UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission file number 001-15827
VISTEON CORPORATION
(Exact name of registrant as specified in its charter)
State of Delaware | 38-3519512 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One Village Center Drive, Van Buren Township, Michigan | 48111 |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (800)-VISTEON
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on which Registered |
Common Stock, par value $0.01 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Warrants, each exercisable for 1.4 shares of Common Stock at an exercise price of $0.01 (expiring October 1, 2020) (Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ü No __
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes __ No ü
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No__
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ü
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
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2016 (the last business day of the most recently completed second fiscal quarter) was approximately $2.2 billion.
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 February 16, 2017, the registrant had outstanding 32,811,170 shares of common stock.
Document Incorporated by Reference
Document | Where Incorporated |
2017 Proxy Statement | Part III (Items 10, 11, 12, 13 and 14) |
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Visteon Corporation and Subsidiaries
Index
Page | ||
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Part I
Item 1. | Business |
Description of Business
Visteon Corporation (the "Company" or "Visteon") is a global automotive supplier that designs, engineers and manufactures innovative electronics products for nearly every original equipment vehicle manufacturer ("OEM") worldwide including Ford, Mazda, Nissan/Renault, General Motors, Honda BMW and Daimler. Visteon is headquartered in Van Buren Township, Michigan and has an international network of manufacturing operations, technical centers and joint venture operations, supported by approximately 10,000 employees, dedicated to the design, development, manufacture and support of its product offerings and its global customers. The Company's manufacturing and engineering footprint is principally located outside of the U.S., with a heavy concentration in low-cost geographic regions.
Visteon provides value for its customers and stockholders through its technology-focused vehicle cockpit electronics business, by delivering a rich, connected cockpit experience for every car from luxury to entry. The Company's cockpit electronics business is one of the broadest portfolios in the industry and includes instrument clusters, information displays, infotainment systems, audio systems, telematics solutions, and head up displays. The Company's vehicle cockpit electronics business comprises and is reported under the Electronics segment. In addition to the Electronics segment, the Company had residual operations in South America and Europe previously associated with the Interiors and Climate businesses, sold or exited by December 31, 2016, but not subject to discontinued operations classification that comprised Other.
The pie charts below highlight the sales breakdown for Visteon's Electronics segment for the year ended December 31, 2016.
The Company’s History
The Company was incorporated in Delaware in January 2000 as a wholly owned subsidiary of Ford Motor Company (“Ford” or “Ford Motor Company”). Subsequently, Ford transferred the assets and liabilities comprising its automotive components and systems business to Visteon. The Company separated from Ford in June 2000 when all of the Company’s common stock was distributed by Ford to its shareholders. After filing for bankruptcy in 2009 as a result of the recession, the Company emerged from bankruptcy in 2010 and in 2012 implemented a comprehensive shareholder value creation plan which involved the transformation milestones below.
Transformation Milestones
The Company previously operated Climate, Interiors, and Electronics product lines. Over the last three years, the Company has transformed the business operations into a pure-play supplier of automotive cockpit electronics and connected car solutions.
A summary of the most recent milestones completing the transformation are summarized below:
• | Exit of Climate Business - On June 9, 2015, Visteon Corporation and its wholly owned subsidiary, VIHI, LLC (collectively, “Visteon”) completed the sale to Hahn & Co. Auto Holdings Co., Ltd. and Hankook Tire Co., Ltd. (together, the “Purchasers”) of all of its shares of Halla Visteon Climate Control Corporation, a Korean corporation (“HVCC”), for approximately $3.4 billion, or KRW 52,000 per share, after adjusting for the 2014 dividend paid by HVCC to Visteon (the “Climate Transaction”), pursuant to and in accordance with the Share Purchase Agreement, dated as of December 17, 2014, among Visteon and the Purchasers. The Company received net cash proceeds of approximately $2.7 billion and recognized a pretax gain of approximately $2.3 billion in connection with the closing of the Climate Transaction in the second quarter 2015. |
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During the fourth quarter of 2016, the Company sold its South Africa climate operations with 2015 annual sales of $9 million for proceeds of $2 million, and recorded a loss of $11 million related to foreign currency translation amounts recorded in accumulated other comprehensive loss.
• | Exit of Interiors Business - During 2014, the Company divested the majority of its global Interiors business (the "Interiors Divestiture"). Subsequently, Visteon completed the sale of its Interiors operations in Thailand on February 2, 2015. On December 1, 2016 the Company completed the sale of its Interiors operations in Argentina and Brazil, incurring a loss of $19 million representing the final working capital cash contribution and related contractual obligations, representing the completion of the Interiors Divestiture. |
On December 1, 2015, Visteon completed the sale and transfer of its equity ownership in Visteon Deutschland GmbH, which operated the Berlin, Germany interiors plant ("Germany Interiors Divestiture"). The Company contributed cash, of approximately $141 million, assets of $27 million, and liabilities of $198 million including pension related liabilities. The Company will make a final contribution payment of approximately $31 million during the first half of 2017 upon fulfillment of buyer contractual commitments, included in the Company's consolidated balance sheet as "Other current liabilities" as of December 31, 2016.
• | Enhance Shareholder Returns - In connection with the Climate Transaction, the Company returned approximately $2.75 billion of cash to shareholders through 2016 via a series of actions including share buybacks and special distributions. |
During 2015, the Company entered into two share buyback programs. Under the first program, the Company repurchased 4,771,262 shares of common stock at an average settlement price of $104.79. The first buyback program concluded in 2015. The second program started during the fourth quarter of 2015 and concluded on March 1, 2016. Under the second program, the Company paid approximately $105 million to repurchase 1,607,849 shares at an average price of $65.05.
On December 9, 2015, the Company declared a special distribution of $43.40 per share of its common stock outstanding as of January 15, 2016, or approximately $1.75 billion in the aggregate. On January 22, 2016 approximately $1.74 billion was distributed to shareholders. An additional amount of approximately $15 million will be paid over a two-year period as related to the vesting and settlement of restricted stock units and performance-based share units previously granted to the Company's employees. These amounts were classified as "Distribution payable" on the Consolidated Balance Sheets as of December 31, 2016 and 2015.
On March 1, 2016, the Company entered into an accelerated share buyback ("ASB") program with a third-party financial institution to purchase shares of Visteon common stock for an aggregate purchase price of $395 million. Under the program, the Company paid the financial institution $395 million and received an initial delivery of 4,370,678 shares of common stock using a reference price of $72.30. The program was concluded on October 14, 2016 and the Company received an additional 1,211,979 shares. In total, the Company purchased 5,582,657 shares at an average price of $70.75 under this ASB program.
On January 10, 2017, the Company's Board of Directors authorized a share repurchase program of up to $400 million of common stock to be executed through March 2018.
The Company's strategic initiatives going forward are outlined in Item 7 "Executive Summary" of this Report.
The Company’s Industry
The Company operates in the automotive industry, which is cyclical and highly sensitive to general economic conditions. The Company believes that future success in the automotive industry is, in part, dependent on alignment with customers to support their efforts to effectively meet the challenges associated with the following significant trends and developments in the global automotive industry.
• | Electronic content and connectivity - The electronic content of vehicles continues to increase due to various regulatory requirements and consumer demand for increased vehicle performance and functionality. The use of electronic components can reduce weight, expedite assembly, enhance fuel economy, improve emissions, increase safety and enhance vehicle performance. Additionally, digital and portable technologies have dramatically influenced the lifestyle of today’s consumers, who expect products that enable such a lifestyle. This requires increased electronic and technical content such as in-vehicle communication, navigation and entertainment capabilities. While original equipment manufacturers ("OEMs") are taking different paths to connect their vehicles to high-speed broadband internet connections in the short-term, future vehicles are expected to be built with vehicle-to-vehicle connectivity systems. There is momentum by OEMs to integrate discrete electronic |
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control units into a multi-core domain controller to increase efficiency and reduce power consumption, cost and weight. The industry continues to advance toward semi-autonomous and autonomous vehicles.
• | Safety - Governments continue to focus regulatory efforts on safer transportation. Accordingly, OEMs are working to improve occupant and pedestrian safety by incorporating more safety-oriented content in their vehicles. Suppliers must enable the safety initiatives of their customers including the development of new technologies. |
• | Vehicle standardization - OEMs continue to standardize vehicle platforms on a global basis, resulting in a lower number of individual vehicle platforms, design cost savings and further scale of economies through the production of a greater number of models from each platform. Having operations in the geographic markets in which OEMs produce global platforms enables suppliers to meet OEMs’ needs more economically and efficiently, thus making global coverage a source of significant competitive advantage for suppliers with a diverse global footprint. Additionally, OEMs are looking to suppliers for increased collaboration to lower costs, reduce risks and decrease overall time to market. Suppliers that can provide fully engineered solutions, systems and pre-assembled combinations of component parts are positioned to leverage the trend toward system sourcing. |
Financial Information about Segments
The Company's operating structure is organized by global product group, including Electronics and Other. These global product groups have financial and operating responsibility over the design, development and manufacture of the Company's product portfolio. The Company's reportable segments are as follows:
• | Electronics - The Company's Electronics segment provides vehicle cockpit electronics products including instrument clusters, information displays, infotainment systems, audio systems, telematics solutions, and head up displays. |
• | Other - Other includes South Africa operations sold on November 1, 2016 and South America operations substantially exited during the fourth quarter of 2016, previously associated with the Climate business but not subject to the Climate Transaction. During 2015 and 2014, Other also included the Berlin, Germany operations previously associated with the Interiors business and sold during the fourth quarter of 2015. |
Refer to Note 22 “Segment Information” in Item 8 of this Report for more information about the Company’s reportable segments.
The Company’s Products
The Company designs and manufacturers vehicle cockpit electronics components, modules and systems further described as follows:
Instrument Clusters
The Company offers a full line of instrument clusters, from standard analog gauge clusters to high-resolution, all-digital, fully reconfigurable, 2-D and 3-D display-based devices. These support all vehicle segments, including motorcycles. These clusters can use a wide range of display technologies, graphic capabilities and decorative elements, including organic light-emitting diode ("OLED"), free-form and curved displays. Premium clusters support complex 3-D graphics and features such as driver awareness and camera inputs.
Information Displays
The Company offers a range of information displays incorporating a sleek profile, craftsmanship and touch sensors, designed to deliver high performance for the automotive market. These displays can integrate a range of user interface technologies and graphics management capabilities, such as 3-D, dual view, cameras, optics and dual (OLED) displays.
Infotainment Systems
The Company offers a range of infotainment platforms from entry to high-end solutions. Visteon’s entry offering is designed to allow vehicle occupants to easily connect their mobile devices to the system and safely access phone functions, listen to music, stream media and enable mobile connectivity applications through Apple CarPlay®, Android Auto and Baidu CarLife. The Company’s Phoenix™ next-generation infotainment platform enables third-party developers to create apps easily while delivering built-in security and over-the-air updates. It facilitates app creation through a software development kit ("SDK") and software simulation of the target hardware system.
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Audio Systems
The Company offers a range of audio products, including audio head units, amplifiers, and analog and digital radios, which deliver consumer device connectivity.
Telematics Solutions
The Company provides a cost-optimized, high-speed telematics control unit to enable secure connected car services, software updates and data. The Company’s telematics solution uses a single hardware and flexible software architecture to support regional telematics service providers and mobile networks. The Company’s wireless gateway platform is designed to meet future connectivity requirements including 4G, V2X, Wi-Fi® and next-generation mobile standards such as 5G. The Company also offers a hands-free telephone unit that provides Bluetooth® and USB connectivity.
Smartcore™ Cockpit Domain Controller
The Company offers an automotive-grade, integrated domain controller approach, called Smartcore™, which can independently operate the infotainment system, instrument cluster and potentially other features on a single, multi-core chip to improve efficiency and reduce power consumption and cost.
Head-Up Displays
The Company provides a complete line of head-up displays ("HUD") that present critical information to the driver in a convenient location and at a comfortable focal distance. Combiner HUD projects a virtual image in front of the driver using a compact, transparent screen mounted on top of the instrument panel. Windshield HUD projects the image directly on the vehicle windscreen. The Company has demonstrated an augmented reality system that overlays graphics in the driver’s line of sight to represent objects in the vehicle’s path; provides navigation guidance; and displays relevant information, such as a lane departure warning.
The Company’s Customers
The Company sells its products primarily to global vehicle manufacturers including Ford, Mazda, Nissan/Renault, General Motors, Honda, BMW and Daimler. Ford, Mazda and Nissan/Renault are the Company's largest customers and in 2016 accounted for sales of approximately 30%, 17% and 15%, respectively. In 2015 and 2014, Ford accounted for 34% and 41%, respectively. Mazda and Nissan/Renault accounted for 16% and 14% of sales for 2015 and did not individually account for greater than 10% of sales for 2014.
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. Price reductions are typically negotiated on an annual basis between suppliers and OEMs. Such reductions are intended to take into account expected annual reductions in the overall cost to the supplier of providing products and services to the customer, through such factors as manufacturing productivity enhancements, material cost reductions and design-related cost improvements. The Company has an aggressive cost reduction program that focuses on reducing its total costs, which are intended to offset customer price reductions. However, there can be no assurance that the Company’s cost reduction efforts will be sufficient to fully offset such price reductions. The Company records price reductions when probable and reasonably estimable.
The Company’s Competition
The automotive sector is concentrated, but operates under highly competitive conditions resulting from the globalized nature of the industry, high fixed costs and the resulting need for scale economies, market dynamics including share in mature economies and positioning in emerging economies, and the low cost of switching for the end consumer. Accordingly, OEMs rigorously evaluate suppliers on the basis of financial viability, product quality, price competitiveness, technical expertise and development capability, new product innovation, reliability and timeliness of delivery, product design and manufacturing capability and flexibility, customer service and overall management. The Company's primary independent competitors include Alpine Electronics, Continental AG, Delphi Automotive PLC, Denso Corporation, Harman International, Nippon Seiki, Panasonic Corporation, Pioneer Corporation, and Robert Bosch GmbH.
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The Company’s Product Sales Backlog
The Company defines backlog as cumulative remaining life-of-program expected net sales, launching in future periods. The Company’s Electronics segment backlog was $16.5 billion as of December 31, 2016, compared to $14.9 billion as of December 31, 2015, reflecting an increase of 10.7%. The Company’s estimated net sales may be impacted by various assumptions, including new program vehicle production levels, customer price reductions, currency exchange rates and program launch timing. In addition, the Company typically enters into customer agreements at the beginning of a vehicle life cycle with the intent to fulfill purchasing requirements for the entire vehicle production life cycle. These agreements may be terminated by customers at any time and, accordingly, expected net sales information does not represent firm orders or firm commitments.
The Company’s Business is Seasonal and Cyclical
Historically, the Company’s business has been moderately seasonal because its largest North American customers typically cease production for approximately two weeks in July for model year changeovers and approximately one week in December during the winter holidays. Customers in Europe historically shut down vehicle production during a portion of August and one week in December. In China, customers typically shut down approximately one week in early October and one week in January or February. Additionally, third quarter automotive production traditionally is lower as new vehicle models enter production.
The Company’s Workforce and Employee Relations
The Company’s workforce as of December 31, 2016 included approximately 10,000 persons, of which approximately 5,000 were salaried employees and 5,000 were hourly workers. Many of the Company’s employees are members of industrial trade unions and confederations within their respective countries, including Europe, Asia and South America. Many of these organizations operate under collectively bargained contracts that are not specific to any one employer. The Company constantly works to establish and maintain positive, cooperative relations with its unions and work representatives around the world and believes that its relationships with unionized employees are satisfactory.
The Company’s Product Research and Development
The Company’s research and development efforts are intended to maintain leadership positions in core products and provide the Company with a competitive edge as it seeks additional business with new and existing customers. The Company also works with technology development partners, including customers, to develop technological capabilities and new products and applications. Total research and development expenditures, net of recoveries were approximately $295 million, $294 million and $257 million in 2016, 2015 and 2014, respectively.
The Company’s Intellectual Property
The Company owns significant intellectual property, including a number of patents, copyrights, proprietary tools and technologies and trade secrets and is involved in numerous licensing arrangements. Although the Company’s intellectual property plays an important role in maintaining its competitive position, no single patent, copyright, proprietary tool or technology, trade secret or license, or group of related patents, copyrights, proprietary tools or technologies, trade secrets or licenses is, in the opinion of management, of such value to the Company that its business would be materially affected by the expiration or termination thereof. The Company’s general policy is to apply for patents on an ongoing basis, in appropriate countries, on its patentable developments which are considered to have commercial significance.
The Company also views its name and mark as significant to its business as a whole. In addition, the Company holds rights in a number of other trade names and marks applicable to certain of its businesses and products that it views as important to such businesses and products.
The Company’s Raw Materials and Suppliers
Raw materials used by the Company in the manufacture of its products include resins, copper, precious metals, steel and electronics components. All of the materials used are generally available from numerous sources. In general, the Company does not carry inventories of raw materials in excess of those reasonably required to meet production and shipping schedules. As of December 31, 2016 the Company had not experienced any other significant shortages of raw materials. The Company monitors its supply base and endeavors to work with suppliers and customers to attempt to mitigate the impact of potential material shortages and supply disruptions. While the Company does not anticipate any significant interruption in the supply of raw materials, there can be no assurance that sufficient sources or amounts of all necessary raw materials will be available in the future.
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The automotive supply industry is subject to inflationary pressures with respect to raw materials which have historically placed operational and financial burdens on the entire supply chain. Accordingly, the Company continues to take actions with its customers and suppliers to mitigate the impact of these inflationary pressures in the future. Actions to mitigate inflationary pressures with customers include collaboration on alternative product designs and material specifications, contractual price escalation clauses and negotiated customer recoveries. Actions to mitigate inflationary pressures with suppliers include aggregation of purchase requirements to achieve optimal volume benefits, negotiation of cost reductions and identification of more cost competitive suppliers. While these actions are designed to offset the impact of inflationary pressures, the Company cannot provide assurance that it will be successful in fully offsetting increased costs resulting from inflationary pressures.
The Company’s International Operations
Financial information about sales and net property by major geographic region can be found in Note 22, Segment Information, included in Item 8 “Financial Statements and Supplementary Data” of this Report. The attendant risks of the Company’s international operations are primarily related to currency fluctuations, changes in local economic and political conditions, and changes in laws and regulations. The following table presents the Company’s sales and net property and equipment by geographic region as a percentage of such consolidated total amounts.
Sales | Property and Equipment, Net | |||||||||||||
Year Ended December 31 | December 31 | |||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | ||||||||||
United States | 26 | % | 26 | % | 29 | % | 4 | % | 4 | % | ||||
Mexico | 2 | % | 2 | % | 2 | % | 14 | % | 17 | % | ||||
Total North America | 28 | % | 28 | % | 31 | % | 18 | % | 21 | % | ||||
Portugal | 14 | % | 13 | % | 18 | % | 18 | % | 16 | % | ||||
Slovakia | 9 | % | 8 | % | 5 | % | 8 | % | 8 | % | ||||
Germany | — | % | 3 | % | 4 | % | 1 | % | 1 | % | ||||
Tunisia | 5 | % | 6 | % | 4 | % | 3 | % | 4 | % | ||||
France | 4 | % | 4 | % | 3 | % | 6 | % | 7 | % | ||||
Other Europe | 2 | % | 3 | % | 3 | % | 2 | % | 4 | % | ||||
Intra-region eliminations | (1 | )% | (2 | )% | (2 | )% | — | % | — | % | ||||
Total Europe | 32 | % | 35 | % | 35 | % | 38 | % | 40 | % | ||||
China | 22 | % | 21 | % | 22 | % | 22 | % | 20 | % | ||||
Japan | 16 | % | 15 | % | 9 | % | 5 | % | 3 | % | ||||
Thailand | 3 | % | 3 | % | 2 | % | 3 | % | 3 | % | ||||
India | 2 | % | 2 | % | 3 | % | 7 | % | 7 | % | ||||
Korea | 1 | % | 1 | % | 1 | % | — | % | — | % | ||||
Intra-region eliminations | (5 | )% | (5 | )% | (3 | )% | — | % | — | % | ||||
Total Asia | 39 | % | 37 | % | 34 | % | 37 | % | 33 | % | ||||
South America | 3 | % | 4 | % | 7 | % | 7 | % | 6 | % | ||||
Inter-region eliminations | (2 | )% | (4 | )% | (7 | )% | — | % | — | % | ||||
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
Impact of Environmental Regulations on the Company
The Company is subject to the requirements of federal, state, local and foreign environmental and occupational safety and health laws and regulations. These include laws regulating air emissions, water discharge and waste management. The Company is also subject to environmental laws requiring the investigation and cleanup of environmental contamination at properties it presently owns or operates and at third-party disposal or treatment facilities to which these sites send or arranged to send hazardous waste. The Company makes capital expenditures in the normal course of business as necessary to ensure that its facilities are in compliance with applicable environmental laws and regulations. During 2016, capital expenditures associated with environmental compliance were not material nor did such expenditures have a materially adverse effect on the Company’s earnings or competitive position.
The Company is aware of contamination at some of its properties. The Company is in various stages of investigation and cleanup at these sites and at December 31, 2016, has recorded a reserve of less than $1 million. 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. Accordingly, although the Company believes its reserve is adequate based on current information,
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the Company cannot provide any assurance that its ultimate environmental investigation and cleanup costs and liabilities will not exceed the amount of its current reserve.
The Company’s Website and Access to Available Information
The Company’s current and periodic reports filed with the United States Securities and Exchange Commission (“SEC”), including amendments to those reports, may be obtained through its internet website at www.visteon.com free of charge as soon as reasonably practicable after the Company files these reports with the SEC. A copy of the Company’s code of business conduct and ethics for directors, officers and employees of Visteon and its subsidiaries, entitled “Ethics and Integrity Policy,” the Corporate Governance Guidelines adopted by the Company’s Board of Directors and the charters of each committee of the Board of Directors are also available on the Company’s website. A printed copy of the foregoing documents may be requested by contacting the Company’s Investor Relations department in writing at One Village Center Drive, Van Buren Township, MI 48111; by phone (734) 710-5800; or via email at investor@visteon.com.
Item 1A. | Risk Factors |
The risks and uncertainties described below are not the only ones facing the Company. Risks attributable to all registrants are not included below. Additional risks and uncertainties, including those not presently known or that the Company believes to be immaterial, also may adversely affect the Company’s results of operations and financial condition. Should any such risks and uncertainties develop into actual events, these developments could have material adverse effects on the Company’s business and financial results.
The Company’s substantial international operations make it vulnerable to risks associated with doing business in foreign countries.
The Company has manufacturing and distribution facilities in many foreign countries, including Mexico and countries in Europe, South America and Asia. International operations are subject to certain risks inherent in doing business abroad, including:
• | changes to international trade agreements; |
• | local economic conditions, expropriation and nationalization, foreign exchange rate fluctuations and currency controls; |
• | withholding, border, and other taxes on remittances and other payments by subsidiaries; |
• | investment restrictions or requirements; |
• | export and import restrictions, including increases in border taxes; and |
• | increases in working capital requirements related to long supply chains. |
In particular, if the United States withdraws from or materially modifies the North American Free Trade Agreement, or any other international trade agreement with one of the countries in which the Company operates, or implements increases in border taxes, there could be a significantly adverse effect on the Company's financial condition, operating results and cash flows.
In addition, the Company has invested significantly in joint ventures with other parties to conduct business in China and elsewhere in Asia. The Company’s ability to repatriate funds from these joint ventures depends not only upon their uncertain cash flows and profits, but also upon the terms of particular agreements with the Company’s joint venture partners and maintenance of the legal and political status quo. As a result, the Company’s exposure to the risks described above is substantial. The likelihood of such occurrences and its potential effect on the Company vary from country to country and are unpredictable. However, any such occurrences could be harmful to the Company’s business and the Company’s profitability and financial condition.
The Company must continue to develop, introduce and achieve market acceptance of new and enhanced products in order to grow its sales in the future.
The growth of the Company's business will be dependent on the demand for innovative automotive electronics products. In order to increase sales in current markets and gain entry into new markets, the Company must innovate to maintain and improve existing products, including software, while successfully developing and introducing distinctive new and enhanced products that anticipate changing customer and consumer preferences and capitalize upon emerging software technologies. However, the Company may experience difficulties that delay or prevent the development, introduction or market acceptance of its new or enhanced products, or undiscovered software errors, bugs and defects in its products may injure the Company's reputation. Furthermore, competitors may develop and introduce technologies that gain greater customer or consumer acceptance, which could adversely affect the future growth of the Company.
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The Company’s ability to effectively operate could be hindered if it fails to attract and retain key personnel.
The Company’s ability to operate its business and implement its strategies effectively depends, in part, on the efforts of its executive officers and other key employees. In addition, the Company’s future success will depend on, among other factors, the ability to attract and retain qualified personnel, particularly engineers and other employees with critical expertise and skills that support key customers and products or in emerging regions. The loss of the services of any key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on the Company’s business.
Warranty claims, product liability claims and product recalls could harm the Company’s business, results of operations and financial condition.
The Company faces the inherent business risk of exposure to warranty and product liability claims in the event that its products fail to perform as expected or such failure results, or is alleged to result, in bodily injury or property damage (or both). In addition, if any of the Company’s designed products are defective or are alleged to be defective, the Company may be required to participate in a recall campaign. As suppliers become more integrally involved in the vehicle design process and assume more of the vehicle assembly functions, automakers are increasingly expecting them to warrant their products and are increasingly looking to suppliers for contributions when faced with product liability claims or recalls. A successful warranty or product liability claim against the Company in excess of its available insurance coverage and established reserves, or a requirement that the Company participate in a product recall campaign, could have materially adverse effects on the Company’s business, results of operations and financial condition.
Developments or assertions by or against the Company relating to intellectual property rights could materially impact its business.
The Company owns significant intellectual property, including a number of patents, trademarks, copyrights and trade secrets, and is involved in numerous licensing arrangements. The Company’s intellectual property plays an important role in maintaining its competitive position in a number of the markets served. Developments or assertions by or against the Company relating to intellectual property rights could materially impact the Company’s business. Significant technological developments by others also could materially and adversely affect the Company’s business and results of operations and financial condition.
The discontinuation of, loss of business or lack of commercial success, with respect to a particular vehicle model for which the Company is a significant supplier could reduce the Company’s sales and harm its profitability.
Although the Company has purchase orders from many of its customers, these purchase orders generally provide for the supply of a customer’s annual requirements for a particular vehicle model and assembly plant, or in some cases, for the supply of a customer’s requirements for the life of a particular vehicle model, rather than for the purchase of a specific quantity of products. In addition, it is possible that customers could elect to manufacture components internally that are currently produced by outside suppliers, such as the Company. The discontinuation of, the loss of business with respect to or a lack of commercial success of a particular vehicle model for which the Company is a significant supplier, could reduce the Company’s sales and harm the Company’s profitability.
The automotive industry is cyclical and significant declines in the production levels of the Company’s major customers could reduce the Company’s sales and harm its profitability.
Demand for the Company’s products is directly related to the automotive vehicle production of the Company’s major customers. Automotive sales and production is cyclical and can be affected by general economic or industry conditions, labor relations issues, fuel prices, regulatory requirements, government initiatives, trade agreements, the cost and availability of credit and other factors.
The Company is highly dependent on Ford Motor Company and decreases in such customers’ vehicle production volumes would adversely affect the Company.
Ford is one of the Company’s largest customers and accounted for 30%, 34% and 41% of sales in 2016, 2015 and 2014, respectively. Accordingly, any change in Ford's vehicle production volumes may have a significant impact on the Company’s sales volume and profitability.
The Company's inability to effectively manage the timing, quality and costs of new program launches could adversely affect its financial performance.
In connection with the award of new business, the Company often obligates itself to deliver new products and services that are subject to its customers’ timing, performance and quality standards. Additionally, as a Tier 1 supplier, the Company must effectively coordinate the activities of numerous suppliers in order to launch programs successfully. Given the complexity of new program
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launches, especially involving new and innovative technologies, the Company may experience difficulties managing product quality, timeliness and associated costs. In addition, new program launches require a significant ramp up of costs; however, the sales related to these new programs generally are dependent upon the timing and success of the introduction of new vehicles by the Company's customers. The Company's inability to effectively manage the timing, quality and costs of these new program launches could adversely affect its financial condition, operating results and cash flows.
The Company’s pension expense and funding levels of pension plans could materially deteriorate or the Company may be unable to generate sufficient excess cash flow to meet increased pension benefit obligations.
The Company’s assumptions used to calculate pension obligations as of the annual measurement date directly impact the expense to be recognized in future periods. While the Company’s management believes that these assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect the Company’s pension obligations and future expense. For more information on sensitivities to changing assumptions, please see “Critical Accounting Estimates” in Item 7 and Note14 “Employee Benefit Plans” in Item 8 of this report.
The Company’s expected annual effective tax rate could be volatile and could materially change as a result of changes in mix of earnings and other factors.
Changes in the Company’s debt and capital structure, among other items, may impact its effective tax rate. The Company is in a position whereby losses incurred in certain tax jurisdictions generally provide no current financial statement benefit. In addition, certain jurisdictions have statutory rates greater than or less than the United States statutory rate. As such, changes in the mix and source of earnings between jurisdictions could have a significant impact on the Company’s overall effective tax rate in future periods. Changes in tax law and rates, changes in rules related to accounting for income taxes or adverse outcomes from tax audits that regularly are in process in any of the jurisdictions in which the Company operates could also have a significant impact on the Company’s overall effective rate in future periods.
The Company may not be able to fully utilize its U.S. net operating losses and other tax attributes.
Visteon's emergence from bankruptcy in 2010 resulted in a change of ownership within the meaning of Internal Revenue Code (“IRC”) Sections 382 and 383, causing the use of Visteon's pre-emergence U.S. federal net operating loss (“NOL”) and various other tax attributes to be limited in the post-emergence period. However, NOLs and other tax attributes generated in the post-emergence period are generally not limited by the emergence from bankruptcy, but could be limited if there is a subsequent change of ownership. If the Company were to have another change of ownership within the meaning of IRC Sections 382 and 383, its post-emergence NOL and other tax attributes could be limited to an amount equal to its market capitalization at the time of the subsequent ownership change multiplied by the federal long-term tax exempt rate. The Company cannot provide any assurance that such an ownership change will not occur, in which case the availability of the Company's NOLs and other tax attributes could be significantly limited or possibly eliminated. Certain tax benefit preservation provisions of its corporate documents could delay or prevent a change of control, even if that change would be beneficial to stockholders.
Privacy and security concerns relating to the Company's current or future products and services could damage its reputation and deter current and potential users from using them.
The Company may gain access to sensitive, confidential or personal data or information that is subject to privacy and security laws, regulations and customer-imposed controls. Concerns about the Company's practices with regard to the collection, use, disclosure, or security of personal information or other privacy related matters, even if unfounded, could damage its reputation and adversely affect its operating results.
Furthermore, regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning cybersecurity and data protection. In addition, the interpretation and application of consumer and data protection laws in the U.S., Europe and elsewhere are often uncertain and in flux. Complying with these various laws could cause the Company to incur substantial costs.
Escalating price pressures from customers may adversely affect the Company’s business.
Downward pricing pressures by automotive manufacturers, while characteristic of the automotive industry, is increasing. Virtually all automakers have implemented aggressive price reduction initiatives and objectives each year with their suppliers, and such actions are expected to continue in the future. In addition, estimating such amounts is subject to risk and uncertainties because any price reductions are a result of negotiations and other factors. Accordingly, suppliers must be able to reduce their operating costs in order to maintain profitability. The Company has taken steps to reduce its operating costs and other actions to offset customer price reductions; however, price reductions have impacted the Company’s sales and profit margins and are expected to
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continue to do so in the future. If the Company is unable to offset customer price reductions in the future through improved operating efficiencies, new manufacturing processes, sourcing alternatives and other cost reduction initiatives, the Company’s results of operations and financial condition will likely be adversely affected.
The Company could be negatively impacted by the distress of its supplier or other shortages.
In an effort to manage and reduce the costs of purchased goods and services, the Company, like many suppliers and automakers, has been consolidating its supply base. In addition, certain materials and components used by the Company are in high demand but of limited availability. As a result, the Company is dependent on single or limited sources of supply for certain components used in the manufacture of its products. The Company selects its suppliers based on total value (including price, delivery and quality), taking into consideration production capacities and financial condition. However, there can be no assurance that strong demand, capacity limitations or other problems experienced by the Company’s suppliers will not result in occasional shortages or delays in the supply of components. If the Company were to experience a significant or prolonged shortage of critical components from any of its suppliers, particularly those who are sole sources, and could not procure the components from other sources, the Company would be unable to meet its production schedules for some of its key products or to ship such products to its customers in a timely fashion, which would adversely affect sales, margins, and customer relations. Furthermore, unfavorable economic or industry conditions could result in financial distress within the Company's supply base, thereby increasing the risk of supply disruption. Although market conditions generally have improved in recent years, uncertainty remains and another economic downturn or other unfavorable industry conditions in one or more of the regions in which the Company operates could cause a supply disruption and thereby adversely affect the Company's financial condition, operating results and cash flows.
Work stoppages and similar events could significantly disrupt the Company’s business.
Because the automotive industry relies heavily on just-in-time delivery of components during the assembly and manufacture of vehicles, a work stoppage at one or more of the Company’s manufacturing and assembly facilities could have material adverse effects on the business. Similarly, if one or more of the Company’s customers were to experience a work stoppage, that customer would likely halt or limit purchases of the Company’s products, which could result in the shutdown of the related manufacturing facilities. A significant disruption in the supply of a key component due to a work stoppage at one of the Company’s suppliers or any other supplier could have the same consequences, and accordingly, have a material adverse effect on the Company’s financial results.
The Company may incur significant restructuring charges.
The Company has taken, and expects to take, restructuring actions to realign and resize its production capacity and cost structure to meet current and projected operational and market requirements. Charges related to these actions could have a material adverse effect on the Company's financial condition, operating results and cash flows. Moreover, there can be no assurances that any future restructuring will be completed as planned or achieve the desired results.
A disruption in the Company's information technology systems could adversely affect its business and financial performance.
The Company relies on the accuracy, capacity and security of its information technology systems. Despite the security and risk-prevention measures we have implemented, the Company's systems could be breached, damaged or otherwise interrupted by computer viruses, unauthorized physical or electronic access or other natural or man-made incidents or disasters. Such a breach or interruption could result in business disruption, theft of the Company intellectual property or trade secrets and unauthorized access to personnel information. To the extent that business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could adversely affect competitive position, relationships with customers, financial condition, operating results and cash flows.
The Company is involved from time to time in legal proceedings and commercial or contractual disputes, which could have an adverse effect on its business, results of operations and financial position.
The Company is involved in legal proceedings and commercial or contractual disputes that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes (including disputes with suppliers), intellectual property matters, personal injury claims and employment matters. No assurances can be given that such proceedings and claims will not have a material adverse impact on the Company’s profitability and financial position.
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The Company is subject to significant foreign currency risks and foreign exchange exposure.
As a result of Visteon global presence, a significant portion of the Company's revenues and expenses is denominated in currencies other than the U.S. dollar. The Company is therefore subject to foreign currency risks and foreign exchange exposure. The Company's primary exposures are to the Euro, Japanese Yen, Mexican Peso and Chinese Renminbi. While the Company employs financial instruments to hedge transactional foreign exchange exposure, including multi-year contracts, exchange rates are difficult to predict and such actions may not insulate the Company' completely from those exposures. As a result, volatility in certain exchange rates could adversely impact Visteon financial results and comparability of results from period to period.
Item 1B. | Unresolved Staff Comments |
None
Item 2. | Properties |
The Company's principal executive offices are located in Van Buren Township, Michigan. At December 31, 2016, the Company and its consolidated subsidiaries owned or leased approximately:
• | 31 corporate offices, technical and engineering centers and customer service centers in twelve countries around the world, of which 30 were leased and 1 was owned. |
• | 17 Electronics manufacturing and/or assembly facilities in Mexico, Portugal, Russia, Slovakia, France, Tunisia, India, Japan, South Korea, China, Thailand and Brazil, of which 13 were leased and 4 were owned. |
In addition, the Company's non-consolidated affiliates operate approximately 6 manufacturing and/or assembly locations, primarily in the Asia Pacific region. The Company considers its facilities to be adequate for its current uses.
Item 3. | Legal Proceedings |
Certain legal proceedings in which we are involved are discussed in Note 21 - "Commitments and Contingencies" of Part II, Item 8 "Financial Statements and Supplementary Data" and should be considered an integral part of Part I, Item 3 "Legal Proceedings."
Item 4. | Mine Safety Disclosures |
None
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Item 4A. Executive Officers and Key Employees
The following table shows information about the executive officers of the Company and other key employees. Ages are as of February 1, 2017:
Name | Age | Position | ||
Sachin S. Lawande | 49 | Director, President and Chief Executive Officer | ||
Christian A. Garcia | 53 | Executive Vice President and Chief Financial Officer | ||
Sunil K. Bilolikar | 55 | Senior Vice President, Operations and Procurement | ||
Matthew M. Cole | 47 | Senior Vice President, Product Development Engineering | ||
Steven S. Fitzgerald | 52 | Senior Vice President and Chief Human Resources Officer | ||
Brett D. Pynnonen | 48 | Senior Vice President and General Counsel | ||
Markus J. Schupfner | 47 | Senior Vice President and Chief Technology Officer | ||
Robert R. Vallance | 56 | Senior Vice President, Customer Business Groups | ||
William M. Robertson | 55 | Vice President, Operations Finance and Investor Relations | ||
Stephanie S. Marianos | 48 | Vice President and Chief Accounting Officer | ||
Sachin S. Lawande has been Visteon’s Chief Executive Officer, President and a director of the Company since June 29, 2015. Before joining Visteon, Mr. Lawande served as Executive Vice President and President, Infotainment Division of Harman International Industries, Inc., an automotive supplier, from July 2013 to June 2015. From July 2011 to June 2013, he served as Executive Vice President and President of Harman’s Lifestyle Division, and from July 2010 to June 2011 as Executive Vice President and Co-President, Automotive Division. Prior to that he served as Harman’s Executive Vice President and Chief Technology Officer since February 2009. Mr. Lawande joined Harman International in 2006, following senior roles at QNX Software Systems and 3Com Corporation. He also serves on the board of directors of Computer Sciences Corporation.
Christian A. Garcia has been Visteon’s Executive Vice President and Chief Financial Officer since October 2016. Prior to joining the Company, Mr. Garcia served as Senior Vice President, Finance and Interim Chief Financial Officer of Hallibuton Company, a global provider of products and services to the energy sector, from January 2015 to August 2016. From January 2014 to December 2015, he served as Halliburton’s Chief Accounting Officer and from September 2011 to December 2014 as Halliburton’s Treasurer. Prior to that, he was Senior Vice President, Investor Relations of Halliburton from January 2011 to August 2011. He also held a series of senior financial positions with Landmark Graphics, a software and consulting provider that was acquired by Halliburton. Prior to joining Landmark Graphics, he worked at Bell and Howell and San Miguel Corp. in the Philippines in various roles.
Sunil K. Bilolikar has been Visteon’s Senior Vice President, Operations and Purchasing since December 2016. Prior to that, he was Group Vice President, Operations and Purchasing since July 2014, Global Director, Operations and Purchasing from January 2012 to June 2014, and Global Director, Operations from 2005 to 2012. During his career with Visteon and Ford Motor Company, he has held several engineering and operations leadership positions in the U.S., Canada, India, Portugal and Germany.
Matthew M. Cole has been Visteon’s Senior Vice President, Product Development since December 2016. Prior to that, he was Vice President, Product Development upon rejoining the Company in July 2014. From July 2011 to June 2014, he served as Vice President, Engineering at Johnson Controls, Inc., an automotive supplier. From July 2010 to June 2011, he served as Johnson Control’s Vice President, Product Management. Prior to that, he spent 19 years at Ford Motor Company and Visteon in product development, engineering and leadership positions in the U.S. and Asia.
Steven S. Fitzgerald has been Visteon’s Senior Vice President and Chief Human Resources Officer since December 2016. Prior to that, he was Vice President and Chief Human Resources Officer since June 2016. Before joining Visteon, he was Vice President, Human Resources, for Avaya, a global communications technology firm, from April 2008 to February 2016. Prior to that, he was Senior Vice President, Human Resources, at Vail Resorts, led global talent management at Sun Microsystems, and served as Senior Director of Organizational Learning and Effectiveness at StorageTek. He started his career at Ford Motor Company, holding a variety of roles over a 14-year period in labor relations, strategy and various operating disciplines.
Brett D. Pynnonen has been Visteon’s Senior Vice President and General Counsel since December 2016. Prior to that, he was Vice President and General Counsel since joining the Company in March 2016. Before joining Visteon he was Senior Vice President, General Counsel and Corporate Secretary of Federal-Mogul Holdings Corporation, a global automotive supplier, from November 2007 to March 2016. Prior to that, he was General Counsel and Secretary of Covansys Corporation, a technology services company, and an attorney at the law firm of Butzel Long.
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Markus J. Schupfner has been Visteon’s Senior Vice President and Chief Technology Officer since December 2016. Prior to that, he was Vice President and Chief Technology Officer since joining the Company in April 2016. Before joining Visteon he was Executive Vice President of Operations at Elektrobit Automotive GmbH, a supplier of embedded software solutions and services, since February 2014, and from November 2009 to January 2014, he was Elektrobit’s Vice President, Infotainment Solutions. Prior to that, he served as Vice President of Navigation for the Infotainment Division of Harman International Industries and held director-level roles at Siemens VDO and Siemens.
Robert R. Vallance has been Visteon’s Senior Vice President, Customer Business Groups since December 2016. Prior to that, he was Vice President, Customer Business Groups upon rejoining the Company in July 2014. From February 2008 to June 2015, he served as Vice President, Electronics Business Group of Johnson Controls, Inc., an automotive supplier. Prior to that, he spent 23 years at Ford Motor Company and Visteon in product development, program and commercial management, strategy and planning, product marketing and manufacturing.
William M. Robertson has been Visteon’s Vice President, Operations Finance and Investor Relations since October 2016. Prior to that, he was Vice President and Corporate Controller since June 2015. He served as the Company’s interim Chief Financial Officer from March 31, 2016 to September 30, 2016. Prior to that, he was Director, Corporate Finance since 2003; Manager, Corporate Finance since April 2001; and Operations Manager since joining the Company in May, 2000. Before joining Visteon, he served as Vehicle Operations Controller for Ford Motor Company.
Stephanie S. Marianos has been Visteon’s Vice President and Chief Accounting Officer since February 2017. Prior to that, she was Chief Accounting Officer since June 2015; Assistant Corporate Controller since July 2014; Associate Director, Corporate Finance since May 2012; Associate Director, Corporate Accounting since April 2008; and Senior Manager, Corporate Accounting since joining the Company in September 2005. Before joining Visteon, she was an independent accounting consultant serving manufacturing, insurance and health care companies. Ms. Marianos began her career at Ernst & Young LLP and is a certified public accountant.
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Part II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
As of February 16, 2017, the Company had 32,811,170 shares of its common stock, $0.01 par value per share, outstanding, which were owned by 7,593 shareholders of record. The table below shows the high and low sales prices per share for the Company’s common stock as reported by the NYSE for each quarterly period for the last two years.
2016 | |||||||
First Quarter* | Second Quarter | Third Quarter | Fourth Quarter | ||||
High | $80.85 | $81.04 | $73.13 | $84.48 | |||
Low | $54.71 | $64.11 | $63.04 | $64.95 | |||
*The company paid a special distribution of $43.40 per share of common stock on January 22, 2016. Stock price before the distribution has been adjusted to proforma distribution as of January 1, 2016.
2015 | |||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||
High | $107.45 | $110.48 | $106.71 | $121.65 | |||
Low | $95.15 | $95.96 | $95.11 | $100.85 | |||
No dividends were paid by the Company on its common stock during the years ended December 31, 2015 or 2014. On January 22, 2016, the Company paid a special distribution of $43.40 per share of common stock. The Company’s Board of Directors (the “Board”) evaluates the Company’s dividend policy based on all relevant factors. The Company’s credit agreements limit the amount of cash payments for dividends that may be made. Additionally, the ability of the Company’s subsidiaries to transfer assets is subject to various restrictions, including regulatory requirements and governmental restraints. Refer to Note 6, “Non-Consolidated Affiliates,” in Item 8 of this Report.
The following table summarizes information relating to purchases made by or on behalf of the Company, or an affiliated purchaser, of shares of the Company’s common stock during the fourth quarter of 2016.
Period | Total Number of Shares (or Units) Purchased (1) | Average Price Paid per Share (or Unit) | Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (3) (in millions) | |||||
Oct. 1, 2016 to Oct. 31, 2016 | — | $0.00 | 1,211,979 | $0.00 | |||||
Nov. 1, 2016 to Nov. 30, 2016 | — | $0.00 | — | $0.00 | |||||
Dec. 1, 2016 to Dec. 31, 2016 | — | $0.00 | — | $0.00 | |||||
Total | — | $0.00 | 1,211,979 | $0.00 | |||||
(1) | This column includes 0 shares surrendered to the Company by employees to satisfy tax withholding obligations in connection with the vesting of restricted share and stock unit awards made pursuant to the Visteon Corporation 2010 Incentive Plan. |
(2) | In total, the Company purchased 5,582,657 shares at an average price of $70.75 under this ASB program. |
(3) | On January 10, 2017, the Company's board of directors authorized a $400 million share repurchase program to be completed through March 2018. |
The following information in Item 5 is not deemed to be “soliciting material” or be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (“Exchange Act”) or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such a filing.
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Performance Graph
The following graph compares the cumulative total stockholder return from December 31, 2012 through December 31, 2016 for its existing common stock, the S&P 500 Index and the Dow Jones U.S. Auto Parts Index. The graph below assumes that $100 was invested on December 31, 2012 in each of the Company's common stock, the stocks comprising the S&P 500 Index and the stocks comprising the Dow Jones U.S. Auto Parts Index, and that all that dividends have been reinvested.
December 31, 2012 | December 31, 2013 | December 31, 2014 | December 31, 2015 | December 31, 2016 | |
Visteon Corporation | $100.00 | $152.20 | $198.60 | $212.70 | $253.60 |
Dow Jones U.S. Auto & Parts Index | $100.00 | $147.30 | $156.70 | $152.40 | $155.20 |
S&P 500 | $100.00 | $132.40 | $150.50 | $152.50 | $170.80 |
The above comparisons are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the Company's common stock or the referenced indices.
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Item 6. | Selected Financial Data |
The following statement of operations, statement of cash flows and balance sheet data were derived from the Company's consolidated financial statements for the years ended December 31, 2016, 2015, 2014, 2013 and 2012. This information should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” in this Report.
Year Ended December 31 | Year Ended December 31 | Year Ended December 31 | Year Ended December 31 | Year Ended December 31 | |||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(Dollars in Millions, Except Per Share Amounts) | |||||||||||||||||||
Statement of Operations Data: | |||||||||||||||||||
Net sales | $ | 3,161 | $ | 3,245 | $ | 2,586 | $ | 1,724 | $ | 1,625 | |||||||||
Net income (loss) from continuing operations | 131 | 42 | (75 | ) | 555 | 56 | |||||||||||||
(Loss) income from discontinued operations, net of tax | (40 | ) | 2,286 | (131 | ) | 220 | 111 | ||||||||||||
Net income (loss) attributable to Visteon Corporation | $ | 75 | $ | 2,284 | $ | (295 | ) | $ | 690 | $ | 100 | ||||||||
Basic earnings (loss) per share | |||||||||||||||||||
Continuing operations | $ | 3.28 | $ | 0.52 | $ | (2.14 | ) | $ | 11.10 | $ | 1.06 | ||||||||
Discontinued operations | (1.14 | ) | 53.48 | (4.30 | ) | 2.70 | 0.83 | ||||||||||||
Basic earnings (loss) attributable to Visteon Corporation | $ | 2.14 | $ | 54.00 | $ | (6.44 | ) | $ | 13.80 | $ | 1.89 | ||||||||
Diluted earnings (loss) per share | |||||||||||||||||||
Continuing operations | $ | 3.25 | $ | 0.51 | $ | (2.14 | ) | $ | 10.86 | $ | 1.05 | ||||||||
Discontinued operations | (1.13 | ) | 52.12 | (4.30 | ) | 2.64 | 0.83 | ||||||||||||
Diluted earnings (loss) attributable to Visteon Corporation | $ | 2.12 | $ | 52.63 | $ | (6.44 | ) | $ | 13.50 | $ | 1.88 | ||||||||
Balance Sheet Data: | |||||||||||||||||||
Total assets | $ | 2,373 | $ | 4,681 | $ | 5,323 | $ | 6,027 | $ | 5,156 | |||||||||
Total debt, excluding held for sale | $ | 382 | $ | 383 | $ | 616 | $ | 399 | $ | 491 | |||||||||
Total Visteon Corporation stockholders' equity | $ | 586 | $ | 1,057 | $ | 865 | $ | 1,920 | $ | 1,385 | |||||||||
Statement of Cash Flows Data: | |||||||||||||||||||
Cash provided from operating activities | $ | 120 | $ | 338 | $ | 284 | $ | 312 | $ | 239 | |||||||||
Cash provided from (used by) investing activities | $ | 302 | $ | 2,358 | $ | (740 | ) | $ | 698 | $ | (40 | ) | |||||||
Cash used by financing activities | $ | (2,262 | ) | $ | (774 | ) | $ | (359 | ) | $ | (141 | ) | $ | (115 | ) | ||||
Year Ended December 31, 2016
On December 1, 2016 the Company completed the sale of its Interiors operations in Argentina and Brazil, incurring a loss of $19 million representing the final working capital cash contribution and related contractual obligations, completing the Interiors Divestiture.
During the fourth quarter of 2016, the Company sold its South Africa climate operations and recorded a loss of $11 million related to foreign currency translation amounts previously recorded in accumulated other comprehensive loss.
On December 9, 2015, the Company declared a special distribution of $43.40 per share of its common stock outstanding as of January 15, 2016, or approximately $1.75 billion in the aggregate. On January 22, 2016 approximately $1.74 billion was paid.
Year Ended December 31, 2015
On June 9, 2015, Visteon completed the sale to Hahn & Co. Auto Holdings Co., Ltd. (“Hahn”) and Hankook Tire Co., Ltd. (“Hankook” and, together with Hahn, the “Purchasers”) of all of its shares of Halla Visteon Climate Control Corporation, a Korean corporation (“HVCC”), for approximately $3.4 billion, or KRW 52,000 per share after adjusting for the 2014 dividend paid by HVCC to Visteon (the “Climate Transaction”), pursuant to and in accordance with the Share Purchase Agreement, dated as of December 17, 2014 (the “Purchase Agreement”), among Visteon and the Purchasers. The respective results of operations of the
18
HVCC Climate business have been reclassified to Net (loss) income from discontinued operations, net of tax for all periods presented.
On December 1, 2015, Visteon Corporation and its wholly owned subsidiary, Visteon Deutschland GmbH, which operates the Berlin, Germany interiors plant completed the sale to APCH Automotive Plastic Components Holding GmbH. The Company recorded a loss of $105 million in connection with the sale. Although the divestiture represents a continuation of the Company’s exit from the Interiors business, the divestiture is not considered a strategic shift given the size of the operations representing $86 million in 2015 sales. Therefore, the operations do not qualify for discontinued operations presentation and operating results prior to the sale are classified within Other as continuing operations.
Year Ended December 31, 2014
In May 2014, pursuant to a Master Purchase Agreement, as subsequently amended, Visteon agreed to divest substantially all of
its global Interiors business (the "Interiors Divestiture") in exchange for the assumption of certain liabilities related to the Company's Interiors business and the payment of nominal cash consideration. In connection with the Interiors Divestiture, the Company recorded losses totaling $326 million during the year ended December 31, 2014. These losses included an asset impairment loss of $190 million recorded during the second quarter of 2014 pursuant to execution of the Purchase Agreement and additional losses of $136 million during the fourth quarter of 2014 pursuant to the Master Closing on November 1, 2014 and the completion of the sale of an Interiors operation in India on December 1, 2014. The operating results of Interiors businesses subject to the Interiors Divestiture have been reclassified to Net (loss) income from discontinued operations, net of tax for all periods presented.
On July 1, 2014, the Company completed the acquisition of substantially all of the global automotive electronics business of Johnson Controls Inc. for an aggregate purchase price of $299 million, including $31 million of cash and equivalents at the acquired business. The Company commenced consolidation of the acquired business from date of acquisition.
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Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations, financial condition and cash flows of Visteon Corporation (“Visteon” or the “Company”). MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s consolidated financial statements and related notes appearing in Item 8 “Financial Statements and Supplementary Data” of this Report.
Executive Summary
Strategic Initiatives
Visteon has transformed into a technology-focused, pure-play supplier of automotive cockpit electronics and connected car solutions. During 2016, the Company’s three strategic initiatives included strengthening the core, moving selectively to adjacent products, and expanding into the autonomous driving space.
• | Strengthen the Core - Visteon offers technology and related manufacturing operations for instrument clusters, information displays, infotainment systems, audio systems, telematics solutions, and head up displays. Backlog, defined as cumulative remaining life of program booked sales, is approximately $16.5 billion as of December 31, 2016, or 5.3 times the last twelve months of sales, reflecting a strong booked sales base on which to launch future growth. This is $1.6 billion higher than the $14.9 billion backlog as of December 31, 2015. |
Core business financial results continue to improve with Adjusted EBITDA margin for electronics of 11.1% in the year ended 2016 compared with 9.5% in the same period of 2015. The Company expects to deliver cost efficiencies by streamlining selling, general and administration costs and engineering costs, improving free cash flow, optimizing the capital structure and driving savings benefits as revenue grows.
During 2016, the Company initiated a restructuring of its engineering and administration organization to focus on technology and execution and also to align the engineering and administrative footprint with its core technologies and customers. The organization will be comprised of customer regional engineering, product management and advanced technologies, and global centers of competence.
• | Move Selectively to Adjacent Products - As consumer demand continues to evolve with an increase in electronics content per vehicle, the Company is advancing its expertise in the areas of cockpit domain controllers, next generation safety applications, and vehicle cybersecurity. Each of these areas require careful assessments of shifting consumer needs and how these new products complement Visteon's core products. |
During 2016 Visteon acquired AllGo Embedded Systems Private Limited, a leading developer of embedded multimedia system solutions for global vehicle manufacturers. The acquisition adds greater scale and depth to the Company's infotainment software capabilities.
• | Expand into Autonomous Driving - The Company's approach to autonomous driving is to feature fail-safe centralized domain hardware, designed for algorithmic developers, and applying artificial intelligence for object detection and other functions. The Company is developing a secure autonomous driving domain controller platform with an open framework based on neural networks. The Company projects a launch of the technology in 2018. |
2017 Strategic Imperatives
Building on the momentum of the initiatives advanced in 2016, it is imperative that Visteon continues to strengthen its core business and further develop its autonomous driving platform. In addition, it is imperative that the Company accelerate its China business as China’s economic environment offers significant growth opportunities in sales and new technology launches. Visteon will continue to leverage joint venture relationships to drive adoption of new offerings.
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Financial Results
Significant aspects of the Company's financial results for the year ended December 31, 2016 include the following.
• | The Company recorded sales of $3,161 million representing a decrease of $84 million when compared with the year ended December 31, 2015. Sales for the Electronics Product Group were consistent with the prior year while sales for the Other operations decreased by $99 million primarily reflecting the sale of the Germany interiors facility in November 2015. Electronics sales were consistent with the prior year reflecting higher production volumes, and new business, partially offset by unfavorable currency and customer pricing. |
• | Gross margin was $464 million or 14.7% of sales for the year ended December 31, 2016 compared to $430 million or 13.3% of sales for the same period of 2015. The increase reflected increased volumes and new business, favorable currency, and improved cost performance. |
• | Net income attributable to Visteon was $75 million for the year ended December 31, 2016, which included a net loss from discontinued operations of $40 million and restructuring expense of $49 million, higher year over year gross margin of $34 million, and lower year over year selling, general and administrative expenses of $25 million. Net income attributable to Visteon was $2,284 million for the year ended December 31, 2015, which included net income from discontinued operations of $2,286 million including the Climate Transaction gain, a gain on sale of non-consolidated affiliates of $62 million, partially offset by a loss on the Germany Divestiture of $105 million, and restructuring expense of $36 million. |
• | Total cash and short-term investments, excluding amounts held for sale, were $882 million, $1,901 million lower than cash balances of $2,783 million on December 31, 2015, primarily attributable to a special distribution of approximately $1,736 million and share repurchases of $500 million, partially offset by the Climate Transaction withholding tax refund of $356 million. |
• | Including discontinued operations, the Company generated $120 million of cash from operating activities for the year ended December 31, 2016, $218 million lower than cash from operating activities of $338 million for the year ended December 31, 2015, primarily attributable to the 2015 Climate Transaction and higher income tax payments. |
• | Cash provided by investing activities of $302 million, inclusive of discontinued operations, for the year ended December 31, 2016 was $2,056 million lower than cash provided by investing activities of $2,358 million for the year ended December 31, 2015. The decrease was primarily attributable to proceeds from the 2015 Climate Transaction of $2,664 million, net of the 2015 Germany Interiors Divestiture contribution of $141 million, partially offset by the 2016 withholding tax refund of $356 million and lower 2016 capital expenditures. |
• | On December 9, 2015, the Company declared a special distribution of $43.40 per share of its common stock outstanding as of January 15, 2016, or approximately $1.75 billion in the aggregate. On January 22, 2016 approximately $1.74 billion was paid. The special cash distribution was funded from Climate Transaction proceeds. |
During 2016, Visteon entered into accelerated stock buyback programs with a third-party financial institution to purchase shares of common stock for an aggregate purchase price of $500 million. Under these programs, Visteon purchased 7,190,506 shares at an average price of $69.48.
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The pie charts below highlight the sales breakdown for Visteon's Electronics segment for the year ended December 31, 2016.
Global Automotive Market Conditions and Production Levels
During 2016 the global automotive industry continued to experience modest growth. China production grew 14% in 2016, far surpassing the global average due to strong demand related to expiring tax cuts on certain vehicles and growth in demand for utility vehicles. The established markets in North America and Europe also continued to grow at a lower than average rate. South America production volumes contracted in 2016 although at a lower rate than in prior years. Production in the remaining regions was mixed due to varying economic, political and social factors.
Light vehicle production levels for 2016 by geographic region are provided below (units in millions):
Light Vehicle Production | ||||||||
2016 | 2015 | Change | ||||||
Global | 93.0 | 88.7 | 4.9 | % | ||||
Asia Pacific | 48.7 | 45.2 | 7.6 | % | ||||
Europe | 21.5 | 20.9 | 2.6 | % | ||||
North America | 17.8 | 17.5 | 1.9 | % | ||||
South America | 2.7 | 3.1 | (10.9 | )% | ||||
Other | 2.3 | 2.0 | 17.5 | % | ||||
Source: IHS Automotive | ||||||||
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Consolidated Results of Operations - 2016 Compared with 2015
The Company's consolidated results of operations for the years ended December 31, 2016 and 2015 were as follows:
Year Ended December 31 | |||||||||||
2016 | 2015 | Change | |||||||||
(Dollars in Millions) | |||||||||||
Sales | $ | 3,161 | $ | 3,245 | $ | (84 | ) | ||||
Cost of sales | 2,697 | 2,815 | (118 | ) | |||||||
Gross margin | 464 | 430 | 34 | ||||||||
Selling, general and administrative expenses | 220 | 245 | (25 | ) | |||||||
Restructuring expense | 49 | 36 | 13 | ||||||||
Interest expense | 18 | 19 | (1 | ) | |||||||
Interest income | 6 | 5 | 1 | ||||||||
Equity in net income of non-consolidated affiliates | 2 | 7 | (5 | ) | |||||||
Loss on debt extinguishment | — | 5 | (5 | ) | |||||||
Loss on divestiture | — | 105 | (105 | ) | |||||||
Gain on non-consolidated affiliate transactions, net | — | 62 | (62 | ) | |||||||
Other expense, net | 24 | 25 | (1 | ) | |||||||
Provision for income taxes | 30 | 27 | 3 | ||||||||
Net income from continuing operations | 131 | 42 | 89 | ||||||||
Net (loss) income from discontinued operations, net of tax | (40 | ) | 2,286 | (2,326 | ) | ||||||
Net income (loss) | 91 | 2,328 | (2,237 | ) | |||||||
Net income attributable to non-controlling interests | 16 | 44 | (28 | ) | |||||||
Net income (loss) attributable to Visteon Corporation | $ | 75 | $ | 2,284 | $ | (2,209 | ) | ||||
Adjusted EBITDA* | $ | 337 | $ | 282 | $ | 55 | |||||
* Adjusted EBITDA is a Non-GAAP financial measure, as further discussed below. | |||||||||||
Sales
Sales for the year ended December 31, 2016 totaled $3,161 million, which represents an decrease of $84 million compared with the same period of 2015. Electronics sales were consistent with the prior year, while sales for the Other operations decreased sales by $99 million. For Electronics, higher production volumes, product mix, and net new business increased sales by $115 million. Unfavorable currency decreased Electronics sales by $27 million, primarily attributable to the Chinese Renminbi, Euro, and Indian Rupee, partially offset by the Japanese Yen. Other reductions were associated with customer pricing, net of design savings. The decrease in sales for the Other operations was primarily related to the sale of the Germany Interiors facility on December 1, 2015 which decreased sales for the year ended December 31, 2016 by $86 million and the wind-down of legacy climate facilities in South America.
Cost of Sales
Cost of sales decreased $118 million for the year ended December 31, 2016 when compared with the same period in 2015. Cost of sales for Electronics decreased $32 million while cost of sales for the Other operations decreased $101 million. For Electronics, higher volumes, product mix, and net new business increased cost of sales by $100 million. Foreign currency decreased cost of sales by $37 million primarily attributable to the Chinese Renminbi, Mexican Peso, Euro, Brazilian Real, and British Pound, partially offset by the Japanese Yen. Net efficiencies, including material, design and usage economics and manufacturing efficiencies decreased cost of sales by $95 million. The decrease in cost of sales for the Other operations was primarily related to the sale of the Germany Interiors facility which decreased cost of sales by $83 million and the wind-down of legacy climate facilities in South America.
Gross Margin
The Company's gross margin was $464 million or 14.7% of sales for the year ended December 31, 2016 compared to $430 million or 13.3% of sales for the same period of 2015. Electronics gross margin increased year-over-year by $32 million while Other gross
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margin increased year-over-year by $2 million. The increase in the Electronics gross margin included $15 million from favorable volumes, net new business and product mix and $10 million from favorable currency. Electronics gross margin also included $7 million of favorable net cost performance, driven by material and manufacturing cost efficiencies, which more than offset customer pricing reductions.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses were $220 million, or 7.0% of sales, and $245 million, or 7.6% of sales, during the years ended December 31, 2016 and 2015, respectively. The decrease of $25 million is primarily related to net efficiencies and lower incentive compensation expense.
Restructuring Expense
Electronics: During the first quarter of 2016, the Company announced a restructuring program to transform the Company's engineering organization and supporting functional areas to focus on execution and technology. The organization will be comprised of regional engineering, product management and advanced technologies, and global centers of competence. During the year ended December 31, 2016, the Company recorded approximately $11 million of restructuring expenses, net of reversals, under this program, associated with approximately 100 employees.
During the fourth quarter of 2016, the Company announced a restructuring program impacting engineering and administrative functions to further align the Company's engineering and related administrative footprint with its core product technologies and customers. The Company expects to incur up to $45 million of restructuring costs for this program. During the year ended December 31, 2016, the Company recorded approximately $27 million of restructuring expenses under this program, associated with approximately 250 employees.
In connection with the Electronics Acquisition, the Company commenced a restructuring program designed to achieve cost savings through transaction synergies. During the year ended December 31, 2015 the Company recorded $20 million of severance and termination benefits, net of reversals, under this program associated with approximately 400 employees.
During October 2015, the Company announced a restructuring program designed to reduce the workforce at a European Electronics facility. The Company recorded $12 million of severance and termination benefits under this program associated with approximately 100 employees,
Other and Discontinued Operations: During 2016, the Company recorded $16 million of restructuring expenses, related to severance and termination benefits of which $14 million relates to the wind-down of certain operations in South America.
Interest Expense, Net
Net interest expense for the year ended December 31, 2016 was $12 million, a decrease of $2 million when compared to $14 million for the same period of 2015. Interest expense of $18 million and $19 million, respectively, for the years ended December 31, 2016 and December 31, 2015 is primarily associated with the Company's Term Facility due April 9, 2021 with original principal of $600 million and prepaid down to $350 million following the Climate Transaction in June 2015.
Equity in Net Income of Non-Consolidated Affiliates
Equity in net income of non-consolidated affiliates was $2 million and $7 million for the years ended December 31, 2016 and 2015, respectively. The income in 2015 was primarily attributable to dividend recognition for a cost basis investment.
Loss on Debt Extinguishment
Loss on debt extinguishment of $5 million during the year ended December 31, 2015 included unamortized original issue discount, debt fees and other debt costs. The loss on debt extinguishment was related to the $246 million repayment of the Company's Term Facility, reducing the outstanding aggregate principal to $350 million.
Loss on Divestiture
On December 1, 2015, Visteon completed the Germany Interiors Divestiture by contributing cash of approximately $141 million, assets of $27 million, and liabilities of $198 million, including pension related liabilities. The Company recognized a pretax loss on divestiture of $105 million related to foreign currency translation and pension benefit plan amounts previously recorded in
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accumulated other comprehensive loss. The Company will make a final contribution payment of approximately $31 million during the first half of 2017 upon fulfillment of buyer contractual commitments.
Gain on Non-Consolidated Affiliates, Net
During the year ended December 31, 2016, Visteon agreed to sell its 50% interest in an equity method investment for approximately $7 million and has recorded an impairment loss of approximately $5 million.
On July 22, 2016, the Company sold a cost method investment to a third party for proceeds of approximately $11 million and recorded a pretax gain on sale of approximately $5 million.
During the year ended December 31, 2015, the Company completed the sale of its 12.5% ownership interest in Yanfeng Visteon Jinqiao Automotive Trim Systems Company, Limited, a Chinese automotive interiors supplier, for proceeds of $91 million and recorded a pretax gain on sale of $62 million.
Other Expense, Net
Other expense, net consists of the following:
Year Ended December 31 | |||||||
2016 | 2015 | ||||||
(Dollars in Millions) | |||||||
Foreign currency translation charge | $ | 11 | $ | — | |||
Transformation initiatives | 9 | 25 | |||||
Transaction hedging and exchange (gains) losses | 1 | (15 | ) | ||||
Integration costs | 2 | 14 | |||||
Loss on asset contributions | 2 | 1 | |||||
Recoverable taxes | (1 | ) | — | ||||
$ | 24 | $ | 25 | ||||
During the year ended December 31, 2016, the Company recorded a charge of approximately $11 million related to foreign currency translation amounts recorded in accumulated other comprehensive loss associated with the sale of the Company's South Africa climate operations.
Transformation initiatives include information technology separation costs and financial and advisory services incurred in connection with the execution of the Company's comprehensive value creation plan and certain severance costs associated with the acquisition of substantially all of the global automotive electronics business of Johnson Controls Inc. (the "Electronics Acquisition") and the Climate Transaction. Transaction hedging and exchange losses (gains) of $1 million and $(15) million for the years ended December 31, 2016 and 2015, respectively, relate to the Climate Transaction proceeds and the Germany Interiors Divestiture contribution.
During the years ended December 31, 2016 and 2015, the Company recorded $2 million and $14 million, respectively, of costs to integrate the businesses associated with Electronics Acquisition. Integration costs included re-branding, facility modification, information technology readiness and related professional services.
In connection with the closure of the Climate facility in Argentina, the Company contributed land and building with a net book value of $2 million to the local municipality for the benefit of former employees. The Company also recorded gains of $1 million during the year ended December 31, 2016 to adjust recoverable value-added taxes to net realizable value attributable to business exit activities.
Income Taxes
The Company's provision for income tax was $30 million for year ended December 31, 2016 and reflects income tax expense related to those countries where the Company is profitable, accrued withholding taxes, ongoing assessments related to the recognition and measurement of uncertain tax benefits, the inability to record a tax benefit for pretax losses and/or recognize tax expense for pretax income in certain jurisdictions (including the U.S.) due to valuation allowances, and other non-recurring tax items.
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The Company's provision for income taxes increased $3 million for the year ended December 31, 2016 compared with 2015. The increase included an $11 million year-over-year increase in unrecognized tax benefits, including interest and penalties, related primarily to the non-recurrence of favorable audit developments and statute expirations during 2015, and unfavorable adjustments in 2016, primarily in connection with intercompany transactions between the U.S. and non-U.S. taxing jurisdictions. Other increases include the non-recurrence of an $18 million income tax benefit on pretax U.S. losses from continuing operations recognized during the 2015. Although the Company maintains a full valuation allowance against net deferred tax assets in the U.S., the level of other categories of income generated in the U.S. during 2015 (primarily related to discontinued operations) resulted in a charge to discontinued operations income tax expense of $18 million with the offsetting benefit recognized in continuing operations, effectively resulting from a reduction in the valuation allowance against deferred tax assets. These increases were partially offset by the non-recurrence of $8 million income tax expense related to the withholding tax associated with the sale of its non-consolidated affiliate located in China and favorable developments in connection with certain Portuguese income tax incentives formally approved during 2016 resulting in a discrete income tax benefit of $3 million, and year-over-year tax benefits of $3 million resulting from the partial elimination of valuation allowances in Mexico and France. Other changes in the Company’s deferred tax asset valuation allowances did not materially impact net tax expense during the years ended December 31, 2016 or 2015. Other decreases reflect the year-over-year changes in the mix of earnings and differing tax rates between jurisdictions. Additionally, during 2016, the Company recorded an $11 million income tax benefit in connection with the recognition of a worthless stock deduction (“WSD”) for U.S. income tax purposes related to Visteon SA (the Company’s wholly owned subsidiary associated with the Company’s Climate facility in Argentina where manufacturing operations have ceased), which resulted in an estimated current year U.S. net operating loss (NOL) allowing the Company to carryback such NOL against its 2015 U.S. taxable income. Consequently, the Company recorded a $3 million income tax receivable which represents the remaining income tax paid in 2015 relating to the Climate sale (which should be refunded after carrying back the current year NOL to 2015 and filing a refund claim), and an $8 million reduction in unrecognized tax benefits that impact the effective rate.
Discontinued Operations
The operations subject to the Interiors Divestiture and Climate Transaction met conditions required to qualify for discontinued operations reporting. Accordingly, the results of operations for the Interiors and Climate businesses have been reclassified to Net income (loss) from discontinued operations, net of tax in the Consolidated Statements of Operations for the years ended December 31, 2016 and 2015. See Note 5 "Discontinued Operations" for additional disclosures.
Net Income
Net income attributable to Visteon was $75 million for the year ended December 31, 2016, which included a net loss from discontinued operations of $40 million, restructuring expense of $49 million, higher year over year gross margin of $34 million, and lower year over year selling, general and administrative expenses of $25 million. Net income attributable to Visteon was $2,284 million for the year ended December 31, 2015, which included net income from discontinued operations of $2,286 million including the Climate Transaction gain, a gain on sale of non-consolidated affiliates of $62 million, partially offset by a loss on the Germany Divestiture of $105 million, and restructuring expense of $36 million.
Adjusted EBITDA
Adjusted EBITDA (a non-GAAP financial measure, as defined below) was $337 million for the year ended December 31, 2016, representing an increase of $55 million when compared with Adjusted EBITDA of $282 million for the same period of 2015. Adjusted EBITDA for the Electronics product group in 2016 was $346 million, a year-over-year increase of $52 million. Adjusted EBITDA for the Other operations in 2016 was a loss of $9 million, a year-over-year improvement of $3 million, primarily attributable to year over year customer pricing and exchange improvements.
The increase in Electronics Adjusted EBITDA included $15 million of favorable volume and mix, primarily attributable to increased production volumes and new business in Asia Pacific. Currency movements favorably impacted Electronics Adjusted EBITDA for the year ended December 31, 2016 by $12 million, largely related to the impact of the Mexican Peso, Brazilian Real, Chinese Renminbi, and British Pound, partially offset by the Japanese Yen. Electronics Adjusted EBITDA in 2016 was also impacted by selling, general and administrative cost efficiencies of $14 million and gross margin cost efficiencies of $11 million. Gross margin cost efficiencies included material, manufacturing efficiencies, which more than offset customary customer pricing productivity.
Adjusted EBITDA is presented as a supplemental measure of the Company's financial performance that management believes is useful to investors because the excluded items may vary significantly in timing or amounts and/or may obscure trends useful in evaluating and comparing the Company's operating activities across reporting periods. The Company defines Adjusted EBITDA as net income attributable to the Company adjusted to eliminate the impact of depreciation and amortization, restructuring expense, net interest expense, loss on debt extinguishment, equity in net income of non-consolidated affiliates, loss on divestiture, gain on
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non-consolidated affiliate transactions, other net expense, provision for income taxes, discontinued operations, net income attributable to non-controlling interests, non-cash stock-based compensation expense and other non-operating gains and losses.
Adjusted EBITDA is not a recognized term under accounting principles generally accepted in the United States and does not purport to be a substitute for net income as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. Adjusted EBITDA has limitations as an analytical tool and is not intended to be a measure of cash flow available for management's discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. In addition, the Company uses Adjusted EBITDA (i) as a factor in incentive compensation decisions, (ii) to evaluate the effectiveness of the Company's business strategies and (iii) because the Company's credit agreements use measures similar to Adjusted EBITDA to measure compliance with certain covenants. Adjusted EBITDA, as determined and measured by the Company should not be compared to similarly titled measures reported by other companies. The reconciliation of Adjusted EBITDA to net income attributable to Visteon for the years ended December 31, 2016 and 2015 is as follows:
Year Ended December 31 | |||||||||||
2016 | 2015 | Change | |||||||||
(Dollars in Millions) | |||||||||||
Adjusted EBITDA | $ | 337 | $ | 282 | $ | 55 | |||||
Depreciation and amortization | 84 | 85 | (1 | ) | |||||||
Restructuring expense | 49 | 36 | 13 | ||||||||
Interest expense, net | 12 | 14 | (2 | ) | |||||||
Equity in net income of non-consolidated affiliates | (2 | ) | (7 | ) | 5 | ||||||
Loss on debt extinguishment | — | 5 | (5 | ) | |||||||
Loss on divestiture | — | 105 | (105 | ) | |||||||
Gain on non-consolidated affiliate transactions, net | — | (62 | ) | 62 | |||||||
Other expense, net | 24 | 25 | (1 | ) | |||||||
Provision for income taxes | 30 | 27 | 3 | ||||||||
Net loss (income) from discontinued operations, net of tax | 40 | (2,286 | ) | 2,326 | |||||||
Net income attributable to non-controlling interests | 16 | 44 | (28 | ) | |||||||
Non-cash, stock-based compensation expense | 8 | 8 | — | ||||||||
Other | 1 | 4 | (3 | ) | |||||||
Net income attributable to Visteon Corporation | $ | 75 | $ | 2,284 | $ | (2,209 | ) | ||||
Segment Results of Operations - 2016 compared with 2015
The Company's operating structure is organized into two global product groups - Electronics and Other. These global product groups have financial and operating responsibility over the design, development and manufacture of the Company's product portfolio. Certain functions such as procurement, information technology and other administrative activities are managed on a global basis with regional deployment. The Company's two reportable segments are as follows:
• | Electronics - The Company's Electronics segment provides vehicle cockpit electronics products to customers, including instrument clusters, information displays, infotainment, audio systems, telematics solutions, and head up displays. |
• | Other - Other includes South Africa climate operations sold on November 1, 2016 and South America climate operations substantially exited during the fourth quarter of 2016. During 2015, Other also included the Berlin, Germany operations previously associated with the Interiors business and sold during the fourth quarter of 2015. |
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Sales
Electronics | Other | Eliminations | Total | ||||||||||||
(Dollars in Millions) | |||||||||||||||
December 31, 2015 | $ | 3,107 | $ | 153 | $ | (15 | ) | $ | 3,245 | ||||||
Volume and mix | 115 | (11 | ) | 15 | 119 | ||||||||||
Currency | (27 | ) | (1 | ) | — | (28 | ) | ||||||||
Germany Interiors Divestiture | — | (86 | ) | — | (86 | ) | |||||||||
Other | (88 | ) | (1 | ) | — | (89 | ) | ||||||||
December 31, 2016 | $ | 3,107 | $ | 54 | $ | — | $ | 3,161 | |||||||
Electronics sales were $3,107 million for the year ended December 31, 2016, consistent with prior year sales. Higher production volumes and new business increased sales by $115 million. Volume, mix, and net new business improved in Asia Pacific and Europe. Volumes were consistent in North America, while South America deteriorated. Unfavorable currency, primarily related to the Chinese Renminbi and Euro partially offset by the Japanese Yen, decreased sales by $27 million. Other reductions reflected customer pricing net of design changes.
Other sales decreased during the year end December 31, 2016 by $99 million. The Germany Interiors Divestiture, effective December 1, 2015, resulted in a decrease in sales of $86 million. Lower production volumes related to the wind down of certain South America businesses reduced sales by $11 million.
Cost of Sales
Electronics | Other | Eliminations | Total | ||||||||||||
(Dollars in Millions) | |||||||||||||||
December 31, 2015 | $ | 2,666 | $ | 164 | $ | (15 | ) | $ | 2,815 | ||||||
Currency | (37 | ) | (7 | ) | — | (44 | ) | ||||||||
Volume, mix, and net new business | 100 | (10 | ) | 15 | 105 | ||||||||||
Germany Interiors Divestiture | — | (83 | ) | — | (83 | ) | |||||||||
Other | (95 | ) | (1 | ) | — | (96 | ) | ||||||||
December 31, 2016 | $ | 2,634 | $ | 63 | $ | — | $ | 2,697 | |||||||
Electronics cost of sales decreased during the year ended December 31, 2016 by $32 million when compared with the same period in 2015. Cost of sales increased $100 million attributable to higher volumes as well as changes in product mix, representing the variable nature of material and labor costs. Foreign currency decreased cost of sales by $37 million primarily attributable to the Chinese Renminbi, Euro, and Mexican Peso, partially offset by the Japanese Yen. Additionally, the Company recognized $95 million of net efficiencies related to material and manufacturing costs.
Cost of sales for Other decreased $101 million, reflecting the impacts of the Germany Interiors Divestiture during the fourth quarter of 2015, and lower production volumes related to the wind down for certain businesses in South America.
Cost of sales includes net engineering costs, comprised of gross engineering expenses related to forward model program development and advanced engineering activities, partially offset by engineering cost recoveries from customers. Electronics gross engineering expenses were $399 million for the year ended December 31, 2016, an increase of $23 million compared to the same period of 2015. Engineering recoveries were $104 million for the year ended December 31, 2016, an increase of $22 million compared to the same period of 2015. Engineering cost recoveries can fluctuate period to period depending on underlying contractual terms and conditions and achievement of related development milestones.
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Adjusted EBITDA
Electronics | Other | Total | |||||||||
(Dollars in Millions) | |||||||||||
December 31, 2015 | $ | 294 | $ | (12 | ) | $ | 282 | ||||
Volume and mix | 15 | (4 | ) | 11 | |||||||
Currency | 12 | 6 | 18 | ||||||||
Other | 25 | 1 | 26 | ||||||||
December 31, 2016 | $ | 346 | $ | (9 | ) | $ | 337 | ||||
Electronics Adjusted EBITDA increased $52 million for the year ended December 31, 2016 when compared to the same period of 2015. Higher volumes and new business, primarily in Asia, increased Adjusted EBITDA by $15 million. Currency increased adjusted EBITDA by $12 million primarily related to the Mexican Peso partially offset by the Japanese Yen. Net cost performance increased adjusted EBITDA by $25 million primarily reflecting material, manufacturing, and selling, general and administrative efficiencies, partially offset by customer pricing.
Other Adjusted EBITDA for the year ended December 31, 2016 increased by $3 million compared to the same period of 2015 primarily reflecting favorable currency related to the Argentine Peso and net cost efficiencies related to the wind-down of the legacy Climate facilities, partially offset by the impact of the sale of Germany Interiors Divestiture during the fourth quarter of 2015.
Consolidated Results of Operations - 2015 Compared with 2014
The Company's consolidated results of operations for the years ended December 31, 2015 and 2014 were as follows:
Year Ended December 31 | |||||||||||
2015 | 2014 | Change | |||||||||
(Dollars in Millions) | |||||||||||
Sales | $ | 3,245 | $ | 2,586 | $ | 659 | |||||
Cost of sales | 2,815 | 2,246 | 569 | ||||||||
Gross margin | 430 | 340 | 90 | ||||||||
Selling, general and administrative expenses | 245 | 228 | 17 | ||||||||
Restructuring expense | 36 | 54 | (18 | ) | |||||||
Interest expense | 19 | 25 | (6 | ) | |||||||
Interest income | 5 | 4 | 1 | ||||||||
Equity in net income of non-consolidated affiliates | 7 | 2 | 5 | ||||||||
Loss on debt extinguishment | 5 | 23 | (18 | ) | |||||||
Loss on divestiture | 105 | — | 105 | ||||||||
Gain on non-consolidated affiliate transactions, net | 62 | 2 | 60 | ||||||||
Other expense, net | 25 | 61 | (36 | ) | |||||||
Provision for income taxes | 27 | 32 | (5 | ) | |||||||
Net income (loss) from continuing operations | 42 | (75 | ) | 117 | |||||||
Net income (loss) from discontinued operations, net of tax | 2,286 | (131 | ) | 2,417 | |||||||
Net income (loss) | 2,328 | (206 | ) | 2,534 | |||||||
Net income attributable to non-controlling interests | 44 | 89 | (45 | ) | |||||||
Net income (loss) attributable to Visteon Corporation | $ | 2,284 | $ | (295 | ) | $ | 2,579 | ||||
Adjusted EBITDA* | $ | 282 | $ | 177 | $ | 105 | |||||
* Adjusted EBITDA is a Non-GAAP financial measure, as previously described. | |||||||||||
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Sales
Sales for the year ended December 31, 2015 totaled $3,245 million, which represents an increase of $659 million compared with the same period of 2014. The primary drivers of the sales increase included the Electronics Acquisition effective July 1, 2014 which increased sales by $691 million. Additionally, higher production volumes and new business favorably impacted sales by $199 million. Favorable volumes increased sales in the Electronics segment but this was partially offset by unfavorable volumes in Other, primarily driven by the wind-down of certain South American businesses and the sale of the Germany Interiors facility on December 1, 2015. Currency unfavorably impacted sales by $175 million, primarily attributable to the weakening Euro, Japanese Yen, Brazilian Real, and the Chinese Renminbi. Other reductions of $56 million were associated with customer pricing, net of design savings.
Cost of Sales
Cost of sales increased $569 million for the year ended December 31, 2015 when compared with the same period in 2014. The increase includes $771 million attributable to increased production volumes, including the Electronics Acquisition, as well as changes in product mix, representing the variable nature of material and labor costs. These increases were partially offset by foreign currency which decreased cost of sales by $142 million, attributable to the weakening of the Euro, Japanese Yen, Brazilian Real, and Chinese Renminbi, the non-recurrence of a 2014 pension settlement gain of $25 million and increased warranty costs primarily attributable to three customer actions related to defective supplier parts of $14 million. Additionally, the Company realized $85 million of net efficiencies related to material, design, and usage economics and other costs.
Gross Margin
The Company's gross margin was $430 million or 13.3% of sales for the year ended December 31, 2015 compared to $340 million or 13.1% of sales for the same period of 2014. The $90 million increase in gross margin included $119 million from favorable volumes and mix, including the impacts of the Electronics Acquisition. Gross margin also included favorable net cost performance of $43 million, primarily reflecting material cost efficiencies. These increases were partially offset by $33 million of unfavorable currency, $25 million related to the non-recurrence of a 2014 pension settlement gain and $14 million of increased warranty costs primarily attributable to three customer actions related to defective supplier parts.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses were $245 million or 7.6% of sales and $228 million or 8.8% of sales during the years ended December 31, 2015 and 2014, respectively. The increase of $17 million is attributable to the Electronics Acquisition which increased costs $48 million and lower cost recoveries associated with divested businesses which increased costs $10 million. These increases were partially offset by cost efficiencies and foreign currency impacts.
Restructuring Expense
Electronics: In connection with the Electronics Acquisition, the Company commenced a restructuring program designed to achieve cost savings through transaction synergies, of approximately $70 million. During the years ended December 31, 2015 and 2014, the Company recorded $20 million and $37 million, respectively, of severance and termination benefits, net of reversals, under this program associated with approximately 1,100 employees.
During October 2015, the Company announced a restructuring program designed to reduce the workforce at a European Electronics facility. The Company recorded $12 million of severance and termination benefits under this program associated with approximately 100 employees.
The Company previously announced a restructuring program designed to reduce fixed costs and to improve operational efficiencies by addressing certain under-performing operations. In connection with that program, the Company announced plans to realign its corporate and administrative functions directly to their corresponding operational beneficiary. During the year ended December 31, 2015, the Company recorded $4 million for restructuring expenses, primarily related to severance and termination benefits associated with certain executives.
Other: During 2014, the Company announced the closure of a Climate facility located in Quilmes, Argentina. In connection with the closure, the Company recorded $13 million of restructuring expenses, primarily related to severance and termination benefits associated with approximately 270 employees. During 2014, the Company recorded $8 million of costs associated with closing facilities in South Africa and Spain.
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Discontinued Operations: Restructuring activities for discontinued operations, included in Other, primarily consist of the following:
• | The Company recorded and paid cash to settle employee severance and termination benefits of $2 million and $3 million, respectively, for the years ended December 31, 2015 and 2014 at the Company's Climate operations in France, under a previously announced program designed to commonize global business systems and processes across its Climate operations for the purpose of reducing costs. |
• | During 2014, the Company recorded $5 million of employee severance and termination benefit costs associated with a previously announced plan to restructure three Interiors facilities located in France and made cash payments of approximately $18 million for related employee severance and termination benefits. |
• | During 2014, the Company announced a plan to further reduce the workforce and related processes at an Interiors operation in Brazil and recorded an additional $3 million for employee severance and termination benefits associated with approximately 50 employees. |
Interest Expense
Interest expense for the year ended December 31, 2015 of $19 million decreased $6 million when compared to $25 million for the same period of 2014. Interest expense for the year ended December 31, 2015 of $19 million is primarily associated with the Company's Term Facility due April 9, 2021 with original principal of $600 million and prepaid down to $350 million following the Climate Transaction in June 2015. During the year ended December 31, 2014, interest expense of $25 million primarily included interest expense of $10 million associated with the Company's 6.75% Senior Notes which were redeemed in April 2014 and interest expense of $13 million associated with the Company's Term Facility at original principal balance of $600 million.
Interest Income
Interest income was $5 million and $4 million for the years ended December 31, 2015 and 2014, respectively. Interest income for 2015 benefited from the investment of Climate Transaction proceeds received in June 2015, while interest income for 2014 benefited from the investment of Yanfeng divestiture proceeds received at the end of 2013.
Equity in Net Income of Non-Consolidated Affiliates
Equity in net income of non-consolidated affiliates was $7 million and $2 million for the years ended December 31, 2015 and 2014, respectively. The increase was primarily attributable to dividend recognition for a cost basis investment.
Loss on Debt Extinguishment
The Company recorded losses on debt extinguishment of $5 million and $23 million during the years ended December 31, 2015 and 2014, respectively. Loss on debt extinguishment of $5 million during the year ended December 31, 2015 related to the $246 million repayment of the Company's Term Facility, reducing the outstanding aggregate principal $350 million, including unamortized original issue discount, debt fees and other debt costs. Loss on debt extinguishment of $23 million during the year ended December 31, 2014 related to the repayment and redemption of the Company's 6.75% senior notes due April 15, 2019 including premium paid on the redemption and unamortized original issue discount, debt fees and other debt issue costs.
Loss on Divestiture
On December 1, 2015, Visteon completed the Germany Interiors Divestiture by contributing cash of approximately $141 million, assets of $27 million, and liabilities of $198 million, including pension related liabilities. The Company will make a final contribution payment of approximately $31 million during the first half of 2017 upon fulfillment of buyer contractual commitments. The Company recognized a pretax loss on divestiture of $105 million related to foreign currency translation and pension benefit plan amounts previously recorded in accumulated other comprehensive loss.
Gain on Non-Consolidated Affiliate Transactions, Net
During the year ended December 31, 2015, the Company completed the sale of its 12.5% ownership interest in Yanfeng Visteon Jinqiao Automotive Trim Systems Company, Limited, a Chinese automotive interiors supplier, for proceeds of $91 million and recorded a pretax gain on sale of $62 million.
During the year ended December 31, 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
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cash of approximately $31 million, including $6 million of dividends. The Company recorded a pretax gain of approximately $2 million on this transaction during the year ended December 31, 2014.
Other Expense, Net
Other expense, net consists of the following:
Year Ended December 31 | |||||||
2015 | 2014 | ||||||
(Dollars in Millions) | |||||||
Transformation costs | $ | 25 | $ | 22 | |||
Integration costs | 14 | 18 | |||||
Transaction hedging and exchange (income) loss | (15 | ) | 10 | ||||
Provision for losses on recoverable taxes | — | 8 | |||||
Loss on asset contribution | 1 | 3 | |||||
$ | 25 | $ | 61 | ||||
The Company recorded transformation costs of $25 million and $22 million for the years ended December 31, 2015 and 2014, respectively, related to financial and advisory services associated with continued execution of its comprehensive shareholder value creation plan and certain severance costs associated with the Electronics Acquisition and the Climate Transaction. Hedging and exchange gains of $15 million and losses of $10 million for the years ended December 31, 2015 and 2014 respectively, relate to the Climate Transaction proceeds and the Germany Interiors Divestiture contribution.
During the years ended December 31, 2015 and 2014, the Company recorded $14 million and $18 million , respectively, of costs to integrate the businesses associated with the Electronics Acquisition. Integration costs incurred were related to re-branding, facility modification, information technology readiness and related professional services.
The Company recorded $8 million during the year ended December 31, 2014 to adjust recoverable value-added taxes to net realizable value attributable to business exit activities. In connection with the closure of the Climate facility located in Quilmes, Argentina in 2014, the Company contributed land and building with a net book value of $3 million to the local municipality for the benefit of former employees.
Income Taxes
The Company's provision for income tax was $27 million for year ended December 31, 2015 reflects income tax expense related to those countries where the Company is profitable, accrued withholding taxes, ongoing assessments related to the recognition and measurement of uncertain tax benefits, the inability to record a tax benefit for pretax losses in the U.S. and certain other jurisdictions due to valuation allowances, and other non-recurring tax items.
The Company's provision for income taxes decreased $5 million for the year ended December 31, 2015 compared with 2014. The decrease included a $9 million year-over-year reduction in unrecognized tax benefits, including interest and penalties, related primarily to favorable audit developments in Asia during the first quarter of 2015, and statute expirations in Europe during 2015, as well as an $18 million income tax benefit on pretax U.S. losses from continuing operations. Although the Company maintains a full valuation allowance against net deferred tax assets in the U.S., the level of other categories of income generated in the U.S. during 2015 (primarily related to discontinued operations) resulted in a charge to discontinued operations income tax expense of $18 million with the offsetting benefit recognized in continuing operations, effectively resulting from a reduction in the valuation allowance against deferred tax assets. Other changes in the Company’s deferred tax asset valuation allowances did not materially impact net tax expense during the years ended December 31, 2015 or 2014. These decreases were partially offset by $12 million attributable to overall changes in the mix of earnings and tax rates between jurisdictions, $8 million related to China tax in connection with the sale of Yanfeng Visteon Jinqiao Automotive Trim Systems Company, Limited and $4 million related to the non-recurrence of a tax benefit related to the partial elimination of valuation allowances in Mexico during 2014.
Visteon's emergence from bankruptcy in 2010 resulted in a change of ownership within the meaning of Internal Revenue Code (“IRC”) Sections 382 and 383, causing the use of Visteon's pre-emergence U.S. federal net operating loss (“NOL”) and various other tax attributes to be limited in the post-emergence period. However, NOLs and other tax attributes generated in the post emergence period are generally not limited by the emergence from bankruptcy, but could be limited if there is a subsequent change of ownership. If the Company were to have another change of ownership within the meaning of IRC Sections 382 and 383, its
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post-emergence NOL and other tax attributes could be limited to an amount equal to its market capitalization at the time of the subsequent ownership change multiplied by the federal long-term tax exempt rate. The Company cannot provide any assurance that such an ownership change will not occur, in which case the availability of the Company's NOLs and other tax attributes could be significantly limited or possibly eliminated. In order to continue to protect the Company's pre and post-emergence period tax attributes and reduce the likelihood that the Company will experience an additional ownership change, once the Company's market capitalization falls below $1.5 billion Board of Director approval is required should a person or group become a 5-percent shareholder and/or an existing 5-percent shareholder intend to increase its ownership interest.
Discontinued Operations
The operations subject to the Interiors Divestiture and Climate Transaction met conditions required to qualify for discontinued operations reporting. Accordingly, the results of operations for the Interiors and Climate businesses have been reclassified to Net income (loss) from discontinued operations in the Consolidated Statements of Operations for the years ended December 31, 2015 and 2014. See Note 5 "Discontinued Operations" for additional disclosures.
Net Income (Loss)
Net income attributable to Visteon was $2,284 million for the year ended December 31, 2015, representing an increase of $2,579 million when compared with net loss attributable to Visteon of $295 million for the year ended December 31, 2014. Net income attributable to Visteon in 2015 included a gain on the Climate Transaction of $2,324 million and a gain on sale of a non-consolidated affiliate of $62 million, partially offset by a loss on the Germany Divestiture of $105 million. Net loss attributable to Visteon was $295 million for the year ended December 31, 2015, including total losses on the Interiors Divestiture of $326 million. Net income (loss) was also impacted by discontinued operations including the timing of the Climate Transaction effective in June of 2015 and the vast majority of the Interiors Divestiture in November of 2014.
Adjusted EBITDA
Year Ended December 31 | |||||||||||
2015 | 2014 | Change | |||||||||
(Dollars in Millions) | |||||||||||
Adjusted EBITDA | $ | 282 | $ | 177 | $ | 105 | |||||
Depreciation and amortization | 85 | 70 | 15 | ||||||||
Restructuring expense | 36 | 54 | (18 | ) | |||||||
Interest expense, net | 14 | 21 | (7 | ) | |||||||
Loss on debt extinguishment | 5 | 23 | (18 | ) | |||||||
Equity in net income of non-consolidated affiliates | (7 | ) | (2 | ) | (5 | ) | |||||
Gain on non-consolidated affiliate transactions | (62 | ) | (2 | ) | (60 | ) | |||||
Loss on divestiture | 105 | — | 105 | ||||||||
Other expense, net | 25 | 61 | (36 | ) | |||||||
Provision for income taxes | 27 | 32 | (5 | ) | |||||||
Net (income) loss from discontinued operations, net of tax | (2,286 | ) | 131 | (2,417 | ) | ||||||
Net income attributable to non-controlling interests | 44 | 89 | (45 | ) | |||||||
Non-cash, stock-based compensation expense | 8 | 12 | (4 | ) | |||||||
Pension settlement gain | — | (25 | ) | 25 | |||||||
Other | 4 | 8 | (4 | ) | |||||||
Net income (loss) attributable to Visteon Corporation | $ | 2,284 | $ | (295 | ) | $ | 2,579 | ||||
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Segment Results of Operations - 2015 compared with 2014
Sales
Electronics | Other | Eliminations | Total | ||||||||||||
(Dollars in Millions) | |||||||||||||||
December 31, 2014 | $ | 2,386 | $ | 251 | $ | (51 | ) | $ | 2,586 | ||||||
Volume and mix | 240 | (77 | ) | 36 | 199 | ||||||||||
Currency | (156 | ) | (19 | ) | — | (175 | ) | ||||||||
Electronics Acquisition | 691 | — | — | 691 | |||||||||||
Other | (54 | ) | (2 | ) | — | (56 | ) | ||||||||
December 31, 2015 | $ | 3,107 | $ | 153 | $ | (15 | ) | $ | 3,245 | ||||||
Electronics sales increased during the year ended December 31, 2015 by $721 million. The largest driver of the sales increase was attributable to the Electronics Acquisition, representing $691 million of the increase. Higher production volumes, primarily in Asia and Europe, increased sales by $240 million. Unfavorable currency, primarily related to the Euro, Japanese Yen, and Chinese Renminbi decreased sales by $156 million. Other changes, totaling $54 million, reflected customer pricing net of design changes.
Other sales decreased during the year ended December 31, 2015 by $98 million, including unfavorable volume and product mix of $77 million primarily reflecting the wind down of certain South America businesses and the sale of the Germany Interiors facility on December 1, 2015. Unfavorable currency, primarily related to the Euro and Brazilian Real, was $19 million.
Cost of Sales
Electronics | Other | Eliminations | Total | ||||||||||||
(Dollars in Millions) | |||||||||||||||
December 31, 2014 | $ | 2,062 | $ | 235 | $ | (51 | ) | $ | 2,246 | ||||||
Currency | (128 | ) | (14 | ) | — | (142 | ) | ||||||||
Volume, mix, and net new business | 805 | (70 | ) | 36 | 771 | ||||||||||
Other | (73 | ) | 13 | — | (60 | ) | |||||||||
December 31, 2015 | $ | 2,666 | $ | 164 | $ | (15 | ) | $ | 2,815 | ||||||
Substantially all of the increases in Electronics cost of sales are attributable to the Electronics Acquisition effective July 1, 2014.
Net engineering costs are comprised of gross engineering expenses related to forward model program development and advanced engineering activities, partially offset by engineering cost recoveries from customers. Electronics gross engineering expenses were $376 million for the year ended December 31, 2015, an increase of $75 million compared to the same period of 2014. Engineering recoveries were $82 million for the year ended December 31, 2015, an increase of $35 million compared to the same period of 2014. Engineering cost recoveries can fluctuate period to period depending on underlying contractual terms and conditions and achievement of related development milestones.
Other cost of sales decreased year over year, primarily related to a $46 million reduction in material costs, a $10 million reduction in freight costs, and a $24 million reduction in labor and overhead costs, reflecting lower production volumes related to the wind down for certain programs in South America and the sale of the Germany Interiors facility on December 1, 2015. Cost of sales in Other also increased $17 million driven by the non-recurrence of a $12 million tax settlement in Brazil and the non-recurrence of a $7 million pension settlement gain.
Adjusted EBITDA
Electronics | Other | Total | |||||||||
(Dollars in Millions) | |||||||||||
December 31, 2014 | $ | 171 | $ | 6 | $ | 177 | |||||
Volume and mix | 93 | (7 | ) | 86 | |||||||
Currency | (18 | ) | (5 | ) | (23 | ) | |||||
Other | 48 | (6 | ) | 42 | |||||||
December 31, 2015 | $ | 294 | $ | (12 | ) | $ | 282 | ||||
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Electronics Adjusted EBITDA increased $123 million for the year ended December 31, 2015 when compared to the same period of 2014. Higher volumes, including the Electronics Acquisition, new business, and favorable product mix, increased Adjusted EBITDA by $93 million. Currency, largely related to the Euro, Japanese Yen and Chinese Renminbi, had an unfavorable impact of $18 million. Other net cost efficiencies of $48 million include $53 million of material, design, and manufacturing costs, $9 million of selling, general, and administrative cost efficiencies, partially offset by $14 million of one time warranty costs.
Other Adjusted EBITDA for the year ended December 31, 2015 decreased by $18 million compared to the same period of 2014. The decrease was partially explained by the non-recurrence of a $12 million Brazil tax settlement in 2014. The additional decrease is attributable to lower production volumes, the Germany Interiors facility sale on December 1, 2015, and unfavorable currency.
Liquidity
Overview
The Company's primary sources of liquidity are cash flows from operations, existing cash balances, and borrowings under available credit facilities, if necessary. The Company believes that funds generated from these sources will be adequate to fund its liquidity requirements.
A portion of the Company's cash flows from operations are generated outside of the U.S. Accordingly, the Company utilizes a combination of cash repatriation strategies, including dividends, royalties, intercompany loan repayments and other distributions and advances to provide the funds necessary to meet obligations globally. The Company’s ability to access funds from its subsidiaries using these repatriation strategies is subject to, among other things, customary regulatory and statutory requirements and contractual arrangements including joint venture agreements and local debt agreements. Additionally, such repatriation strategies may be adjusted or modified as the Company continues to, among other things, rationalize its business portfolio and cost structure.
The Company's ability to fund its liquidity needs is dependent on the level, variability and timing of its customers' worldwide vehicle production, which may be affected by many factors including, but not limited to, general economic conditions, specific industry conditions, financial markets, competitive factors and legislative and regulatory changes. The Company monitors the macroeconomic environment and its impact on vehicle production volumes in relation to the Company's specific cash needs. The Company's intra-year needs are impacted by seasonal effects in the industry, such as mid-year shutdowns, the subsequent ramp-up of new model production and the additional year-end shutdowns by primary customers.
To the extent that the Company's liquidity needs exceed cash provided by its operating activities, the Company would look to cash balances on hand, a $350 million Term Facility due April 9, 2021 ("Term Facility"), its $200 million revolving credit facility due April 9, 2019 ("Revolving Facility"), other affiliate working capital lines of credit, or additional capital through debt or equity markets. Availability under outstanding affiliate credit facilities as of December 31, 2016 is approximately $34 million. See Note 13 "Debt" to the accompanying consolidated financial statements for a more comprehensive discussion of the Company's Term Revolving Facilities. Access to additional capital through the debt or equity markets is influenced by the Company's credit ratings. In March 2016, the Company's credit rating was upgraded by S&P to BB- from B+ and Moody's upgraded the Company's credit rating to Ba3 from B1.
Cash Balances
As of December 31, 2016, the Company had total cash of $882 million, including $4 million of restricted cash. Cash balances totaling $582 million were located in jurisdictions outside of the United States, of which approximately $220 million is considered permanently reinvested for funding ongoing operations outside of the U.S. If such permanently reinvested funds are repatriated to operations in the U.S., the Company would be required to accrue additional tax expense, primarily related to foreign withholding taxes.
Restructuring
During the year ended December 31, 2016, the Company paid $44 million related to restructuring activities. The Company expects to pay $40 million in 2017. See Note 7 "Restructuring" to the Company's consolidated financial statements included in Item 8 of this Report for further information.
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Other Items Affecting Liquidity
In 2015, the Company entered an agreement to repurchase from the buyer certain electronics operations located in India for an estimated purchase price of $50 million and recorded this obligation in 2015. This transaction is expected to close during the first half of 2017 after legal separation and regulatory approvals requirements are met.
During the first half of 2017, the Company expects to make remaining payments of approximately $31 million related to the Germany Interiors Divestiture that closed on December 1, 2015.
During the year ended December 31, 2016, cash contributions to the Company's U.S. and non-U.S. defined benefit pension plan were $12 million. The Company expects to make cash contributions to its defined benefit pension plans of $7 million in 2017. Estimated cash contributions for 2018 through 2020, under current regulations and market assumptions are approximately $29 million.
Cash Flows
Operating Activities
Including discontinued operations, the Company generated $120 million of cash from operating activities during the year ended December 31, 2016, compared to $338 million during the same period of 2015 for a decrease of $218 million. The decrease in cash provided by operating activities is primarily attributable to the divestiture of climate operations which provided $186 million in the first half of 2015. The remaining $32 million decrease in cash from operating activities reflects higher income tax payments of approximately $51 million primarily related to Japan, China and Europe, partially offset by the non-recurrence of taxes withheld in connection with the 2015 sale of a non-consolidated affiliate. The decrease in cash from operating activities is also impacted by higher information technology transition agreements payments of $15 million and higher restructuring payments of $13 million. These decreases were partially offset by the non-recurrence of 2015 Climate Transaction related labor and incentive payments of $48 million.
The Company generated $338 million of cash from operating activities during the year ended December 31, 2015, compared to $284 million during the same period of 2014 for an increase of $54 million. The increase during the year ended December 31, 2015 is attributable to lower working capital requirements primarily related to an approximate $97 million reduction in HVCC operations, the impact of capitalized engineering recoveries of $17 million and lower restructuring cash payments of $23 million. These increases were partially offset by Climate Transaction related payments of $69 million, primarily labor and incentive payments of $48 million, information technology transition agreements payments of $18 million, interiors divestitures related information technology transition agreement payments of $5 million, and lower dividends from non-consolidated affiliates of $9 million.
Investing Activities
Cash provided from investing activities during the year ended December 31, 2016 totaled $302 million, compared to net cash provided from investing activities of $2,358 million in the same period in 2015 for a decrease of $2,056 million. Net cash provided from investing activities during the year ended December 31, 2016, includes the Climate Transaction withholding tax recovery of $356 million, liquidation of short-term investments of $47 million, and proceeds from a cost-basis investment of $11 million. These increases were partially offset by capital expenditures of $75 million, payments related to the South America interiors divestiture of $10 million and a three-year term loan of $10 million provided to the buyer, the acquisition of AllGo Embedded Systems Private Limited of $15 million and net loans to non-consolidated affiliates of $8 million.
Cash provided from investing activities during the year ended December 31, 2015 totaled $2,358 million, compared to net cash used by investing activities of $740 million for the same period in 2014 for an increase of $3,098 million. Net cash provided from investing activities during the year ended December 31, 2015 included the impacts of divestiture activity including Climate Transaction net proceeds of $2,664 million and non-consolidated affiliate divestiture proceeds of $91 million, partially offset by the Germany Interiors Divestiture contribution of $141 million and other transaction related payments of $15 million. Additional investing activity included capital expenditures of $187 million and short-term net investments of $47 million.
Financing Activities
Cash used by financing activities during the year ended December 31, 2016 totaled $2,262 million, compared to $774 million for the same period in 2015 for an increase in cash used by financing activities of $1,488 million. Cash used by financing activities during the year ended December 31, 2016 included a distribution payment of $1,736 million, share repurchases of $500 million,
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stock based compensation tax withholding payments of $11 million, non-controlling interest dividends of $13 million, and capital lease and net debt payments of $2 million.
Cash used by financing activities during the year ended December 31, 2015 totaled $774 million, compared to $359 million for the same period in 2014 for an increase in cash used by financing activities of $415 million. Cash used by financing activities during the year ended December 31, 2015 included $500 million in share repurchases, the prepayment on the Company's term facility, including fees, of $250 million, non-controlling interest dividends of $55 million, partially offset by option and warrant exercises of $40 million.
Debt and Capital Structure
The Company’s short and long-term debt consists of the following:
Weighted Average Interest Rate | Carrying Value | ||||||||||||
Maturity | 2016 | 2015 | 2016 | 2015 | |||||||||
(Dollars in Millions) | |||||||||||||
Short-term debt: | |||||||||||||
Current portion of long-term debt | 4.2% | 4.6% | $ | 3 | $ | 3 | |||||||
Short-term borrowings | 2.6% | 2.4% | 33 | 34 | |||||||||
Total short-term debt | $ | 36 | $ | 37 | |||||||||
Long-term debt: | |||||||||||||
Term facility due April 9, 2021 | 2021 | 4.0% | 3.5% | $ | 346 | $ | 345 | ||||||
Other | 2016-2020 | 13.4% | 4.1% | — | 1 | ||||||||
Total long-term debt | $ | 346 | $ | 346 | |||||||||
See "Liquidity" above and also see Notes 13 "Debt" and Note 17 "Stockholders' Equity and Non-controlling Interests" to the Company's consolidated financial statements included in Item 8 of this Report for further information.
Stock Warrants
In October 2010, the Company issued ten year warrants expiring October 1, 2020 at an exercise price of $9.66 per share. As of December 31, 2016 and 2015, there are 909 warrants outstanding. The warrants may be net share settled and are recorded as permanent equity in the Company’s consolidated balance sheets. These warrants were valued at $15.00 per share on the October 1, 2010 issue date using the Black-Scholes option pricing model.
Pursuant to the Ten Year Warrant Agreement, the original exercise price of $9.66 for the ten year warrants is subject to adjustment as a result of the special distribution of $43.40 per share to shareholders at the beginning of 2016. The new exercise price for each of the remaining 909 ten year warrants outstanding as of December 31, 2016 is reduced to a nominal $0.01 and each warrant is entitled to approximately 1.4 shares of stock upon exercise based on share price as of December 31, 2016.
Share Repurchase Program
On January 10, 2017 the Company announced that its board of directors authorized a share repurchase program of up to $400 million of common stock to be executed through March 2018.
During 2016, the Company paid $500 million and repurchased 7,190,506 shares of common stock. During 2015, the Company paid $500 million and repurchased 4,771,262 shares of common stock.
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. See Note 17 "Stockholder's Equity and Non-controlling Interests" in Item 8 of this Report for more information on the Company's share repurchase programs.
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Treasury Stock
As of December 31, 2016 and 2015, the Company held 22,211,410 and 15,182,372 shares of common stock in treasury. These shares may be used in satisfying obligations under employee incentive compensation arrangements. The Company values shares of common stock held in treasury at cost.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes the Company's contractual obligations existing as of December 31, 2016:
Total | 2017 | 2018-2019 | 2020-2021 | 2022 & After | |||||||||||||||
(Dollars in Millions) | |||||||||||||||||||
Debt, including capital leases | $ | 386 | $ | 36 | $ | — | $ | 350 | $ | — | |||||||||
Purchase obligations | 129 | 65 | 38 | 19 | 7 | ||||||||||||||
Interest payments on long-term debt | 58 | 13 | 27 | 18 | — | ||||||||||||||
Operating leases | 155 | 23 | 38 | 30 | 64 | ||||||||||||||
Transaction obligations | 81 | 81 | — | — | — | ||||||||||||||
Total contractual obligations | $ | 809 | $ | 218 | $ | 103 | $ | 417 | $ | 71 | |||||||||
This table excludes amounts related to the Company's income tax liabilities associated with uncertain tax positions impacting the effective rate of $12 million as the Company is unable to make reasonable estimates for the periods in which these liabilities may become due.
The Company also has minimum funding requirements with respect to pension obligations. The Company may elect to make contributions in excess of the minimum funding requirements in response to investment performance or changes in interest rates. During 2017, the Company expects to make cash contributions to its U.S. defined benefit and non-U.S. defined benefit pension plans of $1 million and $6 million, respectively. The Company’s expected 2017 contributions may be revised.
Critical Accounting Estimates
The Company’s significant accounting policies have been disclosed in the consolidated financial statements and accompanying notes under Note 2 “Summary of Significant Accounting Policies.” Certain policies relate to estimates that involve matters that are highly uncertain at the time the accounting estimate is made and different estimates or changes to an estimate could have a material impact on the reported financial position, changes in financial condition or results of operations. Such critical estimates are discussed below. For these, materially different amounts could be reported under varied conditions and assumption. Other items in the Company's consolidated financial statements require estimation, however, in our judgment, they are not as critical as those discussed below.
Product Warranty and Recall
The Company accrues for warranty obligations for products sold based on management estimates, with support from the Company’s sales, engineering, quality and legal functions, of the amount that eventually will be required to settle such obligations. This accrual is based on several factors, including contractual arrangements, past experience, current claims, production changes, industry developments and various other considerations. The Company accrues for product recall claims related to potential financial participation in customer actions to provide remedies as a result of actual or threatened regulatory or court actions or the Company’s determination of the potential for such actions. The Company's accrual for recall claims is based on specific facts and circumstances underlying individual claims with support from the Company’s engineering, quality and legal functions. Amounts accrued are based upon management’s best estimate of the amount that will ultimately be required to settle such claims. See Note 21 "Commitments and Contingencies" in Item 8 of this Report for additional information.
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Restructuring
The Company accrued costs in connection with its restructuring of the engineering and administration organization. These accruals include estimates primarily related to employee termination costs. Actual costs may vary from these estimates. These accruals are reviewed on a quarterly basis and changes to restructuring actions are appropriately recognized when identified. See Note 7 “Restructuring” in Item 8 of this report for additional information.
Pension Plans
Many of the Company’s employees participate in defined benefit pension plans or retirement/termination indemnity plans. The Company has approximately $289 million in unfunded pension liabilities as of December 31, 2016, of which approximately $220 million and $69 million are attributable to U.S. and non-U.S. pension plans, respectively. The determination of the Company’s obligations and expense for its pension plans is dependent on the Company’s selection of certain assumptions used by actuaries in calculating such amounts. Selected assumptions are described in Note 14 “Employee Retirement Benefits” to the Company’s consolidated financial statements included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, which are incorporated herein by reference, including the discount rate, expected long-term rate of return on plan assets and rate of increase in compensation.
Actual results that differ from assumptions used are accumulated and amortized over future periods and, accordingly, generally affect recognized expense in future periods. Therefore, assumptions used to calculate benefit obligations as of the annual measurement date directly impact the expense to be recognized in future periods. The primary assumptions affecting the Company’s accounting for employee benefits, as of December 31, 2016 are as follows:
• | Long-term rate of return on plan assets: The expected long-term rate of return is used to calculate net periodic pension cost. The required use of the expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. Over time the expected long-term rate of return on plan assets is designed to approximate actual returns. The expected long-term rate of return for pension assets has been estimated based on various inputs, including historical returns for the different asset classes held by the Company’s trusts and its asset allocation, as well as inputs from internal and external sources regarding expected capital market returns, inflation and other variables. |
In determining its pension expense for 2016, the Company used long-term rates of return on plan assets ranging from 3.5% to 12.7% outside the U.S. and 7.0% in the U.S. The Company has set the assumptions for its 2017 pension expense which range from 2.9% to 11.5% outside the U.S. and 6.75% in the U.S. Actual returns on U.S. pension assets for 2016, 2015 and 2014 were 8.4%, (3.8)% and 14.4%, respectively, compared to the expected rate of return assumption of 7% for each of those years. The Company’s market-related value of pension assets reflects changes in the fair value of assets over a five-year period, with a one-third weighting to the most recent year. Market-related value was reset to fair value at October 1, 2010.
• | Discount rate: The discount rate is used to calculate pension obligations. The discount rate assumption is based on market rates for a hypothetical portfolio of high-quality corporate bonds rated Aa or better with maturities closely matched to the timing of projected benefit payments for each plan at its annual measurement date. The Company used discount rates ranging from .8% to 12.7% to determine its pension and other benefit obligations as of December 31, 2016, including weighted average discount rates of 4.12% for U.S. pension plans, and 4.39% for non-U.S. pension plans. |
2016 Discount Rate for Estimated Service and Interest Cost: Through December 31, 2015, the Company recognized service and interest components of pension expense using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The single weighted average discount method represents the constant annual rate required to discount all future benefit payments related to past service from the date of expected future payment to the measurement date, such that the aggregate present value equals the obligation. The U.S. and certain non-U.S. frozen plans do not have a service component, as additional benefits are no longer accrued.
During the fourth quarter of 2015, the Company changed the method used to estimate the service and interest components of net periodic benefit cost for pension benefits for its U.S. and certain non-U.S. plans. The Company has elected to utilize an approach that discounts individual expected cash flows underlying interest and service costs using the applicable spot rates derived from the yield curve used to determine the benefit obligation to the relevant projected cash flows. The election and adoption of this method provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. The use of disaggregated discount rates results in a different amount of interest cost compared to the traditional single weighted-average discount rate approach because of different weightings given to each subset of payments. The use of disaggregated discount rates affects the amount of service cost because the benefit payments
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associated with new service credits for active employees tend to be of longer duration than the overall benefit payments associated with the plan’s benefit obligation. As a result, the payments would be associated with longer-term spot rates on the yield curve, resulting in lower present values than the calculations using the traditional single weighted-average discount rate.
This change does not affect the measurement of the total benefit obligation, but resulted in a decrease in the service and interest components of benefit cost beginning in 2016. Based on current economic conditions, the Company estimates that the service cost and interest cost for the affected plans was reduced by approximately $6 million in 2016 as a result of the change in method. The Company has accounted for this as a change in accounting estimate that is inseparable from a change in accounting principle, and accordingly has accounted for it on a prospective basis.
While the Company believes that these assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect the Company’s pension benefit obligations and its future expense. The following table illustrates the sensitivity to a change in certain assumptions for Company sponsored U.S. and non-U.S. pension plans on its 2016 funded status and 2017 pretax pension expense.
Impact on U.S. 2017 Pretax Pension Expense | Impact on U.S. Plan 2016 Funded Status | Impact on Non-U.S. 2017 Pretax Pension Expense | Impact on Non-U.S. Plan 2016 Funded Status | ||||
25 basis point decrease in discount rate (a)(b) | -$1 million | -$27 million | Less than +$1 million | -$11 million | |||
25 basis point increase in discount rate (a)(b) | + $1 million | +$26 million | Less than -$1 million | +$8 million | |||
25 basis point decrease in expected return on assets (a) | +$1.5 million | Less than +$1 million | |||||
25 basis point increase in expected return on assets (a) | -$1.5 million | Less than -$1 million | |||||
____________ | |||||||
(a) Assumes all other assumptions are held constant. | |||||||
(b) Excludes impact of assets used to hedge discount rate volatility. | |||||||
Income Taxes
The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Significant judgment is required in determining the Company’s worldwide provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against the Company’s net deferred tax assets. Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance to reduce deferred tax assets when, based on all available evidence, both positive and negative, it is more likely than not that such assets will not be realized. This assessment, which is completed on a jurisdiction-by-jurisdiction basis, requires significant judgment, and in making this evaluation, the evidence considered by the Company includes, historical and projected financial performance, as well as the nature, frequency and severity of recent losses along with any other pertinent information.
In the ordinary course of the Company’s business, there are many transactions and calculations where the final tax determination is uncertain. The Company is regularly audited by tax authorities. Where appropriate, the Company accrues for contingencies related to income tax risks and non-income tax risks. See Note 16 "Income Taxes" in Item 8 of this Report for additional information.
Fair Value Measurements
The Company uses fair value measurements in the preparation of its financial statements, utilizing various inputs including those that can be readily observable, corroborated or are generally unobservable. The Company utilizes market-based data and valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Additionally, the Company applies assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. See Note 19 "Fair Value Measurements" in Item 8 of this Report for additional information.
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Recent Accounting Pronouncements
See Note 2 “Summary of Significant Accounting Policies” to the accompanying consolidated financial statements under Item 8 of this Report for a discussion of recent accounting pronouncements.
Forward-Looking Statements
Certain statements contained or incorporated in this Annual Report on Form 10-K which are not statements of historical fact constitute “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Forward-looking statements give current expectations or forecasts of future events. Words such as “anticipate”, “expect”, “intend”, “plan”, “believe”, “seek”, “estimate” and other words and terms of similar meaning in connection with discussions of future operating or financial performance signify forward-looking statements. These statements reflect the Company’s current views with respect to future events and are based on assumptions and estimates, which are subject to risks and uncertainties including those discussed in Item 1A under the heading “Risk Factors” and elsewhere in this report. Accordingly, undue reliance should not be placed on these forward-looking statements. Also, these forward-looking statements represent the Company’s estimates and assumptions only as of the date of this report. The Company does not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made and qualifies all of its forward-looking statements by these cautionary statements.
You should understand that various factors, in addition to those discussed elsewhere in this document, could affect the Company’s future results and could cause results to differ materially from those expressed in such forward-looking statements, including:
• | Visteon’s ability to satisfy its future capital and liquidity requirements; Visteon’s ability to access the credit and capital markets at the times and in the amounts needed and on terms acceptable to Visteon; Visteon’s ability to comply with covenants applicable to it; and the continuation of acceptable supplier payment terms. |
• | Visteon’s ability to satisfy its pension and other postretirement employee benefit obligations, and to retire outstanding debt and satisfy other contractual commitments, all at the levels and times planned by management. |
• | Visteon’s ability to access funds generated by its foreign subsidiaries and joint ventures on a timely and cost effective basis. |
• | Changes in the operations (including products, product planning and part sourcing), financial condition, results of operations or market share of Visteon’s customers. |
• | Changes in vehicle production volume of Visteon’s customers in the markets where it operates, and in particular changes in Ford’s vehicle production volumes and platform mix. |
• | Increases in commodity costs or disruptions in the supply of commodities, including steel, resins, aluminum, copper, fuel and natural gas. |
• | Visteon’s ability to generate cost savings to offset or exceed agreed upon price reductions or price reductions to win additional business and, in general, improve its operating performance; to achieve the benefits of its restructuring actions; and to recover engineering and tooling costs and capital investments. |
• | Visteon’s ability to compete favorably with automotive parts suppliers with lower cost structures and greater ability to rationalize operations; and to exit non-performing businesses on satisfactory terms, particularly due to limited flexibility under existing labor agreements. |
• | Restrictions in labor contracts with unions that restrict Visteon’s ability to close plants, divest unprofitable, noncompetitive businesses, change local work rules and practices at a number of facilities and implement cost-saving measures. |
• | The costs and timing of facility closures or dispositions, business or product realignments, or similar restructuring actions, including potential asset impairment or other charges related to the implementation of these actions or other adverse industry conditions and contingent liabilities. |
• | Significant changes in the competitive environment in the major markets where Visteon procures materials, components or supplies or where its products are manufactured, distributed or sold. |
• | Legal and administrative proceedings, investigations and claims, including shareholder class actions, inquiries by regulatory agencies, product liability, warranty, employee-related, environmental and safety claims and any recalls of products manufactured or sold by Visteon. |
• | Changes in economic conditions, currency exchange rates, changes in foreign laws, regulations or trade policies or political stability in foreign countries where Visteon procures materials, components or supplies or where its products are manufactured, distributed or sold. |
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• | Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages or other interruptions to or difficulties in the employment of labor in the major markets where Visteon purchases materials, components or supplies to manufacture its products or where its products are manufactured, distributed or sold. |
• | Changes in laws, regulations, policies or other activities of governments, agencies and similar organizations, domestic and foreign, that may tax or otherwise increase the cost of, or otherwise affect, the manufacture, licensing, distribution, sale, ownership or use of Visteon’s products or assets. |
• | Possible terrorist attacks or acts of war, which could exacerbate other risks such as slowed vehicle production, interruptions in the transportation system or fuel prices and supply. |
• | The cyclical and seasonal nature of the automotive industry. |
• | Visteon’s ability to comply with environmental, safety and other regulations applicable to it and any increase in the requirements, responsibilities and associated expenses and expenditures of these regulations. |
• | Visteon’s ability to protect its intellectual property rights, and to respond to changes in technology and technological risks and to claims by others that Visteon infringes their intellectual property rights. |
• | Visteon’s ability to quickly and adequately remediate control deficiencies in its internal control over financial reporting. |
• | Other factors, risks and uncertainties detailed from time to time in Visteon’s Securities and Exchange Commission filings. |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The primary market risks to which the Company is exposed include changes in foreign currency exchange rates, interest rates and certain commodity prices. The Company manages these risks through derivative instruments and various operating actions including fixed price contracts with suppliers and cost sourcing arrangements with customers. The Company's use of derivative instruments is limited to mitigation of market risks, including hedging activities. However, derivative instruments are not used for speculative or trading purposes, as per clearly defined risk management policies. Additionally, the Company's use of derivative instruments creates exposure to credit loss in the event of non-performance by the counter-party to the derivative financial instruments. The Company limits this exposure by entering into agreements directly with a variety of major financial institutions with high credit standards and that are expected to fully satisfy their obligations under the contracts. Additionally, the Company's ability to utilize derivatives to manage market risk is dependent on credit conditions and market conditions given the current economic environment.
Foreign Currency Risk
The Company's net cash inflows and outflows that are exposed to the risk of changes in 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, investments in subsidiaries and anticipated foreign currency denominated transaction proceeds. Where possible, the Company utilizes derivative financial instruments to manage foreign currency exchange rate risks. Forward and option contracts may be utilized to reduce the impact to the Company's cash flow from adverse movements in exchange rates. Foreign currency exposures are reviewed periodically 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, Japanese Yen, and Mexican Peso. Where possible, the Company utilizes a strategy of partial coverage for transactions in these currencies. As of December 31, 2016 and 2015, the net fair value of foreign currency forward and option contracts was an asset of less than $1 million and $6 million, respectively, maturities of these instruments generally do not exceed eighteen months.
The hypothetical pretax gain or loss in fair value from a 10% favorable or adverse change in quoted currency exchange rates would be approximately $31 million and $26 million for foreign currency derivative financial instruments as of December 31, 2016 and 2015, respectively. These estimated changes assume a parallel shift in all currency exchange rates and include the gain or loss on financial instruments used to hedge investments in subsidiaries. Because exchange rates typically do not all move in the same direction, the estimate may overstate the impact of changing exchange rates on the net fair value of the Company's financial derivatives. It is also important to note that gains and losses indicated in the sensitivity analysis would generally be offset by gains and losses on the underlying exposures being hedged.
In addition to the transactional exposure described above, the Company's operating results are impacted by the translation of its foreign operating income into U.S. dollars. The Company does not enter into foreign exchange contracts to mitigate this exposure.
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Interest Rate Risk
The Company is subject to interest rate risk, principally in relation to variable rate debt. The Company may use derivative financial instruments to manage exposure to fluctuations in interest rates.
During 2015, the Company entered into interest rate swaps with a notional amount of $150 million that effectively convert designated cash flows associated with underlying interest payments on the Term Facility from a variable interest rate to a fixed interest rate, the maturities of these swaps will not exceed the underlying Term Facility. The instruments have been designated as cash flow hedges with the effective portion of the gain or loss reported in the Accumulated other comprehensive income component of Stockholders' equity in the Company's consolidated balance sheets and such gains and losses will be reclassified at the time the underlying hedged transactions are realized. The ineffective portion of these swaps is assessed based on the hypothetical derivative method and is recorded as interest expense in the Company's consolidated statements of comprehensive income. As of December 31, 2016 there was no ineffectiveness associated with these derivatives and the fair value was a liability of $1 million.
The Company significantly reduced interest rate exposure after the swap transactions by reducing variable rate basis of debt to approximately 59% from 98% as of December 31, 2016.
Commodity Risk
The Company's exposures to market risk from changes in the price of production material are managed primarily through negotiations with suppliers and customers, although there can be no assurance that the Company will recover all such costs. The Company continues to evaluate derivatives available in the marketplace and may decide to utilize derivatives in the future to manage select commodity risks if an acceptable hedging instrument is identified for the Company's exposure level at that time, as well as the effectiveness of the financial hedge among other factors.
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Item 8. | Financial Statements and Supplementary Data |
Visteon Corporation and Subsidiaries
Index to Consolidated Financial Statements
Page No. | |
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Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined under Rule 13a-15(f) of the Securities Exchange Act of 1934. Under the supervision and with the participation of the principal executive and financial officers of the Company, an evaluation of the effectiveness of internal control over financial reporting was conducted based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations (“the COSO 2013 Framework”) of the Treadway Commission.
Based on the evaluation performed under the COSO 2013 Framework as of December 31, 2016, management has concluded that the Company’s internal control over financial reporting is effective. Additionally, Ernst & Young LLP, an independent registered public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, as stated in their report which is included herein.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Visteon Corporation
We have audited Visteon Corporation and subsidiaries' internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Visteon Corporation and subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Visteon Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as at December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2016 consolidated financial statements of Visteon Corporation and subsidiaries and our report dated February 23, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 23, 2017
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Visteon Corporation
We have audited the accompanying consolidated balance sheets of Visteon Corporation and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in equity for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule included in Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Visteon Corporation and subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Visteon Corporation and subsidiaries' internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 23, 2017
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VISTEON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31 | |||||||||||
2016 | 2015 | 2014 | |||||||||
(Dollars in Millions, Except Per Share Amounts) | |||||||||||
Sales | $ | 3,161 | $ | 3,245 | $ | 2,586 | |||||
Cost of sales | 2,697 | 2,815 | 2,246 | ||||||||
Gross margin | 464 | 430 | 340 | ||||||||
Selling, general and administrative expenses | 220 | 245 | 228 | ||||||||
Restructuring expense | 49 | 36 | 54 | ||||||||
Interest expense | 18 | 19 | 25 | ||||||||
Interest income | 6 | 5 | 4 | ||||||||
Equity in net income of non-consolidated affiliates | 2 | 7 | 2 | ||||||||
Loss on debt extinguishment | — | 5 | 23 | ||||||||
Loss on divestiture | — | 105 | — | ||||||||
Gain on non-consolidated affiliate transactions, net | — | 62 | 2 | ||||||||
Other expense, net | 24 | 25 | 61 | ||||||||
Income (loss) before income taxes | 161 | 69 | (43 | ) | |||||||
Provision for income taxes | 30 | 27 | 32 | ||||||||
Net income (loss) from continuing operations | 131 | 42 | (75 | ) | |||||||
Net (loss) income from discontinued operations, net of tax | (40 | ) | 2,286 | (131 | ) | ||||||
Net income (loss) | 91 | 2,328 | (206 | ) | |||||||
Net income attributable to non-controlling interests | 16 | 44 | 89 | ||||||||
Net income (loss) attributable to Visteon Corporation | $ | 75 | |||||||||