UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

 

Commission File Number 1-15827

 

VISTEON CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (800)-VISTEON

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ü    No       

 

Indicate by check mark whether the registrant: 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         No       

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer          Accelerated Filer          Non-Accelerated Filer          Smaller Reporting Company   ü  

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes         No  ü  

 

As of July 30, 2010, the Registrant had outstanding 130,245,880 shares of common stock, par value $1.00 per share.

 

Exhibit index located on page number 61.

 

 

VISTEON CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

 

INDEX

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

 

See accompanying notes to the consolidated financial statements.

 

 

See accompanying notes to the consolidated financial statements.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

 

Visteon Corporation (the “Company” or “Visteon”) is a leading global supplier of climate, interiors and electronics systems, modules and components to global automotive original equipment manufacturers (“OEMs”). Headquartered in Van Buren Township, Michigan, Visteon has a workforce of approximately 28,500 employees and a network of manufacturing operations, technical centers, sales offices and joint ventures in every major geographic region of the world.

 

Reorganization under Chapter 11 of the U.S. Bankruptcy Code

 

On May 28, 2009 (the “Petition Date”), Visteon and certain of its U.S. subsidiaries (the “Debtors”) filed voluntary petitions for reorganization relief under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Court”). The reorganization cases are being jointly administered as Case No. 09-11786 under the caption “In re Visteon Corporation, et al” (hereinafter referred to as the “Chapter 11 Proceedings”). The Debtors continue to operate their businesses as “debtors-in-possession” (“DIP”) under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. The Company’s other subsidiaries, primarily non-U.S. subsidiaries, have been excluded from the Chapter 11 Proceedings and continue to operate their businesses without supervision from the Court and are not subject to the requirements of the Bankruptcy Code.

 

The Chapter 11 Proceedings were initiated in response to sudden and severe declines in global automotive production during the latter part of 2008 and early 2009 and the adverse impact on the Company’s cash flows and liquidity. Under the Chapter 11 Proceedings, the Debtors continue to develop a plan of reorganization designed to restructure their capital structure and operations. Confirmation of a plan of reorganization could materially change the amounts and classifications reported in the Company’s consolidated financial statements, which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization. Additional details regarding the status of the Company’s Chapter 11 Proceedings are included herein under Note 4, “Voluntary Reorganization under Chapter 11 of the United States Bankruptcy Code,” to the consolidated financial statements.

 

Visteon UK Limited Administration

 

On March 31, 2009, in accordance with the provisions of the United Kingdom Insolvency Act of 1986 and pursuant to a resolution of the board of directors of Visteon UK Limited, a company organized under the laws of England and Wales (the “UK Debtor”) and an indirect, wholly-owned subsidiary of the Company, representatives from KPMG (the “Administrators”) were appointed as administrators in respect of the UK Debtor (the “UK Administration”). The UK Administration was initiated in response to continuing operating losses of the UK Debtor and mounting labor costs and their related demand on the Company’s cash flows, and does not include the Company or any of the Company’s other subsidiaries. The effect of the UK Debtor’s entry into administration was to place the management, affairs, business and property of the UK Debtor under the direct control of the Administrators. Since their appointment, the Administrators have wound down the business of the UK Debtor and closed its operations in Enfield, UK, Basildon, UK and Belfast, UK, and made the employees redundant. The Administrators continue to realize the UK Debtor’s assets, primarily comprised of receivables. No assurance can be provided that the Company will not be subject to future litigation and/or liabilities related to the UK Administration, including assertions by the UK Pensions Regulator.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The UK Debtor recorded sales, negative gross margin and net loss of $32 million, $7 million and $10 million, respectively for the three months ended March 31, 2009. As of March 31, 2009 total assets of $64 million, total liabilities of $132 million and related amounts deferred as “Accumulated other comprehensive income” of $84 million, were deconsolidated from the Company’s balance sheet resulting in a deconsolidation gain of $152 million. The Company also recorded $57 million for contingent liabilities related to the UK Administration, including $45 million of costs associated with former employees of the UK Debtor, for which the Company was reimbursed from the escrow account, on a 100% basis.

 

Additional amounts related to these items or other contingent liabilities for potential claims under the UK Administration, which may result from (i) negotiations; (ii) actions of the Administrators; (iii) resolution of contractual arrangements, including unexpired leases; (iv) assertions by the UK Pensions Regulator; and, (v) material adverse developments; or other events, may be recorded in future periods. No assurance can be provided that the Company will not be subject to future litigation and/or liabilities related to the UK Administration. Additional liabilities, if any, will be recorded when they become probable and estimable and could materially affect the Company’s results of operations and financial condition in future periods.

 

Transactions with Ford Motor Company

 

The Company transacts a significant amount of commercial activity with Ford Motor Company (“Ford”). The financial statement impact of these commercial activities is summarized in the table below.

 

 

 

 

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

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Financial Statement Presentation:  The accompanying consolidated financial statements have been prepared in accordance with GAAP and on a going concern basis, which contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. The Company’s financial statements do not include any adjustments related to assets or liabilities that may be necessary should the Company not be able to continue as a going concern. However, as a result of the Chapter 11 Proceedings, such realization of assets and liquidation of liabilities, without substantial adjustments to amounts and/or changes of ownership, is highly uncertain. Given this uncertainty, there is substantial doubt about the Company’s ability to continue as a going concern. The appropriateness of using the going concern basis for the Company’s financial statements is dependent upon, among other things, the Company’s ability to: (i) comply with terms of DIP financing; (ii) comply with various orders entered by the Court in connection with the Chapter 11 Proceedings; (iii) maintain adequate cash on hand; (iv) generate sufficient cash from operations; (v) achieve confirmation of a plan of reorganization under the Bankruptcy Code; and (vi) achieve profitability following such confirmation.

 

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

 

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

 

Principles of Consolidation:  The consolidated financial statements include the accounts of the Company and all subsidiaries that are more than 50% owned and over which the Company exercises control. Investments in affiliates of greater than 20% and for which the Company does not exercise control are accounted for using the equity method. The consolidated financial statements also include the accounts of certain entities in which the Company holds a controlling interest based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary.

 

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

 

Services revenues are recognized as services are rendered and associated costs of providing such services are recorded as incurred. Services revenues and related costs for the first half of 2010 included $3 million of contractual reimbursement from Ford under the Amended Reimbursement Agreement for costs associated with the separation of Automotive Components Holdings, LLC (“ACH”) leased employees no longer required to provide such services.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Restricted Cash:  Restricted cash represents cash designated for uses other than current operations and includes approximately $80 million under the terms of the ABL Credit Agreement, $79 million pursuant to a cash collateral order of the Court, $13 million related to the Letter of Credit Reimbursement and Security Agreement and $9 million for other corporate purposes.

 

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance amending fair value disclosures for interim and annual reporting periods beginning after December 15, 2009. This guidance requires disclosures about transfers of financial instruments into and out of Level 1 and 2 designations and disclosures about purchases, sales, issuances and settlements of financial instruments with a Level 3 designation. The Company adopted this guidance with effect from January 1, 2010 without material impact on its consolidated financial statements.

 

In December 2009, the FASB amended the Accounting Standards Codification (“ASC”) to provide consolidation guidance that requires a more qualitative assessment of the primary beneficiary of a variable interest entity (“VIE”) based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The amended guidance also requires an ongoing reconsideration of the primary beneficiary. This guidance was adopted by the Company on a prospective basis as of January 1, 2010 without material impact on its consolidated financial statements.

 

In December 2009, the FASB amended the ASC to provide guidance on the accounting for transfers and servicing of financial assets. This guidance became effective for fiscal years beginning after November 15, 2009 and was adopted by the Company on a prospective basis as of January 1, 2010 without material impact on its consolidated financial statements.

 

 

On May 28, 2009, the Debtors filed voluntary petitions for reorganization relief under the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The reorganization cases are being jointly administered as Case No. 09-11786 under the caption “In re Visteon Corporation, et al”. The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. The Company’s other subsidiaries, primarily non-U.S. subsidiaries, have been excluded from the Chapter 11 Proceedings and continue to operate their businesses without supervision from the Court and are not subject to the requirements of the Bankruptcy Code.

 

Implications of Chapter 11 Proceedings

 

Under section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect pre-petition indebtedness or to exercise control over the property of the debtor’s estate. Absent an order of the Court, substantially all pre-petition liabilities are subject to settlement under a plan of reorganization. While operating as debtors-in-possession under the Bankruptcy Code and subject to approval of the Court or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, a confirmed plan of reorganization could materially change the amounts and classifications in the historical consolidated financial statements.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Subsequent to the petition date, the Debtors received approval from the Court to pay or otherwise honor certain pre-petition obligations generally designed to stabilize the Debtors’ operations including employee obligations, tax matters and from limited available funds, pre-petition claims of certain critical vendors, certain customer programs, limited foreign business operations, adequate protection payments and certain other pre-petition claims. Additionally, the Debtors have been paying and intend to continue to pay undisputed post-petition claims in the ordinary course of business.

 

Section 365 of the Bankruptcy Code permits the Debtors to assume, assume and assign or reject certain pre-petition executory contracts subject to the approval of the Court and certain other conditions. Rejection constitutes a Court-authorized breach of the contract in question and, subject to certain exceptions, relieves the Debtors of their future obligations under such contract but creates a deemed pre-petition claim for damages caused by such breach or rejection. Parties whose contracts are rejected may file claims against the rejecting debtor for damages. Generally, the assumption, or assumption and assignment of an executory contract would require a debtor to cure all prior defaults under such executory contract and to provide adequate assurance of future performance. Additional liabilities subject to compromise and resolution in the Chapter 11 Proceedings have been asserted as a result of damage claims created by the Debtors’ rejection of executory contracts.

 

To successfully emerge from chapter 11, in addition to obtaining exit financing, the Court must confirm a plan of reorganization, which will depend upon the timing and outcome of numerous ongoing matters in the Chapter 11 Proceedings. A plan of reorganization determines the rights and satisfaction of claims of various creditors and security holders, but the ultimate settlement of certain claims will be subject to the uncertain outcome of litigation, negotiations and Court decisions up to and for a period of time after a plan of reorganization is confirmed. At this time, it is not possible to predict with certainty the effect of the Chapter 11 Proceedings on the Company’s business.

 

Plan of Reorganization

 

On May 6, 2010, the Company entered into an Equity Commitment Agreement (the “ECA”) with a group of investors (together, the “Investors”), which provides, among other things, that the Company will conduct a rights offering whereby certain holders of existing unsecured notes of the Company may elect to purchase shares of the common stock of the reorganized Visteon, and the Investors severally agree to purchase shares of the common stock of the reorganized Visteon and any shares not purchased in connection with the rights offering. The Company also entered into a Plan Support Agreement (the “PSA”) with holders of more than two-thirds in amount of the 12.25% senior notes claims and two-thirds in aggregate amount of the 7.00% senior notes claims and the 8.25% senior notes claims, pursuant to which such holders will support the fourth amended joint plan of reorganization (the “Fourth Amended Plan”), except in certain limited circumstances. These agreements were approved by the Court on June 17, 2010.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

On June 24, 2010, the Debtors filed the Fourth Amended Plan and related fourth amended disclosure statement (the “Fourth Amended Disclosure Statement”) with the Court. The Debtors filed a revised Fourth Amended Disclosure Statement on June 30, 2010. The Fourth Amended Plan and Fourth Amended Disclosure Statement as filed with the Court outline a proposal for the settlement of claims against the estate of the Debtors based on an estimate of the overall enterprise value. The Fourth Amended Plan is comprised of two mutually exclusive sub plans — the Rights Offering Sub Plan and the Claims Conversion Sub Plan. The Debtors will seek to consummate the Rights Offering Sub Plan in the event that up to $1.25 billion in new capital can be raised by the Investors and certain exit financing loans can be obtained by the Debtors. Under the Rights Offering Sub Plan, the term lenders’ secured claims would be paid in cash; the holders of the 12.25% senior notes, 7.00% senior notes and 8.25% senior notes together would receive between 4.9% and 5% of the distributable equity of reorganized Visteon and eligible holders thereof would be entitled to participate in the rights offering for between 93.1% and 95% of reorganized Visteon common stock (non-eligible holders would receive the lesser of $50 million or 40% of their allowed claim amount); holders of the 12.25% senior notes would also receive warrants to purchase reorganized Visteon common stock at an exercise price of $9.66 per share; and most holders of general unsecured claims would receive the lesser of their pro rata share of $141 million or 50% of their allowed claim amount. Holders of Visteon common stock would not be entitled to receive a distribution unless their class votes to accept the Fourth Amended Plan, in which case, the holders would receive 2% of the distributable equity and warrants to purchase shares of reorganized Visteon common stock.

 

Under the Claims Conversion Sub Plan, the following percentages of reorganized Visteon common stock would be distributed in satisfaction of claims: the secured term lenders would receive between 84.9% and 86.2%, the holders of the 12.25% senior notes would receive between 6.3% and 6.5%, the holders of the 7.00% and 8.25% senior notes would receive between 7.5% and 8.6%. Most holders of general unsecured claims would receive the lesser of their pro rata share of $141 million or 50% of their allowed claim amount. The Claims Conversion Sub Plan does not provide for any recovery to holders of the Company’s existing equity securities.

 

On July 28, 2010 the Company signed a letter agreement (the “Letter Agreement”) with the four financial institutions comprising a steering committee of the Company’s term loan lenders and the agent for the Company’s term loan facility, in which the steering committee and the agent affirmed their support of the Company’s Fourth Amended Plan. Pursuant to the Letter Agreement, holders of a majority of the $1.5 billion term loan (i.e., approximately 55 percent of the outstanding amount), including members of the steering committee as well as several other large term loan lenders, agreed to vote in favor of the Fourth Amended Plan. In addition, the steering committee has agreed to recommend voting in favor of the Fourth Amended Plan to the remaining term loan lenders. The term loan agent also agreed, at the direction of a majority of the term loan lenders, to cease all litigation efforts it is undertaking in connection with confirmation of the Fourth Amended Plan (including all of its discovery efforts), if the term lenders class votes to accept the Plan, and to withdraw with prejudice its currently pending appeal of the ECA and bondholder PSA. Finally, the term loan agent agreed to provide affirmative support of the Fourth Amended Plan throughout the remainder of the Chapter 11 Proceedings including at the confirmation hearing, if the term lenders class votes to accept the Plan.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

As part of the Letter Agreement, the Company acknowledged that the Fourth Amended Plan will provide term lenders with post-petition interest at the default rate set forth in the term loan credit agreement through the effective date of the Fourth Amended Plan (or such date payment of the term loan facility claim is made) on amounts due and owing under the term loan credit agreement from and as of the Petition Date. As of June 30, 2010 this amount of post-petition interest is estimated to be approximately $122 million. Additionally, the Company agreed to support compensation to the term lenders for certain professional fees and expenses. Preliminary voting results indicate that the term lenders class has voted to accept the Fourth Amended Plan.

 

In August of 2010, the Company entered into an agreement with the Investors and the Ad Hoc Equity Committee (“AHEC”), pursuant to which the AHEC agreed to support and vote in favor of the Fourth Amended Plan, without any modifications to the Fourth Amended Plan, as well as withdraw its legal challenges to the Fourth Amended Plan, the ECA and supporting agreements, in exchange for the right to participate in the direct purchase commitment under the ECA for 144,456 shares and the payment on the date of the Company’s exit from bankruptcy of up to $4.25 million of certain costs and expenses of the members of the AHEC and their respective advisors.

 

The Court approved the adequacy of the Fourth Amended Disclosure Statement on June 28, 2010, and the Debtors have completed the process of soliciting approval of the Fourth Amended Plan from eligible stakeholders. The Court has reserved August 31, 2010 to commence a hearing to confirm the Fourth Amended Plan to the extent that each class of unsecured claims and interests in Visteon votes to accept the plan pursuant to section 1126 of the Bankruptcy Code. To the extent that any such class does not vote to accept the Fourth Amended Plan, the hearing to confirm the Fourth Amended Plan is currently scheduled to begin on September 28, 2010. Preliminary voting results indicate that the Fourth Amended Plan is fully consensual on a class basis as all creditor and equity classes have voted to accept the Plan. Based on such preliminary voting results, the Company expects to go forward with the confirmation hearing on August 31, 2010.

 

Also, the subscription deadline for the Company’s $950 million rights offering to eligible holders of its unsecured senior notes has now passed and preliminary results indicate that the rights offering has been oversubscribed.

 

Chapter 11 Reorganization Financing

 

The Debtors are currently funding post-petition operations under a temporary cash collateral order from the Court and a $150 million Senior Secured Super Priority Priming Debtor in Possession Credit and Guaranty Agreement (“DIP Credit Agreement”), under which the Company has borrowed $75 million and may borrow the remaining $75 million in one additional advance prior to maturity on August 18, 2010, subject to certain conditions. The Company is currently evaluating various alternatives including potential repayment, with respect to the maturity of the DIP Credit Agreement. The Company’s non-debtor subsidiaries, primarily non-U.S. subsidiaries, have been excluded from the Chapter 11 Proceedings and are funding their operations through cash generated from operating activities supplemented by customer support agreements and local financing arrangements or through cash transfers from the Debtors subject to specific authorization from the Court.

 

There can be no assurance that cash on hand and other available funds will be sufficient to meet the Company’s reorganization or ongoing cash needs or that the Company will be successful in extending the duration of the temporary cash collateral order with the Court or that the Company will remain in compliance with all necessary terms and conditions of the DIP Credit Agreement or that the lending

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

commitments under the DIP Credit Agreement will not be terminated by the lenders. Additionally, the Company believes that its presently outstanding equity securities will have little or no value and will be canceled under any plan of reorganization. For this reason, the Company urges that caution be exercised with respect to existing and future investments in any currently outstanding security of the Company.

 

Customer Agreements

 

In connection with the Chapter 11 Proceedings, the Company has entered into various accommodation, support and other agreements with certain North American and European customers that provide for additional liquidity through cash surcharge payments, payments for research and engineering costs, accelerated payment terms, asset sales and other commercial arrangements. Generally, in exchange for benefits under these agreements, the Company agreed to continue producing and delivering component parts to these customers during the term of the respective agreements. Additionally, under agreements with certain North American customers, the Company agreed to provide assistance in re-sourcing production to other suppliers; to build inventory banks, as necessary to support transition; to grant customers the option to purchase dedicated equipment and tooling owned by the Company; to grant a right of access to the Company’s facilities if the Company ceases production; to grant a security interest in certain operating assets that would be necessary for component part production; and, to provide limited release of certain commercial and other claims and causes of actions, subject to exceptions.

 

Revenue associated with payments from customers pursuant to these agreements is being recorded in relation to the delivery of associated products, assets and/or services in accordance with the terms of the underlying agreement, or over the estimated duration of the respective benefit to the customer, generally representing the average duration of remaining production on current vehicle platforms. The Company recorded $15 million and $43 million of revenue associated with these settlement payments during the three and six months ended June 30, 2010, respectively, with $84 million deferred on the balance sheet at June 30, 2010. Pursuant to support agreements with certain European customers, the Company anticipates receipt of an additional non-refundable settlement payment of approximately $30 million on or before June 30, 2011, subject to the terms and conditions of these agreements.

 

Financial Statement Classification

 

Financial reporting applicable to companies in chapter 11 of the Bankruptcy Code generally does not change the manner in which financial statements are prepared. However, it does require, among other disclosures, that the financial statements for periods subsequent to the filing of the chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, revenues, expenses, realized gains and losses and provisions for losses that can be directly associated with the reorganization of the business have been reported separately as “Reorganization expenses, net” in the Company’s statement of operations.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Reorganization expenses included in the consolidated financial statements are as follows:

 

 

Pre-petition liabilities subject to compromise under a plan of reorganization have been reported separately from both pre-petition liabilities that are not subject to compromise and from liabilities arising subsequent to the petition date. Liabilities that are expected to be affected by a plan of reorganization are reported at amounts expected to be allowed, even if they may be settled for lesser amounts. Liabilities subject to compromise as of June 30, 2010 and December 31, 2009 are set forth below and represent the Company’s estimate of pre-petition claims to be resolved in connection with the Chapter 11 Proceedings. Such claims remain subject to future adjustments, which may result from (i) negotiations; (ii) actions of the Court; (iii) disputed claims; (iv) rejection of executory contracts and unexpired leases; (v) the determination as to the value of any collateral securing claims; (vi) proofs of claim; or (vii) other events.

 

Liabilities subject to compromise include the following:

 

 

Employee liabilities classified as Liabilities subject to compromise increased during the second quarter of 2010 due to the reinstatement of other postretirement employee benefits for certain former employees of the Company’s Connersville and Bedford facilities pursuant to a July 13, 2010 ruling of the United States Court of Appeals for the Third Circuit. This reinstatement is discussed further in Note 12 “Employee Benefits.” Interest payable also increased during the second quarter of 2010 due the recognition of $122 million of previously unrecorded contractual interest on the Company’s seven-year secured term loans, as described below.

 

Contractual Interest

 

The Company has not made principal and interest payments in connection with its pre-petition debt during the Chapter 11 Proceedings, including the $1.5 billion principal amount under the seven-year secured term loans due 2013; the $862 million principal amount under various unsecured notes due 2010, 2014 and 2016; and the $127 million of other secured and unsecured borrowings. Additionally, debt discounts of

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

$8 million, deferred financing costs of $14 million and terminated interest rate swaps of $23 million are no longer being amortized and have been included as a valuation adjustment to the related pre-petition debt.

 

Contractual interest expense represents amounts due under the contractual terms of outstanding debt, including debt subject to compromise. The Company ceased recording interest expense on outstanding pre-petition debt instruments classified as liabilities subject to compromise from the May 28, 2009 petition date as such amounts of contractual interest were not being paid and were not determined to be probable of being an allowed claim. Adequate protection amounts pursuant to the cash collateral order of the Court, and as related to the ABL Credit Agreement have been classified as “Interest expense” on the Company’s consolidated statement of operations. Interest expense on a contractual basis would have been $55 million and $108 million for the three and six-month periods ended June 30, 2010, respectively.

 

During the second quarter of 2010, the Company recorded $122 million of prior contractual interest expense related to the seven-year secured term loans because it became probable that the interest would become an allowed claim in connection with the execution of the Letter Agreement. Additionally, effective July 1, 2010 the Company commenced recording interest expense at the default rate set forth in the credit agreements associated with the seven-year secured term loans. Absent developments that alter the Company’s view of the likelihood of such amounts becoming an allowed claim, the Company expects to continue recording such interest expense through the effective date of the Fourth Amended Plan (or through the date of the seven-year secured term loans claim payment) on amounts due and owing under the seven-year secured term loans from and as of the Petition Date.

 

Pre-petition Claims

 

On August 26, 2009, pursuant to the Bankruptcy Code, the Debtors filed statements and schedules with the Court setting forth the assets and liabilities of the Debtors as of the Petition Date. In September 2009, the Debtors issued approximately 57,000 proof of claim forms to their current and prior employees, known creditors, vendors and other parties with whom the Debtors have previously conducted business. To the extent that recipients disagree with the claims as quantified on these forms, the recipient may file discrepancies with the Court. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the Chapter 11 Proceedings. However, the Court will ultimately determine liability amounts, if any, that will be allowed for these claims. An October 15, 2009 bar date was set for the filing of proofs of claim against the Debtors.

 

As of June 30, 2010 approximately 3,400 proofs of claim totaling approximately $8 billion in claims against the Debtors have been filed in connection with the Chapter 11 Proceedings as follows:

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

The Debtors have not completed their evaluation of the approximately 2,100 claims remaining, totaling about $330 million, alleging rights to payment for financing, trade accounts payable and other matters. The Company continues to investigate these unresolved proofs of claim, and intends to file objections to the claims that are inconsistent with its books and records. Additional claims may be filed after the October 15, 2009 bar date, which could be allowed by the Court. Accordingly, the ultimate number and allowed amount of such claims are not presently known and cannot be reasonably estimated at this time. The resolution of such claims could result in a material adjustment to the Company’s financial statements. Additionally, a confirmed plan of reorganization could also materially change the amounts and classifications reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

 

Debtors Financial Statements

 

The financial statements included below represent the condensed combined financial statements of the Debtors only. These statements reflect the results of operations, financial position and cash flows of the combined Debtor subsidiaries, including certain amounts and activities between Debtor and non-Debtor subsidiaries of the Company, which are eliminated in the consolidated financial statements.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

CONDENSED COMBINED DEBTORS-IN-POSSESSION
STATEMENT OF OPERATIONS

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

CONDENSED COMBINED DEBTORS-IN-POSSESSION
BALANCE SHEET

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

CONDENSED COMBINED DEBTORS-IN-POSSESSION
STATEMENT OF CASH FLOWS

 

 

 

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

 

The following is a summary of the Company’s consolidated restructuring reserves and related activity for the six months ended June 30, 2010.

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

2010 Restructuring Actions

 

During the first half of 2010, the Company recorded $17 million of restructuring expenses, including $6 million of employee severance and termination benefits to streamline corporate administrative and support functions; $4 million of employee severance and termination benefits related to the closure of a European Interiors facility; $4 million of equipment move and relocation costs; $2 million of employee severance and termination benefits related to previously announced actions in connection with customer accommodation and support agreements; and approximately $1 million of additional employee severance and termination benefits related to a customer support agreement.

 

Utilization of $28 million includes $22 million of payments for severance and other employee termination benefits, $4 million for payment of equipment move and relocation costs and $2 million of special termination benefits reclassified to pension and other postretirement employee benefit liabilities.

 

2009 Restructuring Actions

 

During the first half of 2009, the Company recorded restructuring expenses of $45 million, including $30 million of employee severance and termination benefits to reduce the Company’s global salaried workforce, $12 million under the previously announced multi-year improvement plan and $3 million related to the consolidation of Electronics operations in South America.

 

Asset Impairments and Loss on Divestitures

 

In June 2010, the Company reached an agreement to sell its entire 46.6% interest in the shares of Toledo Molding & Die, Inc. (“TMD”), a supplier of interior components, for proceeds of approximately $10 million. This agreement was subsequently approved by the Court on July 15, 2010. Accordingly, the Company recorded an impairment charge of approximately $4 million, representing the difference between the carrying value of the Company’s investment in TMD and the expected share sale proceeds, during the second quarter of 2010 for the resulting “other than temporary” impairment of its investment in TMD.

 

On March 8, 2010, the Company completed the sale of substantially all of the assets of Atlantic Automotive Components, L.L.C., (“Atlantic”), to JVIS Manufacturing LLC, an affiliate of Mayco International LLC. During 2009, Atlantic operated on a break-even basis on sales of approximately $35 million. The Company recorded losses of approximately $21 million in connection with the sale of Atlantic assets during the first quarter of 2010.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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

 

 

 

Other current assets are summarized as follows:

 

 

On December 9, 2009, a French subsidiary of the Company entered into an agreement to sell accounts receivable on an uncommitted basis. Primarily all accounts receivable of this subsidiary are pledged as security, therefore pledged accounts receivable increased from December 31, 2009 as the program became fully implemented during 2010.

 

Other non-current assets are summarized as follows:

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

In November 2009, the Company entered into an accommodation agreement with Chrysler Group LLC (“Chrysler”), whereby the assets at the Highland Park, Michigan and Saltillo, Mexico facilities, would be sold to a mutually agreed buyer or Chrysler. Therefore, at December 31, 2009, approximately $4 million and $16 million were classified as assets held for sale in “Other current assets” and “Other non-current assets,” respectively. On April 30, 2010, the Company completed the sale of its Interiors operations located in Highland Park, Michigan and Saltillo, Mexico consisting of the facility, associated assets and certain purchase and supply contracts to Johnson Controls Interiors, LLC and Johnson Controls Automotriz Mexico, S De Rl De Cv.

 

 

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

 

 

Depreciation and amortization expenses are summarized as follows:

 

 

 

The Company had $357 million and $294 million of equity in the net assets of non-consolidated affiliates at June 30, 2010 and December 31, 2009, respectively. The Company recorded equity in net income of non-consolidated affiliates of $35 million and $19 million for the three months ended June 30, 2010 and 2009, respectively. For the six-month periods ended June 30, 2010 and 2009, the Company recorded $65 million and $26 million, respectively.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The following table presents summarized financial data for the Company’s non-consolidated affiliates. Yanfeng Visteon Automotive Trim Systems Co., Ltd (“Yanfeng”), of which the Company owns a 50% interest, is considered a significant non-consolidated affiliate. Summarized financial information reflecting 100% of the operating results of the Company’s equity investees are provided below for the three-month and six-month periods ended June 30.

 

 

 

 

Other current liabilities are summarized as follows:

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Other non-current liabilities are summarized as follows:

 

 

Current and non-current deferred income of $52 million and $32 million, respectively, relate to various customer accommodation, support and other agreements completed during 2009. Revenue associated with these agreements is being recorded in relation to the delivery of associated products, assets and/or services in accordance with the terms of the underlying agreement or over the estimated period of benefit to the customer, generally representing the duration of remaining production on current vehicle platforms. The Company expects to record approximately $23 million, $37 million, $17 million, $6 million and $1 million of these deferred amounts in 2010, 2011, 2012, 2013 and 2014, respectively.

 

 

Pre-Petition Debt

 

As discussed in Note 4 “Voluntary Reorganization under Chapter 11 of the United States Bankruptcy Code,” due to the Chapter 11 Proceedings, substantially all of the Company’s pre-petition debt is in default and has been reclassified to “Liabilities subject to compromise” on the consolidated balance sheets at June 30, 2010 and December 31, 2009, including the following:

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Current Capital Structure

 

As of June 30, 2010, the Company had $207 million and $11 million of debt outstanding classified as short-term debt and long-term debt, respectively. The Company’s short and long-term debt balances consist of the following:

 

 

The DIP Credit Agreement matures and expires on the earliest of (i) August 18, 2010; (ii) the effective date of the Company’s plan of reorganization and (iii) the date a sale or sales of all or substantially all of the Company’s and guarantors’ assets is or are consummated under section 363 of the Bankruptcy Code. Borrowings under the DIP Credit Agreement are issued at a 2.75% discount and bear interest at variable rates equal to (i) 6.50% (or 8.50% in the event a default), plus (ii) a Eurodollar rate (subject to a floor of 3.00% per annum). The Company will also pay a fee of 1.00% per annum on the unused portion of the $150 million available, payable monthly in arrears. The Company is evaluating various alternatives, including potential repayment, with respect to the August 18, 2010 maturity of the DIP Credit Agreement.

 

Fair Value

 

The Company is unable to estimate the fair value of long-term debt of the Debtors that is subject to compromise at June 30, 2010 or December 31, 2009, due to the uncertainties associated with the Chapter 11 Proceedings. The fair value of the Company’s debt that is not subject to compromise has been calculated based on quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities. Fair value of such debt was $220 million and $230 million as of June 30, 2010 and December 31, 2009, respectively.

 

 

In December of 2009, the Court granted the Debtors’ motion in part authorizing them to terminate or amend certain other postretirement employee benefits, including health care and life insurance. In connection with this ruling, the Company eliminated certain other postretirement employee benefits including Company-paid medical, prescription drug, dental and life insurance coverage, effective April 1, 2010, for current and future U.S. retirees, their spouses, surviving spouses, domestic partners and dependents, with the exception of participants covered by the current collective bargaining agreement (“CBA”) at the North Penn facility. This change resulted in a reduction in other postretirement employee benefit liabilities and an increase in Other comprehensive income of approximately $273 million establishing a new prior service cost base during the fourth quarter of 2009.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

On December 29, 2009, the IUE-CWA, the Industrial Division of the Communications Workers of America, AFL-CIO, CLC, filed a notice of appeal of the Court’s order with the District Court for the District of Delaware (the “District Court”) on behalf of certain former employees of the Company’s Connersville and Bedford, Indiana facilities. On March 30, 2010, the District Court affirmed the Court’s order in all respects. On April 1, 2010, the IUE filed a notice of appeal, and subsequently a motion for expedited treatment of the appeal and for a stay pending appeal, with the United States Court of Appeals for the Third Circuit (the “Circuit Court”). On April 13, 2010, the Circuit Court granted the motion to expedite and denied the motion for stay pending appeal.

 

On July 13, 2010, the Circuit Court reversed the order of the District Court and the Court permitting the Company to terminate other postretirement employee benefits without complying with the requirements of Bankruptcy Code Section 1114 and directed the District Court to, among other things, direct the Court to order the Company to take whatever action is necessary to immediately restore all terminated or modified benefits to their pre-termination/modification levels. The Circuit Court also ordered the District Court to direct the Court to consider arguments from the parties as to whether the Company should be required to reimburse retirees for any costs incurred due to the termination of their benefits between May 1, 2010 and the date the other postretirement employee benefits are restored. On July 27, 2010, the Company filed a Petition for Rehearing or Rehearing En Banc requesting that the Circuit Court grant a rehearing to review the panel’s decision, which is pending.

 

During the second quarter of 2010, the Company recorded an increase in other postretirement employee benefit expense of $150 million for the reinstatement of these benefits for certain former employees of the Company’s Connersville and Bedford facilities. No amounts have been recorded for reinstatement of any other previously terminated other postretirement employee benefits. Estimated amounts of any other previously terminated other postretirement employee benefit liabilities will be recorded in future periods if and when such amounts become probable and estimable.

 

On February 18, 2010, the Court issued an order confirming the Debtors’ authority to enter into an agreement with the International Union United Automobile, Aerospace and Agricultural Implement Workers of America and its local union 1695, in connection with the closing of the Debtors’ North Penn facility located in Lansdale, Pennsylvania (the “Closure Agreement”). Pursuant to terms of the Closure Agreement, the North Penn CBA expired in February 2010 and the Company communicated its intent to eliminate Company-paid medical, prescription drug, dental and life insurance benefits for participants associated with the North Penn CBA effective June 1, 2010. This change resulted in a reduction in other postretirement employee benefit liabilities and an increase in Other comprehensive income of approximately $50 million establishing a new prior service cost base.

 

Reductions associated with terminated other postretirement employee benefits, in addition to reductions for prior plan amendments and actuarial gains and losses, have been amortized as a net decrease to future postretirement employee benefit expense over the remaining period of expected benefit. This amortization resulted in a decrease to postretirement employee benefit expense and Other comprehensive income of approximately $75 million and $312 million during the three and six months ended June 30, 2010, respectively.

 

In March 2010, the Patient Protection and Affordable Care Act and the Health Care Education and Affordability Reconciliation Act (the “Acts”) were signed into law. The Acts contain provisions which could impact the Company’s accounting for retiree medical benefits. Accordingly, the Company completed an assessment of the Acts in connection with the reinstatement of other postretirement employee benefits for certain former employees of the Company’s Connersville and Bedford facilities and increased the related benefit liability by an estimated $3 million based upon the Company’s current interpretation of the Acts.

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

This amount may be revised upon issuance of final regulations and the Company may consider plan amendments in future periods.

 

Benefit Expenses

 

The components of the Company’s net periodic benefit costs for the three-month periods ended June 30, 2010 and 2009 were as follows:

 

VISTEON CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The components of the Company’s net periodic benefit costs for the six-month periods ended June 30, 2010 and 2009 were as follows: