liabilities and claims relating to rejected executory contracts and unexpired leases have been settled under the plan of reorganization, however, the ultimate amounts to be paid in settlement of each those claims will continue to be subject to the uncertain outcome of litigation, negotiations and Bankruptcy Court decisions for a period of time after the emergence date.

In December of 2009, the Court granted the Debtors' motion in part authorizing them to terminate or amend certain other postretirement employee benefits, including health care and life insurance. On December 29, 2009, the IUE-CWA, the Industrial Division of the Communications Workers of America, AFL-CIO, CLC, filed a notice of appeal of the Court's order with the District Court. By order dated March 31, 2010, the District Court affirmed the Court's order in all respects. On April 1, 2010, the IUE filed a notice of appeal. On July 13, 2010, the Circuit Court reversed the order of the District Court as to the IUE-CWA and directed the District Court to, among other things, direct the Court to order the Company to take whatever action is necessary to immediately restore terminated or modified benefits to their pre-termination/modification levels. On July 27, 2010, the Company filed a Petition for Rehearing or Rehearing En Banc requesting that the Circuit Court review the panel’s decision, which was denied. By orders dated August 30, 2010, the Court ruled that the Company should restore certain other postretirement employee benefits to the

24


Table of Contents

appellant-retirees and also to salaried retirees and certain retirees of the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”). 

On September 1, 2010, the Company filed a Notice of Appeal to the District Court of the Court's decision to include non-appealing retirees, and on September 15, 2010, the UAW filed a Notice of Cross-Appeal. On July 25, 2012, the District Court ruled in favor of the Company on both appeals, and the UAW has appealed this ruling to the Circuit Court. In May 2014, the Circuit Court heard oral arguments on the appeals. The Company reached an agreement with the original appellants in late-September 2010, which resulted in the Company not restoring other postretirement employee benefits of such retirees. On September 30, 2010, the UAW filed a complaint, which it amended on October 1, 2010, in the United States District Court for the Eastern District of Michigan seeking, among other things, a declaratory judgment to prohibit the Company from terminating certain other postretirement employee benefits for UAW retirees after October 1, 2010. The parties reached a preliminary settlement agreement in January 2013, but it was later terminated by the plaintiffs. On October 22, 2013, the U.S. District Court for the Eastern District of Michigan issued an order denying the Company's motion to dismiss the UAW's complaint and granted its motion to transfer the case to the U.S. District Court for the District of Delaware. The UAW filed a petition for a writ of mandamus with the U.S. Court of Appeals for the Sixth Circuit, requesting the court vacate the transfer of the case. In May 2014, the U.S. Court of Appeals for the Sixth Circuit denied the UAW's petition. The UAW has requested a panel rehearing or rehearing en banc. As of June 30, 2014, the Company maintains an accrual for claims that are deemed probable of loss and are reasonably estimable.
 
While the Company believes its accruals for litigation and claims are adequate, the final amounts required to resolve such matters could differ materially from recorded estimates and the Company's results of operations and cash flows could be materially affected.

Product Warranty and Recall

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

The following table provides a reconciliation of changes in the product warranty and recall claims liability for the selected periods:
 
Six Months Ended June 30