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, 2007, 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, or a non-accelerated filer. See definition of “Accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer    ü    Accelerated Filer           Non-Accelerated Filer         

 

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 May 4, 2007, the Registrant had outstanding 129,639,099 shares of common stock, par value $1.00 per share.

 

Exhibit index located on page number 46.

 

 

 

VISTEON CORPORATION AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

 

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, 2007, and the related consolidated statements of operations and the consolidated statements of cash flows for the three-month periods ended March 31, 2007 and March 31, 2006. 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, 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 have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2006, and the related consolidated statements of operations, shareholders’ (deficit) / equity and cash flows for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006; in our report dated February 28, 2007, we expressed unqualified opinions thereon. The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2006 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

May 9, 2007

 

 

See accompanying notes to the consolidated financial statements.

 

 

See accompanying notes to the consolidated financial statements.

 

 

See accompanying notes to the consolidated financial statements.

 

NOTE 1. Description of Business and Company Background

 

Visteon Corporation (the “Company” or “Visteon”) is a leading global supplier of automotive systems, modules and components. The Company sells products primarily to global vehicle manufacturers and also sells to the worldwide aftermarket for replacement and enhancement parts. Headquartered in Van Buren Township, Michigan, with regional headquarters in Kerpen, Germany and Shanghai, China, the Company has a workforce of approximately 45,000 employees and a network of manufacturing operations, technical centers, sales offices and joint ventures in every major geographic region of the world.

 

The Company maintains significant commercial relationships with Ford Motor Company (“Ford”) and its affiliates. Accordingly, transactions with Ford constitute a significant amount of the Company’s product sales and services revenues, accounts receivable and certain postretirement benefit obligations as summarized below:

 

 

 

Additionally, as of March 31, 2007 and December 31, 2006, the Company transferred approximately $260 million and $200 million, respectively of Ford receivables under a European receivables securitization agreement.

 

NOTE 2. Basis of Presentation

 

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 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, 2006, 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)

NOTE 2. Basis of Presentation — (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 ships 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.

 

Revenue from services is recognized as services are rendered. Costs associated with 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.

 

Assets and Liabilities Held for Sale:  In accordance with Statement of Financial Accounting Standards No. 144, (“SFAS 144”) “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classifies assets and liabilities as held for sale when management approves and commits to a formal plan of sale and it is probable that the sale will be completed. The carrying value of the assets and liabilities held for sale are recorded at the lower of carrying value or fair value less cost to sell, and the recording of depreciation is ceased.

 

Recent Accounting Pronouncements:  In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS 159 permits measurement of financial instruments and certain other items at fair value. SFAS 159 is designed to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year after November 15, 2007. The Company is currently evaluating the impact of this statement on its consolidated financial statements.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements.” This statement, which becomes effective January 1, 2008, defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value

 

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

NOTE 2. Basis of Presentation — (Continued)

 

measurements. The Company is currently evaluating the impact of this statement on its consolidated financial statements.

 

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 (“SFAS 156”), “Accounting for Servicing of Financial Assets.” This statement amends Statement of Financial Accounting Standards No. 140, (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Company adopted SFAS 156 as of January 1, 2007 without a material impact on its consolidated financial statements.

 

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments” which amends Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivatives Instruments and Hedging Activities” and SFAS 140. SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only and principal only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principal cash flows. SFAS 155 was adopted by the Company as of January 1, 2007 without a material impact on its consolidated financial statements.

 

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with Statement of Financial Accounting Standards No. 109 (“SFAS 109”) “Accounting for Income Taxes” and prescribes a recognition threshold and measurement process for recording in financial statements tax positions taken or expected to be taken in a tax return. The evaluation of a tax position under FIN 48 is a two-step process. The first step requires an entity to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. For those positions that meet the more likely than not recognition threshold, the second step requires measurement of the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company adopted the provisions of FIN 48 effective January 1, 2007, without a material impact to the Company’s consolidated financial statements.

 

 

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 are 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 period ended March 31, 2007, the Company recorded asset impairment charges of $50 million to adjust certain long-lived assets to their estimated fair values.

 

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

 

 

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 located in Dueren, Germany, Wuelfrath, Germany, Praszka, Poland and Sao Paulo, Brazil. Pursuant to the terms of MASPA, the Company will receive cash proceeds of Euro 67 million (approximately $90 million as of March 31, 2007) and will transfer certain liabilities including employee pensions in exchange for inventory, intellectual property and real and personal property. As of March 31, 2007, the Company determined that these assets and liabilities met the “held for sale” criteria of SFAS 144. Accordingly, these assets and liabilities were recorded at the lower of carrying value or fair value less cost to sell, which resulted in an asset impairment charge of approximately $18 million. The Company closed on the sale of the Europe operations on April 30, 2007, while the sale of the Brazil operation is expected to close during the fourth quarter of 2007.

 

In consideration of the MASPA and the Company’s March 2007 announced exit of the brake manufacturing business at its chassis facility located in Swansea, Wales, U.K., an asset impairment charge of $25 million was recorded to reduce the net book value of certain long-lived assets at the facility to their estimated fair value. The Company’s estimate of fair value was based on market prices, prices of similar assets, and other available information.

 

Additionally, during the first quarter of 2007 the Company entered into an agreement to sell an Electronics building located in Hiroshima, Japan. The Company determined that this building met the “held for sale” criteria of SFAS 144 as of March 31, 2007 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. The Company expects the sale of the building to close during the fourth quarter of 2007.

 

The Company has classified associated assets and liabilities as “held for sale” in the accompanying balance sheet as follows:

 

 

 

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

 

The Company has undertaken various restructuring activities to achieve its strategic objectives, including the reduction of operating costs. Restructuring activities include, but are not limited to, plant closures, relocation of production, administrative realignment and consolidation of available capacity and resources. Management expects to finance restructuring programs principally through cash reimbursement from an escrow account established pursuant to the October 1, 2005 transaction whereby Ford acquired all of the issued and outstanding shares of common stock of the parent of Automotive Components Holdings, LLC (“ACH”). To the extent that the Company’s restructuring activities require cash in connection with or beyond that provided by the Escrow Agreement, the Company expects to use cash generated from its ongoing operations, or cash available under its existing debt agreements, subject to the terms of applicable covenants. The Company does not expect that the execution of these programs will have a significant adverse impact on its liquidity position.

 

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. Monies in the escrow account are invested at the direction of the Company, in high quality, short-term investments and related investment earnings are credited to the account as earned. Under the terms of the Escrow Agreement, investment earnings are not available for disbursement until the initial funding is utilized. The following table provides a reconciliation of amounts available in the escrow account.

 

 

As of March 31, 2007 and December 31, 2006, approximately $41 million and $55 million, respectively, of amounts receivable from the escrow account were included in the consolidated balance sheets.

 

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, 2007. Substantially all of the Company’s restructuring expenses are related to employee severance and termination benefit costs.

 

 

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

 

2007 Restructuring Actions

 

During the first quarter of 2007, the Company recorded restructuring expenses of approximately $31 million under the previously announced multi-year improvement plan, including the following significant actions:

 

 

The Company has incurred $144 million in cumulative restructuring costs related to the multi-year improvement plan including $62 million, $31 million, $27 million and $24 million for the Other, Climate, Electronics and Interiors 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, 2007, the restructuring reserve balance of $62 million is entirely attributable to the multi-year improvement plan.

 

The Company currently estimates that the total cash cost associated with this multi-year improvement plan will be approximately $430 million. 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 $340 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.

 

 

 

During the three month-period ended March 31, 2007, the Company granted stock-based compensation as follows:

 

 

• The Visteon Corporation Non-Employee Director Stock Unit Plan provides for the automatic annual grant of $70,000 in RSUs to each non-employee director. RSUs awarded under the Non-Employee Director Stock Unit Plan vest immediately, but are distributed after the participant terminates service as a non-employee director of the Company.

 

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

 

 

Weighted average assumptions used to estimate the fair value of stock-based compensation awards are as follows:

 

 

Effective January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004) (“SFAS 123(R)”), “Share-Based Payments”, using the modified-prospective method. The cumulative effect, net of tax, of adopting SFAS 123(R) was $4 million or $0.03 per share as of January 1, 2006.

 

 

The Company’s European accounts receivable securitization facility (“European Securitization”) extends until August 2011 and provides up to $325 million in funding from the sale of certain customer trade account receivables originating from Company subsidiaries located in Germany, Portugal, Spain, France and the U.K. (“Sellers”). Under the European Securitization, 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. 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.

 

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. The Company recorded true sales of approximately $42 million during the three-months ended March 31, 2007 at a loss of approximately $1 million. Transfers under the European Securitization, for which the Company receives a beneficial interest are not removed from the balance sheet and total $574 million as of March 31, 2007. Such amounts are recorded at fair value and are subordinated to the interests of the 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 account receivables, reduced by outstanding borrowings under the program and other characteristics of those receivables that affect their eligibility (such as bankruptcy or the grade of the obligor, delinquency and excessive concentration). As of March 31, 2007, approximately $325 million of the Company’s transferred receivables were considered eligible for borrowing under this facility, $116 million was outstanding and $209 million was available for funding.

 

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

 

 

The table below provides a reconciliation of the change in interests in account receivables 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 $234 million and $224 million of equity in the net assets of non-consolidated affiliates at March 31, 2007 and December 31, 2006, respectively. The Company recorded equity in net income of non-consolidated affiliates of $9 million and $7 million for the three-months ended March 31, 2007 and 2006, 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 and is shown separately below.

 

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 $132 million and $123 million at March 31, 2007 and December 31, 2006, respectively.

 

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

 

Property and equipment is stated at cost. Depreciable property 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 $10 million of accelerated depreciation expense during the first quarter of 2007, 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 market value of related interest rate swaps, were as follows:

 

 

 

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)” requires recognition of a net asset or liability representing the funded status of defined benefit pension and other postretirement benefit (“OPEB”) plans. In addition, SFAS 158 requires companies to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end balance sheet. The Company adopted the recognition and disclosure provisions of SFAS 158 as of December 31, 2006 and the measurement provisions of this standard as of January 1, 2007.

 

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

 

 

The Company re-measured plan assets and obligations as of January 1, 2007 consistent with the provisions of SFAS 158. As a result of the SFAS 158 re-measurement, the Company recorded a reduction to the pension liability of approximately $100 million, a reduction of the OPEB liability of approximately $90 million and an increase to accumulated other comprehensive income of approximately $190 million. The Company also adjusted the January 1, 2007 retained earnings balance by approximately $33 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. The net periodic benefit costs for the first quarter of 2007 were based on this January 1, 2007 measurement.

 

The components of the Company’s net periodic benefit costs for the three-months ended March 31, 2007 and 2006 were as follows:

 

 

Curtailments and Settlements

 

Curtailment and settlement gains and losses are recorded in accordance with Statement of Financial Accounting Standards No. 88 (“SFAS 88”), “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and are classified in the Company’s consolidated statements of operations as “Cost of sales” or “Selling, general and administrative expenses”. Qualifying curtailment and settlement losses are reimbursable under the terms of the Escrow Agreement.

 

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

 

 

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, the Company partially settled its pension obligations related to the Markham, Ontario facility which was closed in 2002 resulting in a settlement loss of approximately $17 million. As of March 31, 2007, the Company expects to record curtailment gains of approximiately $80 million for retiree health plans in future periods as employees are terminated in connection with the multi-year improvement plan.

 

The Company also recorded a reduction of its pension liability of approximately $40 million, a reduction of its OPEB liability of approximately $30 million, and an increase in accumulated other comprehensive income of approximately $70 million. These adjustments resulted from the re-measurement of German pension plans in connection with the signed agreement for the sale of certain chassis operations in Dueren and Wuelfrath, Germany and certain other pension and OPEB plans affected by actions under the multi-year improvement plan.

 

Retirement Benefit Related Restructuring Expenses

 

In addition to retirement benefit expenses, the Company recorded $2 million for the three-months ended March 31, 2007, for retirement benefit related restructuring charges. Such charges generally relate to special termination benefits, voluntary termination incentives, and pension losses and are the result of various restructuring actions as described in Note 4 “Restructuring Activities”. Retirement benefit related restructuring charges are recorded in accordance with SFAS 87, 88, 106, 112 and 158, are initially classified as restructuring expenses and are subsequently reclassified to retirement benefit expenses.

 

Contributions

 

During the first quarter of 2007, contributions to the Company’s U.S. retirement plans and postretirement health care and life insurance plans were $3 million and $5 million, respectively, and contributions to non-U.S. retirement plans were $25 million. The Company presently anticipates additional contributions to its U.S. retirement plans and postretirement health care and life insurance plans of $46 million and $28 million, respectively, in 2007 for a total of $49 million and $33 million, respectively. The Company also anticipates additional 2007 contributions to non-U.S. retirement plans of $46 million for a total of $71 million.

 

Postretirement Benefit Relief

 

Effective January 1, 2006, Ford acquired two plants from Automotive Component Holdings, LLC (“ACH”), which are located in Rawsonville, Michigan and Sterling Heights, Michigan. In connection with this transaction and the Salaried Employee Transition Agreement between the Company and Ford, certain salaried employees of the Company were transferred to Ford including the accumulated postretirement benefit obligations for these employees. The Company recorded approximately $23 million related to the relief of postretirement benefits payable to Ford in the first quarter of 2006 related to Visteon sponsored benefit obligations for the transferred employees.

 

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

 

Adoption of FIN 48

 

Effective January 1, 2007, the Company adopted FIN 48, which establishes a single model to address accounting for uncertain tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements.

 

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, 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.

 

The Company’s gross unrecognized tax benefits as of January 1 and March 31, 2007 were approximately $150 million and the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is approximately $55 million at January 1 and March 31, 2007. 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 will not impact the effective tax rate in current or future periods.

 

In connection with the adoption of FIN 48 and beginning January 1, 2007, the Company classified all interest and penalties as income tax expense. Prior to the adoption of FIN 48, the Company’s policy was to record interest and penalties related to income tax contingencies as a component of income before taxes. Estimated interest and penalties related to the underpayment of income taxes totaled $1 million for the three-months ended March 31, 2007. Accrued interest and penalties were $20 million and $21 million as of January 1, 2007 and March 31, 2007, respectively.

 

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 income (loss) before income taxes, excluding related equity in net income of affiliated companies, 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 recorded a provision of $17 million for the first quarter of 2007, compared with $30 million for the first quarter of 2006. The provisions for the three month periods ended March 31, 2007 and 2006 are comprised of income tax expense related to those countries where the Company is profitable, accrued withholding taxes, certain non-recurring and other discrete items and the inability to record a tax benefit for pre-tax losses in the U.S. and certain foreign countries to the extent not offset by pre-tax other comprehensive income in those jurisdictions.

 

During the three-months ended March 31, 2007, pre-tax other comprehensive income, primarily attributable to re-measurement of pension and OPEB plans in the U.S. and Germany, effectively offset approximately $23 million of first quarter pre-tax operating losses in the U.S. and Germany, reducing the Company’s current period valuation allowance resulting in a benefit of $8 million allocated to the current year loss from continuing operations.

 

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

 

 

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 U.K. and Germany, will be maintained until sufficient positive evidence exists to reduce or eliminate them.

 

 

Comprehensive (loss) income, net of tax is summarized below:

 

 

Accumulated other comprehensive income (loss) is comprised of the following:

 

 

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

 

Basic (loss) earnings per share of common stock is calculated by dividing reported net (loss) income by the average number of shares of common stock outstanding during the applicable period, adjusted for restricted stock. The calculation of diluted (loss) earnings per share takes into account the effect of dilutive potential common stock, such as stock options, and contingently returnable shares, such as restricted stock.

 

 

Stock options to purchase approximately 14 million shares of common stock and warrants to purchase 25 million shares of common stock 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, 2007.

 

 

Guarantees

 

The Company has guaranteed approximately $65 million and $77 million of debt capacity held by consolidated and unconsolidated subsidiaries, and $97 million for lifetime lease payments held by consolidated subsidiaries at March 31, 2007 and December 31, 2006, respectively. In addition, the Company has guaranteed certain Tier 2 suppliers’ debt and lease obligations and other third-party service providers’ obligations of up to $6 million and $17 million at March 31, 2007 and December 31, 2006 respectively, to ensure the continued supply of essential parts.

 

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

 

 

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.

 

In March 2005, a number of current and former directors and officers were named as defendants in two shareholder derivative suits pending in the State of Michigan Circuit Court for the County of Wayne. As is customary in derivative suits, the Company has been named as a defendant in these actions. As a nominal defendant, the Company is not liable for any damages in these suits nor is any specific relief sought against the Company. The complaints allege that, among other things, the individual defendants breached their fiduciary duties of good faith and loyalty and aided and abetted such breaches during the period between January 23, 2004 and January 31, 2005 in connection with the Company’s conduct concerning, among other things, the matters alleged in the securities class action discussed immediately above. The derivative matters have been stayed pending resolution of defendants motion to dismiss the Securities matter pending in the Eastern District of Michigan and any related appeal.

 

In March and April 2005, the Company and a number of current and former employees, officers and directors were named as defendants in three class action lawsuits brought under the Employee Retirement Income Security Act (“ERISA”) in the U.S. District Court for the Eastern District of Michigan. In September 2005, the plaintiffs filed an amended and consolidated complaint, which generally alleged that the defendants breached their fiduciary duties under ERISA during the class period by, among other things, continuing to offer Visteon stock as an investment alternative under the Visteon Investment Plan (and the Visteon Savings Plan for Hourly Employees, together the “Plans”), failing to disclose complete and accurate information regarding the prudence of investing in Visteon stock, failing to monitor the actions of certain of the defendants, and failing to avoid conflicts of interest or promptly resolve them. These ERISA claims were predicated upon factual allegations similar to those raised in the derivative and securities class actions described immediately above. The consolidated complaint, as amended, was brought on behalf of a named plaintiff and a putative class consisting of all participants or beneficiaries of the Plans whose accounts included Visteon stock at any time from July 20, 2001 through June 15, 2006. In November 2005, the defendants moved to dismiss the consolidated amended complaint on various grounds. Prior to resolution of the defendants’ motion, the parties agreed to a settlement. Upon review of the proposed settlement the judge assigned to the proceeding certified a class covering the period July 1, 2000 through July 15, 2006, and preliminarily approved the settlement on December 12, 2006. The court entered an order of final approval of the settlement on March 9, 2007 and the settlement became effective on April 9, 2007. The amount of the settlement was within the coverage limits of the Company’s applicable insurance policy.

 

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

 

 

In June 2006, the Company and Ford Motor Company were named as defendants in a purported class action lawsuit brought under ERISA in the United States District Court for the Eastern District of Michigan on behalf of certain former salaried employees of the Company associated with two plants located in Michigan. The complaint alleges that the Company and Ford violated their fiduciary duties under ERISA when they established and spun off the Company and allocated certain pension liabilities between them, and later when they transferred the subject employees to Ford as new hires in 2006 after Ford acquired the plants. In August 2006, the Company and Ford moved to dismiss the complaint for failure to state a claim, which is currently pending.

 

At this time the Company is not able to predict with certainty the final outcome of each of the foregoing unresolved lawsuits or its potential exposure with respect to each such lawsuit. In the event of an unfavorable resolution of any of these matters, 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 reserves.

 

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, 2007 and 2006:

 

 

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.

 

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

 

 

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, 2007, had recorded a reserve of approximately $9 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 reserve 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 reserve.

 

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. Reserves 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, 2007 and that are in excess of established reserves. The Company does not reasonably expect, except as otherwise described herein, based on its analysis, that any adverse outcome from such matters would have a material effect on the Company’s financial condition, results of operations or cash flows, although such an outcome is possible.

 

The Company enters into agreements that contain indemnification provisions in the normal course of business for which the risks are considered nominal and impracticable to estimate.

 

 

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 certain 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.

 

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

 

 

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 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 with ACH for the costs of leased employees and other services provided to ACH 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 net sales and other financial information by segment is provided below:

 

 

Reconciling Item

 

Certain adjustments are necessary to reconcile segment net sales, gross margin, inventories, net and property and equipment, net 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 three-months ended March 31, 2006 and as of December 31, 2006 has been reclassified to reflect the alignment of the Company’s South American operations with their respective global product groups during the first quarter of 2007.

 

 

On April 10, 2007, the Company entered into an Agreement to amend and restate the Company’s Credit Agreement (“Amended Credit Agreement”) which provided the Company an additional $500 million secured term loan. Consistent with the existing term loan, the additional term loan will bear interest at a Eurodollar rate plus 3% and will mature on December 13, 2013. The Amended Credit Agreement provides for conforming changes to the existing term loan including changes to permit the additional term loan and to require the inclusion of additional collateral and subsidiary guarantors.

 

The financial data presented herein are unaudited, but in the opinion of management reflect those adjustments, including normal recurring adjustments, necessary for a fair statement of such information.

 

Executive Summary

 

Business Overview

 

Visteon Corporation is a leading global supplier of climate, interiors, electronics and other automotive systems, modules and components to vehicle manufacturers as well as the automotive aftermarket. The Company sells to all the of the world’s largest vehicle manufacturers including BMW, DaimlerChrysler, Ford, General Motors, Honda, Hyundia /Kia, Nissan, Peugot, Renault, Toyota and Volkswagen. The Company has a broad network of manufacturing, technical engineering and joint venture operations throughout the world, supported by approximately 45,000 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.

 

By leveraging the Company’s extensive experience, innovative technology and geographic strengths, the Company aims to grow leading positions in its key climate, interiors and electronics product groups and to improve overall margins, long-term operating profitability and cash flows. To achieve these goals and respond to industry factors and trends, the Company is working to improve its operations, restructure its business, and achieve profitable growth.

 

Summary Financial Results

 

Financial results for the three-months ended March 31, 2007 are summarized as follows:

 

 

Sales and New Business

 

The Company’s net sales were $2.9 billion in the first quarter of 2007, compared with $3.0 billion in the first quarter of 2006, representing a decrease of $34 million or 1%. During the first quarter of 2007, product sales decreased by $19 million and services revenues decreased by $15 million. The decrease in product sales reflects lower Ford North America and Nissan North America production volumes and the impact of past sourcing actions, partially offset by favorable Ford Europe production volumes and an increase in direct sourced parts in Asia. Favorable foreign currency of $187 million and customer price reductions comprise the remainder of the year-over-year changes.

 

While the distribution of the Company’s sales has remained consistent across its product groups, product sales on a regional basis experienced a significant shift during the three-months ended March 31, 2007. North American product sales decreased year-over-year resulting in a 10% reduction of total product sales. This decline was driven by a decline in Ford production of 136,000 units, a 40,000 unit decline at Nissan, and the impact of past sourcing actions. Europe and South America product sales increased year-over-year driven primarily by currency and new business representing a 6% increase in total product sales. Asia increased total product sales by 3%, which was primarily due to currency, incremental revenue from directed sourcing arrangements, and new business.

 

The automotive industry remains challenging, primarily in North America, with continued market share pressures concentrated with U.S. vehicle manufacturers. Continued declines in North American vehicle production from the Company’s key customers will continue to adversely affect the Company’s operating results. However, the Company continues to work with other vehicle manufacturers to further its sales growth and diversification.

 

The Company achieved significant new business wins during the three-months ended March 31, 2007 primarily related to the electronics and climate product groups. Geographically, most of the new business wins are in Europe and Asia and are diversified across a number of customers. The Company also was awarded significant renewals of existing contracts during the quarter with minimal incumbent losses.

 

Visteon’s customers expect it to continue to reduce the costs of the products it provides, as well as provide an increasing level of engineering and related support of vehicle programs on a global basis. The Company must continue to work on reducing its overall costs by improving productivity and restructuring its operations and infrastructure to offset the impact of lower selling prices to its customers.

 

Operations and Restructuring

 

The Company’s gross margin was $111 million in the first quarter of 2007, compared with $244 million in the first quarter of 2006, representing a decrease of $133 million or 55%. The decrease in gross margin was attributable to the non-recurrence of certain items in the first quarter of 2006, including OPEB relief of $23 million related to the transfer of certain Visteon salaried employees to Ford in January 2006 and the non-recurrence of a $17 million favorable customer settlement. During the first quarter of 2007 gross margin was affected by a pension settlement of $17 million related to hourly pension costs at a previously closed facility in Canada, $10 million of accelerated depreciation expense related to restructuring activities, and $10 million of curtailment expense that was included in cost of sales but recovered from the Escrow Account. The remainder was related to vehicle volume and mix and price productivity partially offset by improved operating performance.

 

The Company continues its efforts to improve base operations, which have been focused on quality, safety, investments and cost efficiencies. However, the Company’s near term performance has been impacted by lower volumes and unfavorable customer and product mix. The Company’s operating results during the three-months ended March 31, 2007 were also impacted by premium costs related to program launches and significant premium freight, primarily related to non-core operations in Europe. Additionally, a significant component of the Company’s cost structure is comprised of the cost of raw materials used in the manufacture of its products. Although commodity cost increases have been moderating, the costs remain high, impacting the financial condition of a number of the Company’s suppliers and is making material cost reductions more difficult to achieve.

 

The Company has undertaken various restructuring and other activities to improve base operations and achieve cost efficiencies. Significant actions taken during the three-months ended March 31, 2007 are as follows:

 

 

The Company continues to execute its multi-year improvement program although no assurances can be provided that the results of these efforts will mitigate the negative industry trends currently being experienced.

 

Cash and Liquidity

 

Cash used by operations was $99 million more than the first quarter of 2006, including a use of $65 million in the quarter driven primarily by the change in Ford North America receivable days from 22 to 26 days as well as the normal reversal of the seasonal benefit from the fourth quarter shut-down period. The Company’s capital expenditures were $64 million for the first quarter of 2007, representing a decrease of $21 million when compared to the same period of 2006. Cash at March 31, 2007 was $872 million, down by $9 million when compared with $881 million as of March 31, 2006.

 

On April 10, 2007, the Company entered into an agreement to amend and restate the Company’s existing credit agreement to provide the Company an additional $500 million secured term loan. Consistent with the existing term loan, the additional term loan will bear interest at a Eurodollar rate plus 3% and will mature on December 13, 2013. The amended credit agreement also provides for additional collateral and subsidiary guarantors, and allows for an increase in the amount of the additional secured term loan by up to $200 million.

 

Results of Operations

 

Three-Months Ended March 31, 2007 and 2006