NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Description of Business
Visteon Corporation (the "Company" or "Visteon") is a global automotive supplier that designs, engineers and manufactures innovative cockpit electronics and connected car solutions for the world's major vehicle manufacturing including Ford, Mazda, Renault/Nissan, General Motors, Volkswagen, Jaguar/Land Rover, Daimler, Honda and BMW. 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., primarily in Mexico, Bulgaria, Portugal, Germany, India and China.
Visteon is driving the smart, learning, digital cockpit of the future, to improve safety and the user experience. Visteon is the world’s leading supplier of cockpit electronics including digital instrument clusters, information displays, infotainment, head-up displays, telematics, SmartCore™ cockpit domain controllers, and the DriveCore™ autonomous driving platform. Visteon also delivers artificial intelligence-based technologies, connected car, cybersecurity, interior sensing, embedded multimedia and smartphone connectivity software solutions.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation:
The Company's financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP") on a going concern basis, which contemplates the continuity of operations, realization of assets and satisfaction of liabilities in the normal course of business.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and its 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, but does have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. All other equity investments are measured at cost, less impairment, with changes in fair value recognized in net income.
The Company determines whether joint ventures in which it has invested is a Variable Interest Entity (“VIE”) at the start of each new venture and when a reconsideration event has occurred. An enterprise must consolidate a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported herein. Considerable judgment is involved in making these determinations and the use of different estimates or assumptions could result in significantly different results. Management believes its assumptions and estimates are reasonable and appropriate. However, actual results could differ from those reported herein.
Reclassifications:
Certain prior period amounts have been reclassified to conform to current period presentation.
Revenue Recognition:
The Company generates revenue from the production of automotive vehicle cockpit electronics parts sold to Original Equipment Manufacturers ("OEM"), or Tier 1 suppliers at the direction of the OEM, under long term supply agreements supporting new vehicle production. Such agreements may also require related production for service parts, subsequent to initial vehicle production periods.
The Company’s contracts with customers involve various governing documents (Sourcing Agreements, Master Purchase Agreements, Terms and Conditions Agreements, etc.) which do not reach the level of a performance obligation of the Company until the Company receives either a purchase order and/or a customer release for a specific number of parts at a specified price, at which point the collective group of documents represent an enforceable contract. While the long term supply agreements generally range from three to five years, customers make no commitments to volumes, and pricing or specifications can change prior to or during production. The Company recognizes revenue when control of the parts produced are transferred to the customer according to the terms of the contract, which is usually when the parts are shipped or delivered to the customer’s premises. Customers are generally invoiced upon shipment or delivery and payment generally occurs within 45 to 90 days. Customers in China are often invoiced one month after shipment or delivery. Customer returns, when they occur, relate to quality rework issues and are not connected to any repurchase obligation of the Company. As of December 31, 2018, all unfulfilled performance obligations are expected to be fulfilled within the next twelve months.
Revenue is measured based on the transaction price and the quantity of parts specified in a contract with a customer. Discrete price changes may occur during the vehicle production period in order for the Company to remain competitive with market prices or based on changes in product specifications. In addition, customers may request or expect certain discounts not reflected in the purchase order that require estimation. In the event the Company concludes that a portion of the revenue for a given part may vary from the purchase order, the Company records variable consideration at the most likely amount to which the Company expects to be entitled. The estimates typically represent a narrow range of discounts and are based on historical experience and input from customer negotiations. The Company records such estimates within Sales and Accounts receivable, net, within the consolidated statements of comprehensive income and consolidated balance sheets, respectively. The Company adjusts its pricing accruals at the earlier of when the most likely amount of consideration changes or when the consideration becomes fixed. During 2018 the Company recognized approximately
$30 million
net increases in transaction price related to performance obligations satisfied in previous periods, respectively.
The Company does not have an enforceable right to payment at any time prior to when the parts are shipped or delivered to the customer; therefore, the Company recognizes revenue at the point in time it satisfies a performance obligation by transferring control of a part to the customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control of the parts has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.
Foreign Currency:
Assets and liabilities for most of the Company’s non-U.S. businesses are translated into U.S. Dollars at end-of-period exchange rates, income and expense accounts of the Company’s non-U.S. businesses are translated into U.S. Dollars at average-period exchange rates, and the related translation adjustments are recorded in accumulated other comprehensive income (loss) ("AOCI") in the consolidated balance sheets.
The effects of remeasuring monetary assets and liabilities of the Company’s businesses denominated in currencies other than their functional currency are recorded as transaction gains and losses in the consolidated statements of operations. Additionally, gains and losses resulting from transactions denominated in a currency other than the functional currency are recorded as transaction gains and losses in the consolidated statements of operations. Net transaction gains and losses, inclusive of amounts associated with discontinued operations, decreased net income by
$6 million
,
$9 million
and
$10 million
for the years ended December 31,
2018
,
2017
and
2016
respectively.
Restructuring Expense:
The Company defines restructuring expense to include costs directly associated with exit or disposal activities. Such costs include employee severance and termination benefits, special termination benefits, contract termination fees and penalties, and other exit or disposal costs. In general, the Company records involuntary employee-related exit and disposal costs when there is a substantive plan for employee severance and related costs are probable and estimable. For one-time termination benefits (i.e., no substantive plan) and employee retention costs, expense is recorded when the employees are entitled to receive such benefits and the amount can be reasonably estimated. Contract termination fees and penalties and other exit and disposal costs are generally recorded when incurred.
Debt Issuance Costs:
The costs related to issuance or modification of long-term debt are deferred and amortized into interest expense over the life of each respective debt issue. Deferred amounts associated with debt extinguished prior to maturity are expensed upon extinguishment.
Other Costs within Cost of Goods Sold:
Repair and maintenance costs, research and development costs, and pre-production operating costs are expensed as incurred. Research and development expenses include salary and related employee benefits, contractor fees, information technology, occupancy, telecommunications, depreciation, forward model program development, and
advanced engineering activities. Research and development expenses were
$286 million
,
$253 million
, and
$295 million
in
2018
,
2017
and
2016
, respectively, which includes recoveries of
$146 million
,
$133 million
and
$104 million
. Shipping and handling costs are recorded in the Company's consolidated statements of operations as "Cost of sales."
Other Income (Expense), Net:
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|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
(Dollars in Millions)
|
Pension financing benefits, net
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
12
|
|
Transformation initiatives
|
4
|
|
|
(2
|
)
|
|
(9
|
)
|
Gain on non-consolidated transactions, net
|
4
|
|
|
4
|
|
|
—
|
|
Foreign currency translation charge
|
—
|
|
|
—
|
|
|
(11
|
)
|
Integration costs
|
—
|
|
|
—
|
|
|
(2
|
)
|
Loss on asset contributions
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
$
|
21
|
|
|
$
|
14
|
|
|
$
|
(12
|
)
|
Pension financing benefits, net include return on assets net of interest costs and other amortization.
Transformation initiative costs include information technology separation costs, integration of acquired businesses, and financial and advisory services incurred in connection with the Company's transformation into a pure play cockpit electronics business.
During 2018, the Company recognized a
$4 million
benefit on settlement of litigation matters with the Company’s former President and Chief Executive Officer (“former CEO”) as further described in Note 21, "Commitments and Contingencies."
On September 1, 2018, Visteon acquired an additional
1%
ownership interest in Changchun Visteon FAWAY Automotive Electronics Co., Ltd. ("VFAE"), a former non-consolidated affiliate, resulting in a total
51%
controlling interest and a non-cash gain of
$4 million
as further described in Note 3, "Business Acquisitions."
The gain on non-consolidated affiliate transactions for 2017 represents the Company's sale of three cost method investments and an equity method investment as further described in Note 6, "Non-Consolidated Affiliates."
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.
During the year ended December 31, 2016, the Company recorded
$2 million
of costs to integrate the businesses associated with the acquisition of substantially all of the global automotive electronics business of Johnson Controls Inc. ("Electronics Acquisition"). Integration costs included re-branding, facility modification, information technology readiness and related professional services.
In connection with the closure of the Climate facilities located in Argentina in 2016, the Company contributed land and building with a net book value of
$2 million
, to the local municipality for the benefit of former employees.
Net Earnings (Loss) Per Share Attributable to Visteon:
Basic earnings per share is calculated by dividing net income attributable to Visteon, by the average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the average number of common and potential dilutive common shares outstanding after deducting undistributed income allocated to participating securities. Performance based share units are considered contingently issuable shares, and are included in the computation of diluted earnings per share if their conditions have been satisfied as if the reporting date was the end of the contingency period.
Cash and Equivalents:
The Company considers all highly liquid investments purchased with a maturity of three months or less, including short-term time deposits, commercial paper, repurchase agreements and money market funds to be cash equivalents. As of December 31,
2018
the Company's cash balances are invested in a diversified portfolio of cash and highly liquid cash equivalents including money market funds, commercial paper rated A2/P2 and above with maturity under three months, time deposits and other short-term cash investments, which mature under three months with highly rated banking institutions. The cost of such funds approximates fair value based on the nature of the investment.
Restricted Cash:
Restricted cash represents amounts designated for uses other than current operations and includes
$2 million
related to a Letter of Credit Facility, and
$2 million
related to cash collateral for other corporate purposes as of December 31,
2018
.
Accounts Receivable:
Accounts receivable are stated at the invoiced amount, less an allowance for doubtful accounts for estimated amounts not expected to be collected, and do not bear interest. The Company’s accounts receivables are continually assessed for collectability and any allowance is recorded based upon the age of outstanding receivables, historical payment experience and customer creditworthiness. The allowance for doubtful accounts balance was
$6 million
and
$8 million
as of December 31,
2018
and
2017
, respectively. Provisions for estimated uncollectible accounts receivable of
$2 million
,
$3 million
and
$2 million
are included in selling, general and administrative expenses for the years ended December 31,
2018
,
2017
, and
2016
.
The Company exchanges a portion of its accounts receivable for bank notes for certain of its customers in China. The collection of such bank notes are included in operating cash flows based on the substance of the underlying transactions, which are operating in nature. The Company may hold such bank notes until maturity, exchange them with suppliers to settle liabilities, or sell them to third party financial institutions in exchange for cash. The Company has entered into arrangements with financial institutions to sell certain bank notes, generally maturing within nine months. Notes are sold with recourse, but qualify as a sale as all rights to the notes have passed to the financial institution.
Inventories:
Inventories are stated at the lower of cost, determined on a first-in, first-out (“FIFO”) basis, or market. Cost includes the cost of materials, direct labor, in-bound freight and the applicable share of manufacturing overhead. The cost of inventories is reduced for excess and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage.
Product Tooling:
Product tooling includes molds, dies and other tools used in production of a specific part or parts of the same basic design. It is generally required that non-reimbursable design and development costs for products to be sold under long-term supply arrangements be expensed as incurred and costs incurred for molds, dies and other tools that will be owned by the Company or its customers and used in producing the products under long-term supply arrangements be capitalized and amortized over the shorter of the expected useful life of the assets or the term of the supply arrangement. Product tooling owned by the Company is capitalized as property and equipment and is amortized to cost of sales over its estimated economic life, generally not exceeding six years. The Company had receivables of
$22 million
and
$18 million
as of December 31,
2018
and
2017
, respectively, related to production tools in progress, which will not be owned by the Company and for which there is a contractual agreement for reimbursement from the customer.
Contractually Reimbursable Engineering Costs:
Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred, unless the cost reimbursement is contractually guaranteed in a customer contract for which costs are capitalized as costs are incurred and subsequently reduced upon lump sum or piece price recoveries.
Property and Equipment:
Property and equipment is stated at cost or fair value for impaired assets. Property and equipment is depreciated principally using the straight-line method of depreciation over the related asset's estimated useful life. Generally, buildings and improvements are depreciated over a
40
-year estimated useful life, leasehold improvements are depreciated on a straight-line basis over the initial lease term period, and machinery, equipment and other are depreciated over estimated useful
lives ranging from
3
to
15
years. Certain costs incurred in the acquisition or development of software for internal use are capitalized. Capitalized software costs are amortized using the straight-line method over estimated useful lives generally ranging from
3
to
5
years.
Asset impairment charges are recorded for assets held-in-use when events and circumstances indicate that such assets may not be recoverable and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying amounts. If estimated future undiscounted cash flows are not sufficient to recover the carrying value of the assets, an impairment charge is recorded for the amount by which the carrying value of the assets exceeds fair value. The Company classifies assets and liabilities as held for sale when management approves and commits to a formal plan of sale, generally following board of director approval, and it is probable that the sale will be completed within one year. The carrying value of assets and liabilities held for sale is recorded at the lower of carrying value or fair value less cost to sell, and the recording of depreciation is ceased. For impairment purposes, fair value is determined using appraisals, management estimates or discounted cash flow calculations.
Goodwill:
The Company performs either a qualitative or quantitative assessment of goodwill for impairment on an annual basis. Goodwill impairment testing is performed at the reporting unit level. The qualitative assessment considers several factors at the reporting unit level including the excess of fair value over carrying value as of the last quantitative impairment test, the length of time since the last fair value measurement, the current carrying value, market and industry metrics, actual performance compared to forecast performance, and the Company's current outlook on the business. If the qualitative assessment indicates it is more likely
than not that goodwill is impaired, the reporting unit is quantitatively tested for impairment. To quantitatively test goodwill for impairment, the fair value of each reporting unit is determined and compared to the carrying value. An impairment charge is recognized for the amount by which the reporting unit's carrying value exceeds its fair value. Management has tested for impairment and concluded that no impairment exists as of December 31, 2018.
Intangible Assets:
Definite-lived intangible assets are amortized over their estimated useful lives, and tested for impairment in
accordance with the methodology discussed above under "Property and Equipment."Definite-lived intangible assets include:
|
|
•
|
Developed technology intangible assets, which are amortized over average, estimated useful lives generally ranging from
6
to
12
years.
|
|
|
•
|
Customer-related intangible assets, which are amortized over average, estimated useful lives generally ranging from
7
to
12
years.
|
|
|
•
|
Software development costs are capitalized after the software product development reaches technological feasibility and until the software product becomes releasable to customers. These intangible assets are amortized using the straight-line method over estimated useful lives generally ranging from
3
to
5
years.
|
|
|
•
|
Other intangible assets are amortized using the straight-line method over estimated useful lives based on the nature of the intangible asset.
|
Product Warranty and Recall:
Amounts accrued for product warranty and recall claims are based on management’s best estimates of the amounts that will ultimately be required to settle such items. The Company’s estimates for product warranty and recall obligations are developed with support from its sales, engineering, quality and legal functions and include due consideration of contractual arrangements, past experience, current claims and related information, production changes, industry and regulatory developments and various other considerations. For further detail on the Company’s warranty obligations see Note 21, "Commitments and Contingencies."
Income Taxes:
Deferred tax assets and liabilities are recognized 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 carryforwards. 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 it is more likely than not that such assets will not be realized. This assessment requires significant judgment, and must be done on a jurisdiction-by-jurisdiction basis. In determining the need for a valuation allowance, all available positive and negative evidence, including historical and projected financial performance, is considered along with any other pertinent information.
Value Added Taxes:
The Company follows a net basis policy with regard to value added taxes collected from customers and remitted to government authorities, which excludes them from both net sales and expenses.
Fair Value Measurements:
The Company uses fair value measurements in the preparation of its financial statements, which utilize various inputs including those that can be readily observable, corroborated or 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.
Financial Instruments:
The Company uses derivative financial instruments, including forward contracts, swaps, and options to manage exposures to changes in currency exchange rates and interest rates. The Company's policy specifically prohibits the use of derivatives for speculative or trading purposes.
Business Combinations:
In accounting for business combinations, the purchase price of an acquired business is allocated to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. Determining the fair values of assets acquired and liabilities assumed requires management's judgment, the utilization of independent appraisal firms and often involves the use of significant estimates and assumptions with respect to the timing and amount of future cash flows, market rate assumptions, actuarial assumptions, and appropriate discount rates, among other items.
Recently Adopted Accounting Pronouncements:
Effective January 1, 2018 the Company adopted Accounting Standards Update Topic (“ASU”) 2014-09 “Revenue from Contracts with Customers (Topic 606),” using the modified retrospective method. Under the modified retrospective method, the impact of applying the standard is recognized as a cumulative effect on retained earnings. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the year ended
December 31, 2018
. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Certain of the Company’s nonpublic non-consolidated joint ventures have not yet adopted Topic 606 and therefore the Company’s share of earnings as reported in equity in net income of non-consolidated affiliates continues to be reported under historical revenue accounting standards. The Company is still evaluating the impact of the adoption of Topic 606 on January 1, 2019 by its nonpublic non-consolidated affiliates.
In November 2016, the FASB issued an accounting standards update ASU 2016-18, "Restricted Cash," requiring that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The change is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Retrospective application is required. The Company adopted the guidance on a retrospective basis on January 1, 2018 and accordingly, included restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows.
In March 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost." The ASU requires entities to present the service cost component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Entities will present the other components separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, and disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. The standard will be applied retrospectively for the presentation of the service cost component and the components of pension financing costs in the income statement, and prospectively for the guidance limiting the capitalization of net periodic benefit cost in assets to the service cost. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company previously recorded service cost with other compensation costs (benefits) in cost of sales and selling, general and administrative expenses. Adoption of the standard results in the reclassification of other compensation costs (benefits) in "Other income (expense), net." The Company's retrospective adoption of this standard on January 1, 2018 resulted in an
$8 million
increase to cost of sales and a
$4 million
increase to selling, general and administrative expenses, with a corresponding
$12 million
increase in "Other income (expense), net" with no impact to net income for each of the years ended December 31, 2017 and 2016.
Effective January 1, 2018 the Company has elected to early adopt ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities" which was created to better align accounting rules with a company’s risk management activities to reflect the economic results of hedging in the financial statements and simplify hedge accounting treatment. The modified retrospective adoption of ASU 2017-12 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the year ended December 31, 2018. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. For additional information, refer to Note 20, "Financial Instruments" to the Company's consolidated financial statements.
Effective January 1, 2018 the Company adopted ASU 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory,” on the accounting for income taxes, which eliminates the exception in existing guidance that defers the recognition of the tax effects of intra-entity asset transfers other than inventory until the transferred asset is sold to a third party. Under this guidance, an entity recognizes the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments." The ASU addresses eight specific cash flow issues with the objective of reducing the diversity in practice in how certain transactions were classified in the statement of cash flows. The ASU is applied using a retrospective transition method to each period presented. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted the guidance on a retrospective basis on January 1, 2018 and accordingly, previously issued operating cash flows decreased by
$2 million
and
$4 million
for the years ended December 31, 2017 and 2016, respectively. Cash flows used by investing activities decreased by
$2 million
, and cash flows used by financing activities increased by
$1 million
for the year ended December 31, 2017. There was no impact to cash flows used by investing activities or financing activities for the year ended December 31, 2016.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The ASU makes targeted improvements to existing U.S. GAAP for financial instruments, including requiring equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In accordance with this guidance, the Company measures equity investments at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. The adoption of this guidance did not have a significant impact on the Company’s financial statements.
Recent Accounting Pronouncements Not Yet Adopted:
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The new standard requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. There are two transition methods available under the new standard dependent upon the type of financial instrument, either cumulative effect or prospective. The standard will be effective for the Company in the first quarter of 2020. Earlier adoption is permitted only for annual periods after December 15, 2018. Management is currently assessing the impact of the new standard.
In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842).” The standard increases the transparency and comparability of organizations by recognizing right-of-use (“ROU”) assets and lease liabilities on the consolidated balance sheets and disclosing key quantitative and qualitative information about leasing arrangements. In transition, the standard provides for certain practical expedients. Management expects to elect certain practical expedients including the election not to reassess existing or expired contracts to determine if such contracts contain a lease or if the lease classification would differ, as well as the election not to separate lease and non-lease components for arrangements where the Company is a lessee.
The Company will adopt the standard January 1, 2019, by applying the modified retrospective method without restatement of comparative periods' financial information, as permitted by the transition guidance. The impact of adoption will result in the recognition of ROU assets and lease liabilities estimated in the range of
$145 million
to
$165 million
. The standard will not have a significant impact on the Company's consolidated results of operations and cash flows.
NOTE 3. Business Acquisitions
VFAE Acquisition
On
September 1, 2018
, the Company invested approximately
$300,000
and acquired an additional
1%
ownership in VFAE, a Chinese automotive electronic applications manufacturer in which the Company had previously been an equity investor. The Company's ownership interest increased to
51%
and, because of the change in control, the assets and liabilities of VFAE were consolidated from the date of the transaction.
The Company made this additional investment as part of its long-term strategic plan for VFAE. The investment will contribute to the business growth and enhanced economic performance of VFAE by leveraging Visteon’s manufacturing technology and engineering capabilities.
The VFAE acquisition has been accounted for as a purchase transaction. The total consideration, including the
$300,000
paid and the fair value of the original
50%
interest, has been allocated to the assets acquired, liabilities assumed and non-controlling shareholder interest based on their representative value at
September 1, 2018
. The excess consideration over the estimated fair value of the net assets acquired has been allocated to goodwill. The operating results of VFAE have been included in the consolidated financial statements of the Company since the date of the transaction.
The initial summary of the fair value of the assets acquired and liabilities assumed, pending the final valuation and translated in U.S. dollars, in conjunction with the transaction is shown below (in millions):
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|
|
|
|
|
|
|
Assets Acquired
|
|
|
Liabilities Assumed
|
|
Cash and equivalents
|
$
|
16
|
|
|
Payable to Visteon Corporation
|
$
|
9
|
|
Accounts receivable, net
|
12
|
|
|
Accounts payable
|
6
|
|
Inventories, net
|
4
|
|
|
Other current liabilities
|
5
|
|
Other current assets
|
6
|
|
|
Income taxes payable
|
1
|
|
Property and equipment, net
|
5
|
|
|
Other non-current liabilities
|
2
|
|
Intangible assets including goodwill
|
9
|
|
|
Total liabilities assumed
|
23
|
|
Other non-current assets
|
1
|
|
|
Non-controlling interest
|
15
|
|
Total assets acquired
|
$
|
53
|
|
|
Visteon Corporation Consideration
|
$
|
15
|
|
The Company utilized a third party to assist in the fair value determination of certain components of the purchase price allocation, primarily intangible assets and non-controlling interest, as well as the fair value of the Company’s original
50%
equity investment.
Fair values of equity investment and non-controlling interest, as of the acquisition date were estimated using the discounted cash flow technique of the income approach
. Fair values of intangible assets were based on the excess earning method of the income approach. The income approach requires the Company to project related future cash inflows and outflows and apply an appropriate discount rate. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain.
At
December 31, 2017
, the Company previously recorded its investment in VFAE of
$10 million
classified as an "Investment in non-consolidated affiliates" on its consolidated balance sheet. In connection with its increased investment in VFAE, the Company recorded a gain of approximately
$4 million
on its original investment, classified as "Other income (expense), net" in the consolidated income statement.
The acquisition does not meet the thresholds for a significant acquisition and therefore no pro forma financial information is presented.
AllGo Purchase
On July 8, 2016, Visteon acquired AllGo Embedded Systems Private Limited, a leading developer of embedded multimedia system solutions to global vehicle manufacturers, for a purchase price of
$17 million
("AllGo Purchase") including
$2 million
of contingent consideration payable upon completion of certain technology milestones, achieved and paid on July 6, 2017. In addition, the purchase agreement includes contingent payments of
$5 million
if key employees remain employed through July 2019. The Company has recorded a payment obligation of approximately
$4 million
, classified as "Other current liabilities" within the Company's balance sheet as of December 31, 2018. The AllGo Purchase was a strategic acquisition to add greater scale and depth to the Company's infotainment software capabilities. During the year ended December 31, 2016, the Company incurred acquisition-related costs of approximately
$1 million
. These amounts were recorded as incurred and have been classified as "Other income (expense), net" within the Company's consolidated statements of comprehensive income.
NOTE 4. Divestitures
France Transaction
On December 1, 2017, the Company completed an asset sale related to an Electronics facility in France to a third party (the "France Transaction"). In connection with the France Transaction, the Company recorded pre-tax losses of approximately
$33 million
including a cash contribution of
$13 million
, long-lived asset impairment charges
$13 million
and other working capital and transaction related impacts of
$7 million
.
The Company entered into certain other agreements upon closing, including a transition agreement (pursuant to which the parties will provide certain transition services for a specified period following the closing), a manufacturing agreement (pursuant to which the buyer will provide manufacturing services to Visteon), and a sourcing agreement (pursuant to which Visteon commits to a minimum purchase value for a two year period for prototypes and production equipment).
Climate Transaction
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 previously recorded in accumulated other comprehensive loss, included in the Company's consolidated statements of comprehensive as "Other income (expense), net" for the year ended December 31, 2016. This disposal did not qualify for discontinued operations treatment.
Other
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 and made a final contribution payment of approximately
$35 million
adjusted for currency impacts in December 2017.
NOTE 5. Discontinued Operations
During 2014 and 2015, the Company divested the majority of its global Interiors business (the "Interiors Divestiture") and completed the sale of its Argentina and Brazil interiors operations on December 1, 2016. Separately, the Company completed the sale of the majority of its global Climate business (the "Climate Transaction") during 2015. These transactions met the conditions required to qualify for discontinued operations reporting and accordingly the results of operations and the settlement of retained contingencies have been classified in income (loss) from discontinued operations, net of tax, in the consolidated statements of operations and comprehensive income.
Discontinued operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
(Dollars in Millions)
|
Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45
|
|
Cost of sales
|
(5
|
)
|
|
—
|
|
|
(59
|
)
|
Gross margin
|
(5
|
)
|
|
—
|
|
|
(14
|
)
|
Selling, general and administrative expenses
|
(1
|
)
|
|
—
|
|
|
(5
|
)
|
Gain (loss) on Climate Transaction
|
4
|
|
|
7
|
|
|
(2
|
)
|
Long-lived asset impairment
|
—
|
|
|
—
|
|
|
(1
|
)
|
Gain (loss) on Interiors Divestiture
|
—
|
|
|
8
|
|
|
(19
|
)
|
Restructuring expense
|
(1
|
)
|
|
—
|
|
|
(4
|
)
|
Other income (expense), net
|
—
|
|
|
—
|
|
|
(2
|
)
|
(Loss) income from discontinued operations before income taxes
|
(3
|
)
|
|
15
|
|
|
(47
|
)
|
Benefit for income taxes
|
4
|
|
|
2
|
|
|
7
|
|
Net income (loss) from discontinued operations attributable to Visteon
|
$
|
1
|
|
|
$
|
17
|
|
|
$
|
(40
|
)
|
During the first quarter of 2018, the Company recognized a
$3 million
benefit on settlement of litigation matters with its former CEO as further described in Note 21, "Commitments and Contingencies." During 2018, the Company recorded a
$4 million
charge for legal expenses related to former employees at a closed plant in Brazil.
The Company recorded a
$4 million
income tax benefit during 2018 related to uncertain tax positions in connection with the Climate transaction, resulting from statute expiration.
In connection with the Climate Transaction, the Company completed the repurchase of the electronics operations located in India during the first quarter of 2017 for
$47 million
, recognizing a
$7 million
gain on settlement of purchase commitment contingencies. The Company had previously consolidated the India operations based on the Company's controlling financial interest as a result of the repurchase obligation, operating control, and the obligation to fund losses or benefit from earnings.
In connection with the Interiors Divestiture, the Company negotiated a settlement with the Buyer for certain non-income tax items and recognized a gain on divestiture of
$7 million
for the year ended December 31, 2017.
During the year ended December 31, 2016, the Company recorded a
$17 million
income tax benefit to reflect change in estimates associated with the filing of the Company’s U.S. tax returns that resulted in a reduction in U.S. income tax related to the 2015 Climate Transaction, partially offset by
$10 million
of income tax expense primarily associated with
$8 million
adverse currency impacts in connection with the Korean capital gains withholding tax recovered and uncertain tax positions identified during 2016.
NOTE 6. Non-Consolidated Affiliates
Non-Consolidated Affiliate Transaction
s
On October 15, 2018, the Company completed the purchase of a 12.5% equity investment in a private radar imaging firm for $1 million, as further described in Note 19, "Fair Value Measurements."
On September 1, 2018, Visteon acquired an additional
1%
ownership interest in VFAE resulting in a total
51%
controlling interest and a non-cash gain of
$4 million
, as further described in Note 3, "Business Acquisitions."
During 2017, the Company completed the sale of its
50%
interest in an equity method investment for proceeds of
$7 million
, consistent with its carrying value.
During 2017, the Company disposed of its remaining cost method investments for proceeds of approximately
$8 million
and recorded a net pretax gain of
$4 million
, classified as "Other income (expense), net" during the year ended December 31, 2017.
During 2016, the Company agreed to sell a
50%
interest in an equity investment for approximately
$7 million
and recorded an impairment loss of approximately
$5 million
related to this transaction. Also in 2016, the Company sold a cost method investment to a third party for proceeds of approximately
$11 million
. The Company recorded a pre-tax gain of
$5 million
related to this transaction during the year ended December 31, 2016, classified as "Other income (expense), net."
Investments in Affiliates
The Company recorded equity in the net income of non-consolidated affiliates of
$13 million
,
$7 million
and
$2 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis. If the Company determines that an “other-than-temporary” decline in value has occurred, an impairment loss will be recorded, which is measured as the difference between the recorded book value and the fair value of the investment. As of December 31, 2018, the Company determined that no such indicators were present.
A summary of the Company's investments in non-consolidated equity method affiliates is provided below:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
YFVIC
(50%)
|
$
|
38
|
|
|
$
|
28
|
|
Changchun FAWAY Auto Electronics Co., Ltd.
(50%)
|
—
|
|
|
10
|
|
Others
|
4
|
|
|
3
|
|
Total investments in non-consolidated affiliates
|
$
|
42
|
|
|
$
|
41
|
|
A summary of transactions with affiliates is shown below:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Billings to affiliates (a)
|
$
|
52
|
|
|
$
|
52
|
|
Purchases from affiliates (b)
|
$
|
79
|
|
|
$
|
64
|
|
(a) Primarily relates to parts production and engineering reimbursement
|
(b) Primarily relates to engineering services as well as selling, general and administrative expenses
|
Variable Interest Entities
In October 2014, Yanfeng Visteon Investment Co., Ltd. ("YFVIC"), a 50% joint venture between the Company and Yangfeng Automotive Trim Systems Co. Ltd. ("YF"), completed the purchase of YF's
49%
direct ownership in Yanfeng Visteon Automotive Electronics Co., Ltd ("YFVE"), a consolidated joint venture of the Company. The purchase by YFVIC was financed through a shareholder loan and external borrowings which were guaranteed by Visteon, of which
$11 million
is outstanding as of December 31, 2018. The guarantee contains standard non-payment provisions to cover the borrowers in event of non-payment of principal, accrued interest and other fees, and the loan is expected to be fully paid by September 2019.
The Company determined YFVIC, is a VIE. The Company holds a variable interest in YFVIC primarily related to its ownership interests and subordinated financial support. The Company and YF each own
50%
of YFVIC and neither entity has the power to control the operations of YFVIC, therefore the Company is not the primary beneficiary of YFVIC and does not consolidate the joint venture.
A summary of the Company's investments in YFVIC is provided below:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Payables due to YFVIC
|
$
|
17
|
|
|
$
|
12
|
|
Exposure to loss in YFVIC
|
|
|
|
Investment in YFVIC
|
$
|
38
|
|
|
$
|
28
|
|
Receivables due from YFVIC
|
36
|
|
|
35
|
|
Subordinated loan receivable
|
20
|
|
|
22
|
|
Loan guarantee
|
11
|
|
|
15
|
|
Maximum exposure to loss in YFVIC
|
$
|
105
|
|
|
$
|
100
|
|
NOTE 7
.
Restructuring Activities
The Company has undertaken various restructuring activities to achieve its strategic and financial objectives. Restructuring activities include, but are not limited to, plant closures, production relocation, administrative cost structure realignment and consolidation of available capacity and resources. The Company expects to finance restructuring programs through cash on hand, cash generated from 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. Restructuring costs are recorded as elements of a plan are finalized and the timing of activities and the amount of related costs are not likely to change. However, such costs are estimated based on information available at the time such charges are recorded. In general, management anticipates that restructuring activities will be completed within a time frame such that significant changes to the plan are not likely. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated.
Including amounts associated with discontinued operations, the Company recorded restructuring expenses, net of reversals, of
$30 million
,
$14 million
and
$53 million
during the years ended December 31, 2018, 2017 and 2016, respectively. Significant restructuring programs are summarized below by product group.
Electronics
During the third quarter of 2018, the Company approved a restructuring program impacting engineering and administrative functions to optimize operations. The Company recorded approximately
$19 million
, net of reversals, in relation to the program and expects to incur up to
$25 million
under this program. As of December 31, 2018, approximately
$14 million
remains accrued for the program.
During the second quarter of 2018, the Company recorded employee severance and termination benefit expenses of approximately
$3 million
related to legacy employees at a South America facility and
$2 million
, net of reversals, associated with employees at North America manufacturing facilities due to the wind-down of certain products. As of December 31, 2018, approximately
$3 million
remains accrued for these programs.
During the fourth quarter of 2016, the Company approved a restructuring program impacting engineering and administrative functions to further align the Company's footprint with its core product technologies and customers. The Company has recorded approximately
$5 million
,
$14 million
, and
$26 million
of restructuring expenses, net of reversals, respectively under this program
during the years ended December 31, 2018, 2017 and 2016, of which
$2 million
remains accrued as of December 31, 2018. The Company has recorded approximately
$45 million
of restructuring expenses since inception of this program and it is considered substantially complete.
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 2016, the Company recorded approximately
$11 million
restructuring expenses, net of reversals, respectively.
Other and Discontinued Operations
During 2018, the Company recorded
$1 million
associated with a former European Interiors facility related to settlement of employee severance litigation.
During the year ended December 31, 2016, the Company recorded
$16 million
of restructuring expenses related to severance and termination benefits related to the wind-down of certain operations in South America.
As of December 31, 2018, the Company retained approximately
$3 million
of restructuring reserves as part of the Interiors Divestiture associated with previously announced programs for the fundamental reorganization of operations at facilities in Brazil and France.
Restructuring Reserves
Restructuring reserve balances of
$23 million
and
$24 million
as of December 31, 2018 and 2017, respectively, are classified as Other current liabilities on the consolidated balance sheets. The Company anticipates that the activities associated with the restructuring reserve balance as of December 31, 2018 will be substantially complete within one year. The Company’s consolidated restructuring reserves and related activity are summarized below including amounts associated with discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronics
|
|
Other
|
|
Total
|
|
(Dollars in Millions)
|
December 31, 2015
|
$
|
33
|
|
|
$
|
5
|
|
|
$
|
38
|
|
Expense
|
41
|
|
|
16
|
|
|
57
|
|
Reversals
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Utilization
|
(38
|
)
|
|
(12
|
)
|
|
(50
|
)
|
Foreign currency
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
December 31, 2016
|
31
|
|
|
9
|
|
|
40
|
|
Expense
|
19
|
|
|
—
|
|
|
19
|
|
Reversals
|
(4
|
)
|
|
(1
|
)
|
|
(5
|
)
|
Utilization
|
(30
|
)
|
|
(2
|
)
|
|
(32
|
)
|
Foreign currency
|
2
|
|
|
—
|
|
|
2
|
|
December 31, 2017
|
18
|
|
|
6
|
|
|
24
|
|
Expense
|
31
|
|
|
1
|
|
|
32
|
|
Reversals
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Utilization
|
(26
|
)
|
|
(4
|
)
|
|
(30
|
)
|
Foreign currency
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
December 31, 2018
|
$
|
20
|
|
|
$
|
3
|
|
|
$
|
23
|
|
Given the economically-sensitive and highly competitive nature of the automotive industry, the Company continues to closely monitor current market factors, industry trends and opportunities to streamline the Company's operations, including but not limited to, additional restructuring actions. However, there can be no assurance that any such actions will be sufficient to fully offset the impact of adverse factors on the Company or its results of operations, financial position and cash flows.
NOTE 8. Inventories
Inventories consist of the following components:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Raw materials
|
$
|
124
|
|
|
$
|
133
|
|
Work-in-process
|
26
|
|
|
24
|
|
Finished products
|
34
|
|
|
32
|
|
|
$
|
184
|
|
|
$
|
189
|
|
NOTE 9. Other Assets
Other current assets are comprised of the following components:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Recoverable taxes
|
$
|
46
|
|
|
$
|
56
|
|
Contractually reimbursable engineering costs
|
40
|
|
|
14
|
|
Joint venture receivables
|
37
|
|
|
43
|
|
Prepaid assets and deposits
|
20
|
|
|
36
|
|
China bank notes
|
12
|
|
|
23
|
|
Other
|
4
|
|
|
3
|
|
|
$
|
159
|
|
|
$
|
175
|
|
The Company sold
$36 million
,
$16 million
and
$2 million
of China bank notes to financial institutions during 2018, 2017 and 2016, respectively. As of
December 31, 2018
,
$3 million
remains outstanding and will mature by the end of the second quarter of 2019, and as of December 31, 2017,
$10 million
remained outstanding which matured during the first quarter of 2018.
Other non-current assets are comprised of the following components:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Deferred tax assets
|
$
|
45
|
|
|
$
|
46
|
|
Recoverable taxes
|
33
|
|
|
35
|
|
Contractually reimbursable engineering costs
|
29
|
|
|
24
|
|
Joint venture note receivables
|
20
|
|
|
22
|
|
Long term notes receivable
|
—
|
|
|
10
|
|
Other
|
16
|
|
|
14
|
|
|
$
|
143
|
|
|
$
|
151
|
|
In conjunction with the Interiors Divestiture, the Company entered into a three year term loan with the buyer with an original maturity of December 1, 2019. This loan was settled, prior to maturity, including
$1 million
of interest income.
Current and non-current contractually reimbursable engineering costs of
$40 million
and
$29 million
, respectively, as of
December 31, 2018
, and
$14 million
and
$24 million
, respectively, as of
December 31, 2017
, are related to pre-production design and development costs incurred pursuant to long-term supply arrangements that are contractually guaranteed for reimbursement by customers. The Company expects to receive cash reimbursement payments of approximately
$40 million
in
2019
,
$19 million
in
2020
,
$9 million
in
2021
, and
$1 million
in
2022
.
NOTE 10. Property and Equipment
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Land
|
$
|
13
|
|
|
$
|
13
|
|
Buildings and improvements
|
76
|
|
|
73
|
|
Machinery, equipment and other
|
531
|
|
|
471
|
|
Construction in progress
|
56
|
|
|
65
|
|
Total property and equipment
|
676
|
|
|
622
|
|
Accumulated depreciation
|
(303
|
)
|
|
(269
|
)
|
|
373
|
|
|
353
|
|
Product tooling, net of amortization
|
24
|
|
|
24
|
|
Property and equipment, net
|
$
|
397
|
|
|
$
|
377
|
|
Depreciation and amortization expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
(Dollars in Millions)
|
Depreciation
|
$
|
73
|
|
|
$
|
71
|
|
|
$
|
66
|
|
Amortization
|
3
|
|
|
3
|
|
|
3
|
|
|
$
|
76
|
|
|
$
|
74
|
|
|
$
|
69
|
|
The net book value of capitalized internal use software costs was approximately
$19 million
and
$11 million
as of December 31,
2018
and
2017
, respectively. Related amortization expense was approximately
$7 million
,
$4 million
and
$4 million
for the years ended
2018
,
2017
and
2016
. Amortization expense of approximately
$7 million
,
$6 million
,
$4 million
and
$1 million
is expected for the annual periods ended December 31,
2019
,
2020
,
2021
and
2022
, respectively.
NOTE 11. Intangible Assets
Intangible assets as of December 31,
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Estimated Weighted Average Useful Life (years)
|
|
Gross Intangibles
|
|
Accumulated Amortization
|
|
Net Intangibles
|
|
|
|
(Dollars in Millions)
|
Definite-Lived:
|
|
|
Developed technology
|
8
|
|
$
|
40
|
|
|
$
|
(31
|
)
|
|
$
|
9
|
|
Customer related
|
10
|
|
90
|
|
|
(42
|
)
|
|
48
|
|
Capitalized software development
|
4
|
|
16
|
|
|
(3
|
)
|
|
13
|
|
Other
|
20
|
|
14
|
|
|
(2
|
)
|
|
12
|
|
Subtotal
|
|
|
160
|
|
|
(78
|
)
|
|
82
|
|
Indefinite-Lived:
|
|
|
Goodwill
|
|
|
47
|
|
|
—
|
|
|
47
|
|
Total
|
|
|
$
|
207
|
|
|
$
|
(78
|
)
|
|
$
|
129
|
|
A roll-forward of the net carrying amounts of intangible assets is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2018
|
|
Gross Intangibles
|
|
Accumulated Amortization
|
|
Net Intangible
|
|
Additions
|
|
Foreign Currency
|
|
Amortization Expense
|
|
Net Intangibles
|
|
(Dollars in Millions)
|
|
|
Definite-Lived:
|
|
|
|
|
Developed technology
|
$
|
40
|
|
|
$
|
(27
|
)
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
$
|
9
|
|
Customer related
|
88
|
|
|
(35
|
)
|
|
53
|
|
|
7
|
|
|
(3
|
)
|
|
(9
|
)
|
|
48
|
|
Capitalized software development
|
8
|
|
|
(1
|
)
|
|
7
|
|
|
8
|
|
|
—
|
|
|
(2
|
)
|
|
13
|
|
Other
|
13
|
|
|
(1
|
)
|
|
12
|
|
|
2
|
|
|
(1
|
)
|
|
(1
|
)
|
|
12
|
|
Subtotal
|
149
|
|
|
(64
|
)
|
|
85
|
|
|
17
|
|
|
(5
|
)
|
|
(15
|
)
|
|
82
|
|
Indefinite-Lived:
|
|
|
|
|
Goodwill
|
47
|
|
|
—
|
|
|
47
|
|
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
47
|
|
Total
|
$
|
196
|
|
|
$
|
(64
|
)
|
|
$
|
132
|
|
|
$
|
19
|
|
|
$
|
(7
|
)
|
|
$
|
(15
|
)
|
|
$
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2017
|
|
Gross Intangibles
|
|
Accumulated Amortization
|
|
Net Intangibles
|
|
Additions
|
|
Foreign Currency
|
|
Amortization Expense
|
|
Net Intangibles
|
|
(Dollars in Millions)
|
|
|
Definite-Lived:
|
|
|
|
|
Developed technology
|
$
|
40
|
|
|
$
|
(25
|
)
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
|
$
|
13
|
|
Customer related
|
83
|
|
|
(25
|
)
|
|
58
|
|
|
—
|
|
|
4
|
|
|
(9
|
)
|
|
53
|
|
Capitalized software development
|
4
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
(1
|
)
|
|
7
|
|
Other
|
8
|
|
|
(1
|
)
|
|
7
|
|
|
4
|
|
|
1
|
|
|
—
|
|
|
12
|
|
Subtotal
|
135
|
|
|
(51
|
)
|
|
84
|
|
|
8
|
|
|
6
|
|
|
(13
|
)
|
|
85
|
|
Indefinite-Lived:
|
|
|
|
|
Goodwill
|
45
|
|
|
—
|
|
|
45
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
47
|
|
Total
|
$
|
180
|
|
|
$
|
(51
|
)
|
|
$
|
129
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
(13
|
)
|
|
$
|
132
|
|
On September 1, 2018, in connection with the VFAE acquisition, the Company recorded customer related intangible assets of
$7 million
. These definite lived intangible assets are being amortized using the straight-line method over their estimated useful lives of
10
to
12
years. Additionally, the Company recorded goodwill of
$2 million
for the excess of the total consideration over the fair values of the identifiable assets and liabilities acquired. These gross additions were partially offset by foreign currency related impacts in Customer related and Other intangibles of
$5 million
and
$1 million
, respectively.
During 2017, the Company contributed
$2 million
to American Center for Mobility, a non-profit corporation who is building a state of the art research and development facility. The contribution provides the Company certain rights regarding access to the facility for three years. The Company will use the facility for autonomous driving research and development activities for multiple products and therefore capitalized the contribution as an intangible asset. The Company made a second contribution of
$2 million
during the third quarter of 2018 when the facility was substantially complete. The
$4 million
intangible asset, classified as "Other", is being amortized over a
36
month period on a straight-line basis beginning in January 2018 when the term of the arrangement began.
During each of the years ended December 31, 2018 and 2017, the Company capitalized
$8 million
and
$4 million
respectively, related to software development cost intended for integration into customer products.
The Company recorded approximately
$15 million
,
$13 million
and
$15 million
of amortization expense related to definite-lived intangible assets for the years ended December 31, 2018, 2017 and 2016, respectively. The Company currently estimates annual amortization expense to be
$18 million
,
$15 million
,
$11 million
,
$11 million
and
$8 million
for the years 2019, 2020, 2021, 2022 and 2023.
NOTE 12. Other Liabilities
Other current liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Product warranty and recall accruals
|
$
|
34
|
|
|
$
|
33
|
|
Restructuring reserves
|
23
|
|
|
24
|
|
Joint venture payables
|
17
|
|
|
12
|
|
Deferred income
|
16
|
|
|
18
|
|
Income taxes payable
|
15
|
|
|
12
|
|
Rents and royalties
|
14
|
|
|
24
|
|
Non-income taxes payable
|
13
|
|
|
10
|
|
Dividends payable
|
3
|
|
|
3
|
|
Distribution payable
|
—
|
|
|
14
|
|
Other
|
26
|
|
|
30
|
|
|
$
|
161
|
|
|
$
|
180
|
|
In the fourth quarter of 2015, the Company declared a special distribution of
$1.75 billion
to common shareholders of the Company. During 2018, the final
$14 million
of the special distribution was paid. This special cash distribution was funded from the Climate Transaction proceeds.
Other non-current liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Foreign currency hedges
|
$
|
18
|
|
|
$
|
23
|
|
Product warranty and recall accruals
|
14
|
|
|
16
|
|
Deferred income
|
14
|
|
|
16
|
|
Income tax reserves
|
6
|
|
|
12
|
|
Non-income tax reserves
|
5
|
|
|
7
|
|
Other
|
19
|
|
|
21
|
|
|
$
|
76
|
|
|
$
|
95
|
|
As of December 31,
2018
and
2017
, deferred income, other non-current liabilities, includes approximately
$12 million
and
$14 million
, respectively, of deferred gain on the sale-leaseback of the Company's corporate headquarters. The gain on the sale is being amortized into income on a straight-line basis over the term of the lease which terminates in 2027.
NOTE 13. Debt
The Company’s short and long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Interest Rate
|
|
Carrying Value
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
(Dollars in Millions)
|
Short-Term Debt:
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
—%
|
|
3.9%
|
|
$
|
—
|
|
|
$
|
2
|
|
Short-term borrowings
|
4.8%
|
|
3.9%
|
|
57
|
|
|
44
|
|
|
|
|
|
|
$
|
57
|
|
|
$
|
46
|
|
Long-Term Debt:
|
|
|
|
|
|
|
|
Term facility due March 24, 2024
|
3.2%
|
|
3.6%
|
|
$
|
348
|
|
|
$
|
347
|
|
Short-Term Debt
Short-term borrowings are primarily related to the Company's non-U.S. joint venture and are payable in Chinese Renminbi and India Rupee. As of December 31,
2018
and
2017
, the Company had short-term borrowings of
$57 million
and
$44 million
, respectively. Short-term borrowings increased in
2018
primarily due to changes in local working capital needs.
Available borrowings on outstanding affiliate credit facilities as of December 31,
2018
, are approximately
$29 million
and certain of these facilities have pledged assets as security.
Long-Term Debt
As of December 31, 2016, the Company had an amended credit agreement (the "Credit Agreement") which included a
$350 million
Term Facility maturing April 9, 2021 and a Revolving Credit Facility with capacity of
$200 million
maturing April 9, 2019. Borrowings under the Term Facility accrued interest at the greater of LIBOR or
0.75%
, plus
2.75%
, with an option by the Company to specify the LIBOR tenor of either 1,2,3 or 6 months. Loans drawn under the Revolving Credit Facility had an interest rate equal to LIBOR plus a margin ranging from
2.00%
to
2.75%
as specified by a ratings grid contained in the Credit Agreement.
On March 24, 2017, the Company entered into a second amendment of the Credit Agreement to, among other things, extend the maturity dates of both facilities by three years and increase the Revolving Credit Facility capacity to
$300 million
. The amended Revolving Credit Facility and the amended Term Facility will mature on March 24, 2022 and March 24, 2024, respectively. The amendment reduced the LIBOR spread applicable to both the Revolving Credit Facility and the Term Facility by
0.50%
and reduced the LIBOR floor related to the Term Facility from
0.75%
to
0.00%
. The
$350 million
of borrowings under the amended Term Facility accrued interest at a rate of LIBOR plus
2.25%
. In conjunction with the refinancing, the Company received a credit rating upgrade from Standard & Poor's to BB from BB-. Pursuant to the ratings grid contained within the amended Revolving Credit Facility agreement, any borrowing thereunder shall accrue interest at LIBOR plus
1.75%
.
During the fourth quarter of 2017, the Company entered into a third amendment to the Credit Agreement (the "Amendment"). The Amendment provides for the repricing of the initial Term Facility in an aggregate principal amount of
$350 million
. At the Company's option, loans under the amended Term Facility accrue interest at a rate of LIBOR plus
2.00%
. The Amendment did not modify any terms related to the Revolving Credit Facility.
On May 30, 2018, the Company entered into a fourth amendment of its Credit Agreement to reduce the applicable margin on Eurodollar Rate loans. At the Company’s option, the Term Facility under the amended Credit Agreement interest shall accrue at a rate equal to the applicable annualized domestic rate plus an applicable margin of
0.75%
or the LIBOR-based rate plus an applicable margin of
1.75%
per annum.
The Company is required to pay accrued interest on any outstanding principal balance under the credit facility with a frequency of the lesser of the LIBOR tenor or every three months. Any outstanding principal under this facility will be due upon the maturity date. The Company may also terminate or reduce the lending commitments under this facility, in whole or in part, upon three business days’ notice.
The Revolving Credit Facility also provides
$75 million
availability for the issuance of letters of credit and a maximum of
$20 million
for swing line borrowing. Any amount of the facility utilized for letters of credit or swing line loans outstanding will reduce the amount available under the amended Revolving Credit Facility. The Company may request increases in the limits under the amended Term Facility and the amended Revolving Credit Facility and may request the addition of one or more term loan facilities under the Credit Agreement. Outstanding borrowings may be prepaid without penalty (other than borrowings made for the purpose of reducing the effective interest rate margin or weighted average yield of the loans). There are mandatory prepayments of principal in connection with: (i) excess cash flow sweeps above certain leverage thresholds, (ii) certain asset sales or other dispositions, (iii) certain refinancing of indebtedness and (iv) over-advances under the Revolving Credit Facility. There are no excess cash flow sweeps required at the Company’s current leverage level.
The Credit Agreement requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, and contains customary events of default. The Revolving Credit Facility also requires that the Company maintain a total net leverage ratio no greater than
3.00
:
1.00
. During any period when the Company’s corporate and family ratings meet investment grade ratings, certain of the negative covenants shall be suspended. As of December 31, 2018, the Company was in compliance with all its debt covenants.
All obligations under the Credit Agreement and obligations in respect of certain cash management services and swap agreements with the lenders and their affiliates are unconditionally guaranteed by certain of the Company’s subsidiaries. Under the terms of the Credit Agreement, all obligations under the Credit Agreement are secured by a first-priority perfected lien (subject to certain exceptions) on substantially all property of the Company and the subsidiaries party to the security agreement, subject to certain limitations.
In connection with the second amendment both the Term Facility and Revolving Credit Facility during 2017, the Company recorded
$1 million
of interest expense and deferred
$2 million
of costs as a non-current asset. The deferred costs are being amortized over the term of the debt facilities. As of December 31, 2018, the amended Term Facility remains at
$350 million
of aggregate principal and there were no outstanding borrowings under the amended Revolving Credit Facility.
Other
On September 29, 2017, the Company amended certain terms of its letter of credit facility. The amended agreement reduced the facility amount from
$15 million
to
$5 million
and extended the expiration date by three years to September 30, 2020. Under the agreement the Company is required to maintain a collateral account equal to
103%
of the aggregate stated amount of issued letters of credit (or
110%
for non-U.S. currencies) and must reimburse any amounts drawn under issued letters of credit. The Company had $2 million and
$3 million
of outstanding letters of credit issued under this facility secured by restricted cash, as of December 31, 2018 and 2017, respectively.
Additionally, the Company had
$14 million
and
$17 million
of locally issued letters of credit as of December 31, 2018 and 2017, respectively to support various tax appeals, customs arrangements and other obligations at its local affiliates, of which less than
$1 million
and
$1 million
was secured by cash collateral for the years ended December 31, 2018 and 2017, respectively.
NOTE 14. Employee Benefit Plans
Defined Benefit Plans
The Company sponsors pay related benefit plans for employees in the U.S., UK, Germany, Brazil, France, Mexico, Japan, and Canada. Employees in the U.S. and UK are no longer accruing benefits under the Company's defined benefit plans as these plans were frozen. The Company’s defined benefit plans are partially funded with the exception of certain supplemental benefit plans for executives and certain non-U.S. plans, primarily in Germany, which are unfunded.
The Company's expense for all defined benefit pension plans, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Year Ended December 31
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
(Dollars in Millions)
|
Costs Recognized in Income:
|
|
|
|
|
|
|
|
|
|
|
|
Pension service cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
Pension financing benefit (cost):
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
(27
|
)
|
|
(29
|
)
|
|
(28
|
)
|
|
(8
|
)
|
|
(9
|
)
|
|
(10
|
)
|
Expected return on plan assets
|
41
|
|
|
41
|
|
|
42
|
|
|
9
|
|
|
9
|
|
|
10
|
|
Amortization of losses and other
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(1
|
)
|
Settlements and curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
(1
|
)
|
Restructuring related pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits (a)
|
(2
|
)
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(2
|
)
|
|
(1
|
)
|
Net pension income (expense)
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
8
|
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
|
$
|
(6
|
)
|
Weighted Average Assumptions:
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.65
|
%
|
|
4.12
|
%
|
|
4.37
|
%
|
|
3.28
|
%
|
|
3.51
|
%
|
|
4.60
|
%
|
Compensation increase
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
3.62
|
%
|
|
3.66
|
%
|
|
3.70
|
%
|
Long-term return on assets
|
6.74
|
%
|
|
6.73
|
%
|
|
7.00
|
%
|
|
4.86
|
%
|
|
5.24
|
%
|
|
4.87
|
%
|
(a) Primarily related to restructuring actions
|
The Company previously recorded service cost with other components of net pension income (expense) in cost of sales and selling, general and administrative expenses. Adoption of ASU 2017-07, “Compensation - Retirement Benefits (Topic 715)," during 2018 resulted in the reclassification of pension financing benefits into "Other income (expense), net" for all periods presented.
The Company's total accumulated benefit obligations for all defined benefit plans was
$990 million
and
$1,093 million
as of December 31,
2018
and
2017
, respectively. The benefit plan obligations for employee retirement plans with accumulated benefit obligations in excess of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Accumulated benefit obligation
|
$
|
813
|
|
|
$
|
892
|
|
Projected benefit obligation
|
$
|
818
|
|
|
$
|
898
|
|
Fair value of plan assets
|
$
|
582
|
|
|
$
|
661
|
|
Assumptions used by the Company in determining its defined benefit pension obligations as of December 31, 2018 and 2017 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
Weighted Average Assumptions
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Discount rate
|
|
4.33
|
%
|
|
3.65
|
%
|
|
3.34
|
%
|
|
3.28
|
%
|
Rate of increase in compensation
|
|
N/A
|
|
|
N/A
|
|
|
3.51
|
%
|
|
3.62
|
%
|
The Company’s obligation for all defined benefit pension plans, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Year Ended December 31
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
Benefit obligation — beginning
|
$
|
840
|
|
|
$
|
828
|
|
|
$
|
281
|
|
|
$
|
249
|
|
Service cost
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Interest cost
|
27
|
|
|
29
|
|
|
8
|
|
|
9
|
|
Actuarial loss (gain)
|
(63
|
)
|
|
29
|
|
|
(17
|
)
|
|
8
|
|
Settlements and curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Special termination benefits
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Foreign exchange translation
|
—
|
|
|
—
|
|
|
(16
|
)
|
|
26
|
|
Divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Benefits paid and other
|
(46
|
)
|
|
(46
|
)
|
|
(8
|
)
|
|
(7
|
)
|
Benefit obligation — ending
|
$
|
760
|
|
|
$
|
840
|
|
|
$
|
250
|
|
|
$
|
281
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
|
Plan assets — beginning
|
$
|
647
|
|
|
$
|
608
|
|
|
$
|
220
|
|
|
$
|
190
|
|
Actual return on plan assets
|
(35
|
)
|
|
84
|
|
|
(5
|
)
|
|
14
|
|
Sponsor contributions
|
1
|
|
|
1
|
|
|
7
|
|
|
8
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Foreign exchange translation
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
16
|
|
Benefits paid and other
|
(46
|
)
|
|
(46
|
)
|
|
(8
|
)
|
|
(7
|
)
|
Plan assets — ending
|
$
|
567
|
|
|
$
|
647
|
|
|
$
|
200
|
|
|
$
|
220
|
|
Total funded status at end of period
|
$
|
(193
|
)
|
|
$
|
(193
|
)
|
|
$
|
(50
|
)
|
|
$
|
(61
|
)
|
Balance Sheet Classification:
|
|
|
|
|
|
|
|
|
|
Other non-current assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
3
|
|
Accrued employee liabilities
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Employee benefits
|
(193
|
)
|
|
(193
|
)
|
|
(53
|
)
|
|
(63
|
)
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
Actuarial loss
|
53
|
|
|
40
|
|
|
27
|
|
|
33
|
|
Tax effects/other
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
(10
|
)
|
|
$
|
53
|
|
|
$
|
40
|
|
|
$
|
18
|
|
|
$
|
23
|
|
Components of the net change in AOCI related to all defined benefit pension plans, exclusive of amounts attributable to non-controlling interests on the Company’s consolidated statements of changes in equity for the years ended December 31,
2018
and
2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Actuarial loss (gain)
|
$
|
13
|
|
|
$
|
(15
|
)
|
|
$
|
(4
|
)
|
|
$
|
(6
|
)
|
Deferred taxes
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Currency/other
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Reclassification to net income
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
$
|
13
|
|
|
$
|
(15
|
)
|
|
$
|
(5
|
)
|
|
$
|
2
|
|
Actuarial losses for the year ended December 31, 2018 are primarily related to a decrease in return on assets partially offset by an increase in discount rates. Actuarial losses of
$1 million
for the non-U.S. retirement plans are expected to be amortized to income during 2019. Actuarial gains and losses are amortized using the 10% corridor approach representing 10% times the greater of plan
assets and the projected benefit obligation. Generally, the expected return is determined using a market-related value of assets where gains (losses) are recognized in a systematic manner over five years. For less significant plans, fair value is used.
Benefit payments, which reflect expected future service, are expected to be paid by the Company plans as follows:
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
(Dollars in Millions)
|
2019
|
$
|
40
|
|
|
$
|
5
|
|
2020
|
38
|
|
|
6
|
|
2021
|
38
|
|
|
6
|
|
2022
|
39
|
|
|
7
|
|
2023
|
40
|
|
|
8
|
|
Years 2024 - 2028
|
215
|
|
|
50
|
|
During the year ended December 31, 2018, cash contributions to the Company's U.S. defined benefit plans were
$1 million
and non-U.S. defined benefit pension plans were
$7 million
. Additionally, the Company expects to make cash contributions to its U.S. defined benefit pension plans of
$1 million
in 2019. Contributions to non-U.S. defined benefit pension plans are expected to be
$6 million
during 2019. The Company’s expected 2019 contributions may be revised.
On April 28, 2016, the Company purchased a non-participating annuity contract for all participants of the Canada non-represented plan. The annuity purchase covered
52
participants and resulted in the use of
$5 million
of plan assets for pension benefit obligation settlements of approximately
$5 million
. In connection with the annuity purchase, the Company recorded a settlement loss of approximately
$1 million
during the year ended December 31, 2016.
Substantially all of the Company’s defined benefit pension plan assets are managed by external investment managers and held in trust by third-party custodians. The selection and oversight of these external service providers is the responsibility of the investment committees of the Company and their advisers. The selection of specific securities is at the discretion of the investment manager and is subject to the provisions set forth by written investment management agreements and related policy guidelines regarding permissible investments, risk management practices and the use of derivative securities. Derivative securities may be used by investment managers as efficient substitutes for traditional securities, to reduce portfolio risks or to hedge identifiable economic exposures. The use of derivative securities to engage in unrelated speculation is expressly prohibited.
The primary objective of the pension funds is to pay the plans’ benefit and expense obligations when due. Given the relatively long time horizon of these obligations and their sensitivity to interest rates, the investment strategy is intended to improve the funded status of its U.S. and non-U.S. plans over time while maintaining a prudent level of risk. Risk is managed primarily by diversifying each plan’s target asset allocation across equity, fixed income securities and alternative investment strategies, and then maintaining the allocation within a specified range of its target. In addition, diversification across various investment subcategories within each plan is also maintained within specified ranges.
The Company’s retirement plan asset allocation as of December 31, 2018 and 2017 and target allocation for 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Allocation
|
|
Percentage of Plan Assets
|
|
U.S.
|
|
Non-U.S.
|
|
U.S.
|
|
Non-U.S.
|
|
2019
|
|
2019
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Equity securities
|
38
|
%
|
|
33
|
%
|
|
30
|
%
|
|
41
|
%
|
|
27
|
%
|
|
35
|
%
|
Fixed income
|
15
|
%
|
|
43
|
%
|
|
18
|
%
|
|
16
|
%
|
|
41
|
%
|
|
43
|
%
|
Alternative strategies
|
46
|
%
|
|
14
|
%
|
|
51
|
%
|
|
42
|
%
|
|
19
|
%
|
|
12
|
%
|
Cash
|
1
|
%
|
|
3
|
%
|
|
1
|
%
|
|
1
|
%
|
|
8
|
%
|
|
4
|
%
|
Other
|
—
|
%
|
|
7
|
%
|
|
—
|
%
|
|
—
|
%
|
|
5
|
%
|
|
6
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The expected long-term rate of return for defined benefit pension plan assets was selected based on various inputs, including returns projected by various external sources for the different asset classes held by and to be held by the Company’s trusts and its targeted asset allocation. These projections incorporate both historical returns and forward looking views regarding capital market returns, inflation and other variables. Pension plan assets are valued at fair value using various inputs and valuation techniques.
A description of the inputs and valuation techniques used to measure the fair value for each class of plan assets is included in Note 19, "Fair Value Measurements."
Discount Rate for Estimated Service and Interest Cost:
The Company uses the spot rate method 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 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 .35% to 10.65% to determine its pension and other benefit obligations as of December 31, 2018, including weighted average discount rates of 4.33% for U.S. pension plans, and 3.34% for non-U.S. pension plan.
Defined Contribution Plans
Most U.S. salaried employees and certain non-U.S. employees are eligible to participate in defined contribution plans by contributing a portion of their compensation, which is partially matched by the Company. Matching contributions for the U.S. defined contribution plan are
100%
on the first
6%
of pay contributed. The expense related to all matching contributions was approximately
$7 million
in 2018,
$8 million
in 2017, and
$9 million
in 2016.
Other Postretirement Employee Benefit Plans
In Canada, the Company has a financial obligation for the cost of providing other postretirement health care and life insurance benefits to certain of its employees under Company-sponsored plans. These plans generally pay for the cost of health care and life insurance for retirees and dependents, less retiree contributions and co-pays. Other postretirement benefit obligations were
$1 million
and
$2 million
as of December 31, 2018 and 2017, respectively.
NOTE 15. Stock-Based Compensation
The Visteon Corporation 2010 Incentive Plan (the “2010 Incentive Plan”)
provides for the grant of up to
4.75 million
shares of common stock for
restricted stock awards (“RSAs”), restricted stock units (“RSUs”),
non-qualified stock options ("Stock Options"), stock appreciation rights (“SARs”), performance based share units ("PSUs"), and other stock based awards. The Company's stock-based compensation instruments are accounted for as equity awards or liability awards based on settlement intention as follows.
|
|
•
|
For equity settled stock-based compensation instruments, compensation cost is measured based on grant date fair value of the award and is recognized over the applicable service period. For equity settled stock-based compensation instruments, the delivery of Company shares may be on a gross settlement basis or on a net settlement basis, as determined by the recipient. The Company's policy is to deliver such shares using treasury shares or issuing new shares.
|
|
|
•
|
Cash settled stock-based compensation instruments are subject to liability accounting. At the end of each reporting period, the vested portion of the obligation for cash settled stock-based compensation instruments is adjusted to fair value based on the period-ending market prices of the Company's common stock. Related compensation expense is recognized based on changes to the fair value over the applicable service period.
|
Generally, the Company's stock-based compensation instruments are subject to graded vesting and recognized on an accelerated basis. The settlement intention of the awards is at the discretion of the Organization and Compensation Committee of the Company's Board of Directors. These stock-based compensation awards generally provide for accelerated vesting upon a change-in-control, which is defined in the 2010 Incentive Plan and requires a double-trigger. Accordingly, the Company may be required to accelerate recognition of related expenses in future periods in connection with the change-in-control events and subsequent changes in employee responsibilities, if any.
On June 7, 2018, the Company modified the accounting for certain cash settled stock-based compensation Restricted Stock Units ("RSUs") for non-employee directors of the Company. These awards, previously subject to liability accounting, are now expected to settle in stock. The liability of $6 million related to these awards has been reclassified to shareholders' equity as of June 30, 2018 and will be subject to equity method accounting going forward.
On October 1, 2017, the Company modified certain cash settled stock-based compensation PSUs and RSUs. These awards, previously subject to liability accounting, are now expected to settle in stock. The employee liability of
$3 million
related to these awards has been reclassified to shareholders' equity as of December 31, 2017 and will be subject to equity method accounting going forward.
The total recognized and unrecognized stock-based compensation expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
Unrecognized Stock-Based Compensation Expense
|
|
2018
|
|
2017
|
|
2016
|
|
December 31, 2018
|
|
(Dollars in Millions)
|
Performance based share units
|
$
|
(2
|
)
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
9
|
|
Restricted stock units
|
8
|
|
|
11
|
|
|
6
|
|
|
7
|
|
Stock options
|
2
|
|
|
2
|
|
|
2
|
|
|
1
|
|
Total stock-based compensation expense
|
$
|
8
|
|
|
$
|
19
|
|
|
$
|
12
|
|
|
$
|
17
|
|
During 2018, the Company recognized a
$10 million
benefit on forfeiture of unvested shares due to the settlement of a litigation matter as further described in Note 21, "Commitments and Contingencies."
Performance Based Share Units
The number of PSUs that will vest is based on the Company's achievement of a pre-established relative total shareholder return goal compared to its peer group of companies over a
three
year period, which may range from
0%
to
150%
of the target award.
A summary of employee activity for PSUs is provided below:
|
|
|
|
|
|
|
|
|
PSUs
|
|
Weighted Average Grant Date Fair Value
|
|
|
(In Thousands)
|
|
|
Non-vested as of December 31, 2015
|
662
|
|
|
$
|
37.92
|
|
Granted
|
82
|
|
|
89.79
|
|
Vested
|
(324
|
)
|
|
32.58
|
|
Forfeited
|
(6
|
)
|
|
68.70
|
|
Non-vested as of December 31, 2016
|
414
|
|
|
51.94
|
|
Granted
|
78
|
|
|
110.66
|
|
Vested
|
(16
|
)
|
|
90.45
|
|
Forfeited
|
(15
|
)
|
|
103.72
|
|
Non-vested as of December 31, 2017
|
461
|
|
|
58.76
|
|
Granted
|
87
|
|
|
124.90
|
|
Vested
|
(63
|
)
|
|
105.29
|
|
Forfeited
|
(290
|
)
|
|
33.85
|
|
Non-vested as of December 31, 2018
|
195
|
|
|
$
|
110.42
|
|
The grant date fair value for PSUs was determined using the Monte Carlo valuation model. Unrecognized compensation expense as of December 31,
2018
for PSUs to be settled in shares of the Company's common stock was
$9 million
for the non-vested portion and will be recognized over the remaining vesting period of approximately
1.8
years. The Company made cash settlement payments of
$1 million
for PSUs expected to be settled in cash during the years ended December 31, 2018 and 2017. Unrecognized compensation expense as of December 31,
2018
was less than $
1 million
for the non-vested portion of these awards and will be recognized over the remaining vesting period of approximately
1.7
years.
The Monte Carlo valuation model requires management to make various assumptions including the expected volatility, risk free interest rate and dividend yield. Prior to 2017, expected volatility was based on a rolling average of the daily stock closing prices of a peer group of companies with a period equal to the expected life of the award. The peer group of companies was used due to the relatively short history of the Company's common stock since its emergence from bankruptcy and due to the significant Company transformation between 2012 and 2016. Beginning in 2017, the Company elected to utilize the Company's own volatility based on the Company’s stock history using daily stock prices over a period commensurate with the expected life. The Company now has enough history as a pure play electronics automotive supplier to use its own volatility when applying the Monte Carlo Method. The risk-free rate was based on the U.S. Treasury yield curve in relation to the contractual life of the stock-based compensation instrument. The dividend yield was based on historical patterns and future expectations for Company dividends.
Weighted average assumptions used to estimate the fair value of PSUs granted during the years ended as of December 31,
2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
Expected volatility
|
24.1
|
%
|
|
23.8
|
%
|
Risk-free rate
|
2.33
|
%
|
|
1.59
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
Restricted Stock Units
The grant date fair value of RSUs is measured as the average of the high and low market price of the Company's common stock as traded on the public stock exchange on the date of grant. These awards generally vest in one-third increments on the grant date anniversary over a
three
year vesting period.
The Company granted
70,000
,
76,000
and
94,000
RSUs, expected to be settled in shares, during the years ended December 31,
2018
,
2017
and
2016
, respectively, at a weighted average grant date fair value of
$123.52
,
$94.51
and
$81.54
per share, respectively. Unrecognized compensation expense as of December 31, 2018 was
$7 million
for non-vested RSUs and will be recognized over the remaining vesting period of approximately
1.7
years.
The Company granted
23,000
and
18,000
RSUs, expected to be settled in cash, during the years ended December 31,
2017
and
2016
, respectively, at weighted average grant date fair values
$95.45
and
$78.49
per share, respectively. The Company made cash settlement payments of less than
$1 million
,
$1 million
and less than
$1 million
during the years ended December 31,
2018
,
2017
and
2016
, respectively. Unrecognized compensation expense as of December 31,
2018
was less than
$1 million
for non-vested RSUs and will be recognized on a weighted average basis over the remaining vesting period of approximately
1.5
years.
A summary of employee activity for RSUs is provided below:
|
|
|
|
|
|
|
|
|
RSUs
|
|
Weighted Average Grant Date Fair Value
|
|
|
|
|
Non-vested as of December 31, 2015
|
86
|
|
|
$
|
84.26
|
|
Granted
|
112
|
|
|
81.05
|
|
Vested
|
(17
|
)
|
|
90.45
|
|
Forfeited
|
(11
|
)
|
|
79.11
|
|
Non-vested as of December 31, 2016
|
170
|
|
|
83.30
|
|
Granted
|
99
|
|
|
94.73
|
|
Vested
|
(29
|
)
|
|
83.46
|
|
Forfeited
|
(10
|
)
|
|
83.66
|
|
Non-vested as of December 31, 2017
|
230
|
|
|
87.09
|
|
Granted
|
70
|
|
|
123.52
|
|
Vested
|
(102
|
)
|
|
96.34
|
|
Forfeited
|
(34
|
)
|
|
61.69
|
|
Non-vested as of December 31, 2018
|
164
|
|
|
$
|
105.24
|
|
Additionally, as of December 31,
2018
, the Company has
55,000
outstanding RSUs awarded at a weighted average grant date fair value of
$125.10
under the Non-Employee Director Stock Unit Plan which vest immediately but are not stock settled until the participant terminates service.
Stock Options and Stock Appreciation Rights
Stock Options and SARs are recorded with an exercise price equal to the average of the high and low market price at which the Company's common stock was traded on the public stock exchange on the date of grant. The grant date fair value of these awards is measured using the Black-Scholes option pricing model. Stock Options and SARs generally vest in one-third increments on the grant date anniversary over a
three
year vesting period and have an expiration date
7
or
10
years from the date of grant.
The Company received payments of
$3 million
,
$2 million
and less than
$1 million
related to the exercise of stock options with total intrinsic value of options exercised of
$2 million
,
$1 million
and less than
$1 million
during the years ended December 31,
2018
,
2017
and
2016
, respectively. Unrecognized compensation expense for non-vested Stock Options and SARs as of December 31,
2018
was approximately
$1 million
and less than
$1 million
, respectively, and are expected to be recognized over a weighted average period of
1.5
years and
1.0
years, respectively.
The Black-Scholes option pricing model requires management to make various assumptions including the expected term, risk-free interest rate, dividend yield and expected volatility. The expected term represents the period of time that granted awards are expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee exercise patterns. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of the stock-based compensation instrument. The dividend yield is based on historical patterns and future expectations for Company dividends.
Prior to 2017, expected volatility was based on a rolling average of the daily stock closing prices of a peer group of companies with a period equal to the expected life of the award. The peer group of companies was used due to the relatively short history of the Company's common stock since its emergence from bankruptcy and due to the significant Company transformation between 2012 and 2016. Beginning in 2017, the Company elected to utilize the Company's own volatility based on the Company’s stock history using daily stock prices over a period commensurate with the expected life. The Company now has enough history as a pure play electronics automotive supplier to use its own volatility when applying the Black-Scholes Method.
Weighted average assumptions used to estimate the fair value of awards granted during the years ended December 31,
2018
,
2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
SARs
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Expected term (in years)
|
5.00
|
|
|
5.00
|
|
|
5.00
|
|
|
—
|
|
|
5.00
|
|
|
4.50
|
|
Expected volatility
|
22.95
|
%
|
|
27.31
|
%
|
|
36.84
|
%
|
|
—
|
%
|
|
27.31
|
%
|
|
34.65
|
%
|
Risk-free interest rate
|
2.58
|
%
|
|
2.03
|
%
|
|
1.37
|
%
|
|
—
|
%
|
|
2.03
|
%
|
|
1.83
|
%
|
A summary of employee activity for Stock Options and SARs is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted Average
Exercise Price
|
|
SARs
|
|
Weighted Average
Exercise Price
|
|
(In Thousands)
|
|
|
|
(In Thousands)
|
|
|
December 31, 2015
|
48
|
|
|
$
|
59.41
|
|
|
15
|
|
|
$
|
44.36
|
|
Granted
|
96
|
|
|
73.02
|
|
|
2
|
|
|
78.24
|
|
Exercised
|
(6
|
)
|
|
57.46
|
|
|
(3
|
)
|
|
31.28
|
|
Forfeited or expired
|
(23
|
)
|
|
72.01
|
|
|
(1
|
)
|
|
59.59
|
|
December 31, 2016
|
115
|
|
|
68.37
|
|
|
13
|
|
|
51.10
|
|
Granted
|
84
|
|
|
94.77
|
|
|
2
|
|
|
94.77
|
|
Exercised
|
(26
|
)
|
|
65.79
|
|
|
(7
|
)
|
|
44.33
|
|
Forfeited or expired
|
(7
|
)
|
|
77.36
|
|
|
—
|
|
|
59.59
|
|
December 31, 2017
|
166
|
|
|
81.72
|
|
|
8
|
|
|
69.21
|
|
Granted
|
78
|
|
|
124.35
|
|
|
—
|
|
|
—
|
|
Exercised
|
(31
|
)
|
|
68.02
|
|
|
(1
|
)
|
|
51.25
|
|
December 31, 2018
|
213
|
|
|
$
|
99.36
|
|
|
7
|
|
|
$
|
72.84
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
57
|
|
|
$
|
80.39
|
|
|
5
|
|
|
$
|
64.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options and SARs Outstanding
|
Exercise Price
|
|
Number Outstanding
|
|
Weighted
Average
Remaining Life
|
|
Weighted
Average
Exercise Price
|
|
|
(In Thousands)
|
|
(In Years)
|
|
|
$10.00 - $60.00
|
|
9
|
|
|
3.0
|
|
$
|
50.11
|
|
$60.01 - $80.00
|
|
51
|
|
|
4.3
|
|
$
|
73.06
|
|
$80.01 - $100.00
|
|
82
|
|
|
5.3
|
|
$
|
96.51
|
|
$100.01 - $130.00
|
|
78
|
|
|
6.3
|
|
$
|
124.35
|
|
|
|
220
|
|
|
|
|
|
Tables above are reflective of the modified exercise price for stock options and SARs due to the special distribution of
$43.40
in January 2016, where applicable.
NOTE 16. Income Taxes
Income Tax Provision
Details of the Company's income tax provision from continuing operations are provided in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
(Dollars in Millions)
|
Income (Loss) Before Income Taxes:
(a)
|
|
|
|
|
|
U.S
|
$
|
76
|
|
|
$
|
84
|
|
|
$
|
41
|
|
Non-U.S
|
127
|
|
|
132
|
|
|
118
|
|
Total income before income taxes
|
$
|
203
|
|
|
$
|
216
|
|
|
$
|
159
|
|
Current Tax Provision:
|
|
|
|
|
|
U.S. federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11
|
)
|
Non-U.S
|
42
|
|
|
42
|
|
|
54
|
|
Total current tax provision
|
42
|
|
|
42
|
|
|
43
|
|
Deferred Tax Provision (Benefit):
|
|
|
|
|
|
Non-U.S
|
1
|
|
|
6
|
|
|
(13
|
)
|
Total deferred tax provision (benefit)
|
1
|
|
|
6
|
|
|
(13
|
)
|
Provision for income taxes
|
$
|
43
|
|
|
$
|
48
|
|
|
$
|
30
|
|
|
|
|
|
|
|
(a)
Income (loss) before income taxes excludes equity in net income of non-consolidated affiliates.
|
A summary of the differences between the provision for income taxes calculated at the U.S. statutory tax rate of
21%
for 2018 and
35%
for 2017 and 2016 and the consolidated income tax provision from continuing operations is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
(Dollars in Millions)
|
Tax provision (benefit) at U.S. statutory rate of 21% for 2018 and 35% for 2017 and 2016
|
$
|
43
|
|
|
$
|
76
|
|
|
$
|
56
|
|
Impact of foreign operations
|
16
|
|
|
(5
|
)
|
|
(26
|
)
|
Non-U.S withholding taxes
|
14
|
|
|
15
|
|
|
13
|
|
Tax holidays in foreign operations
|
(5
|
)
|
|
(7
|
)
|
|
(7
|
)
|
State and local income taxes
|
3
|
|
|
(1
|
)
|
|
(1
|
)
|
Tax reserve adjustments
|
(6
|
)
|
|
(14
|
)
|
|
5
|
|
Change in valuation allowance
|
(81
|
)
|
|
(270
|
)
|
|
25
|
|
Impact of U.S. tax reform
|
33
|
|
|
250
|
|
|
—
|
|
Impact of tax law change
|
35
|
|
|
5
|
|
|
26
|
|
Worthless stock deduction
|
—
|
|
|
—
|
|
|
(58
|
)
|
Research credits
|
(5
|
)
|
|
(1
|
)
|
|
(3
|
)
|
Other
|
(4
|
)
|
|
—
|
|
|
—
|
|
Provision for income taxes
|
$
|
43
|
|
|
$
|
48
|
|
|
$
|
30
|
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the U.S. Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from
35%
to
21%
effective for tax years beginning after December 31, 2017, the migration from a worldwide tax system to a territorial system, which institutes a dividends received deduction for foreign earnings with a one-time transition tax on cumulative post-1986 foreign earnings, a modification of the characterization and treatment of certain intercompany transactions and the creation of a new U.S. corporate minimum tax on certain earnings of foreign subsidiaries. As of December 31, 2017, the Company calculated its best estimate of the impact of the Act in its year-end income tax provision in accordance with the guidance available as described below. In accordance with Staff Accounting Bulletin 118 ("SAB 118"), income tax effects of the Act were refined upon obtaining, preparing,
and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of the Act summarized as follows:
|
|
•
|
As a result of the Act, the Company remeasured its U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The Company recorded a cumulative income tax charge of
$267 million
(less than
$1 million
income tax charge in 2018 and
$267 million
income tax charge in 2017); the impact of which was entirely offset by a corresponding income tax benefit associated with a reduction in the U.S. valuation allowance in those years.
|
|
|
•
|
The Act requires a mandatory deemed repatriation of post-1986 undistributed foreign earnings, which results in a one- time transition tax. The Company recorded a cumulative charge of
$52 million
(
$33 million
in 2018 and
$19 million
charge in 2017) related to the one-time transition tax, which was partially offset by the
$36 million
reversal of the Company’s existing deferred tax liability (net of foreign tax credits) associated with repatriation of unremitted foreign earnings. The cumulative
$16 million
income tax charge was entirely offset by a corresponding income tax benefit associated with a reduction in the U.S. valuation allowance in those years.
|
|
|
•
|
For tax years beginning after December 31, 2017, the Act introduces new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred.
|
Other items impacting the Company’s 2018 effective tax rate include the unfavorable impact of foreign operations of $
16 million
which reflects a
$8 million
unfavorable variance due to income taxes on foreign earnings taxed at rates higher than the U.S. statutory rate and
$8 million
related to U.S. income taxes in connection with GILTI and Subpart F inclusions, net of foreign tax credits, excluding the transition tax on the deemed repatriation of foreign earnings described above, entirely offset by a corresponding
$8 million
decrease in the U.S. valuation allowance. Tax reserve adjustments of
$6 million
primarily reflects the favorable audit developments in connection with uncertain tax positions related to goodwill tax amortization at an affiliate in Asia. The
$35 million
unfavorable impact of tax law change in 2018 (excluding the Act) reflects the reduction in deferred tax assets, including net operating loss carryforwards, primarily attributable to the reduction in the corporate income tax rate in France, which was entirely offset by the related valuation allowance.
Other items impacting the Company’s 2017 effective tax rate include the favorable impact of foreign operations of
$5 million
which includes a
$34 million
favorable variance due to income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate partially offset by
$29 million
related to U.S. income taxes in connection with repatriation of earnings, excluding the transition tax on the deemed repatriation of foreign earnings described above, entirely offset by a corresponding
$29 million
decrease in the U.S. valuation allowance. Tax reserve adjustments of
$14 million
primarily reflects the
$16 million
decrease in uncertain tax benefits in connection with the Internal Revenue Service completing its audit during the first quarter of 2017 which was fully offset by the U.S. valuation allowance, while adverse tax reserve adjustments of
$2 million
related to various matters in the U.S. and India for which the uncertainty is expected to be resolved while a full valuation allowance is maintained, and thus, are entirely offset by a corresponding reduction in the valuation allowance. The
$5 million
unfavorable impact of tax law change in 2017 (excluding the Act) reflects the reduction in deferred tax assets, including net operating loss carryforwards, primarily attributable to the reduction in the corporate income tax rates in France and Argentina, which were entirely offset by the related valuation allowances in those jurisdictions.
The Company’s provision for income tax for continuing operations was
$30 million
for year ended December 31, 2016. The favorable impact of foreign operations of
$26 million
includes a
$19 million
favorable variance due to income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, and a
$7 million
tax benefit, net of foreign tax credits, related to U.S. income taxes in connection with repatriation of earnings, entirely offset by a corresponding
$7 million
increase in the U.S. valuation allowance. The favorable worthless stock deduction variance relates to the Company’s investment in its Argentina Climate subsidiary where manufacturing operations have ceased, resulting in a
$58 million
tax benefit that generated a current year U.S. net operating loss, the majority of which was offset by the U.S. valuation allowance, while
$3 million
reduced the Company’s income tax liability for the 2015 tax year and
$8 million
reduced the Company’s unrecognized tax benefits that impact the effective tax rate. Tax reserve adjustments of
$5 million
primarily reflect adverse developments associated with ongoing negotiations to settle certain transfer pricing issues raised with an ongoing audit in Mexico of
$2 million
and
$3 million
related to various matters in the U.S. and India for which the uncertainty is expected to be resolved while a full valuation allowance is maintained, and thus, are entirely offset by a corresponding reduction in the valuation allowance. The
$26 million
unfavorable impact of tax law change in 2016 reflects the reduction in deferred tax assets, including net operating loss carryforwards, primarily attributable to the reduction in the corporate income tax rates in Hungary and Japan, which were largely offset by the related valuation allowance in Hungary of
$24 million
.
Deferred Income Taxes and Valuation Allowances
The Company recorded deferred tax liabilities, net of valuation allowances, for U.S. and non-U.S. income taxes and non-U.S. withholding taxes of approximately
$21 million
and
$19 million
as of December 31,
2018
and
2017
, respectively; on the undistributed earnings of certain consolidated and unconsolidated foreign affiliates as such earnings are intended to be repatriated in the foreseeable future. The amount the Company expects to repatriate is based upon a variety of factors including current year earnings of the foreign affiliates, foreign investment needs and the cash flow needs the Company has in the U.S. and this practice has not changed following incurring the transition tax under the Act. The Company has not provided for deferred income taxes or foreign withholding taxes on the remainder of undistributed earnings from consolidated foreign affiliates because such earnings are considered to be permanently reinvested. It is not practicable to determine the amount of deferred tax liability on such earnings as the actual tax liability, if any, is dependent on circumstances existing when remittance occurs.
The need to maintain valuation allowances against deferred tax assets in the U.S. and other affected countries will cause variability in the Company’s quarterly and annual effective tax rates. Full valuation allowances against deferred tax assets in the U.S. and applicable foreign countries will be maintained until sufficient positive evidence exists to reduce or eliminate them. The factors considered by management in its determination of the probability of the realization of the deferred tax assets include, but are not limited to, recent historical financial results, historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, tax planning strategies and projected future impacts attributable to the Act. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses, in particular, when there is a cumulative loss incurred over a three-year period. However, the three-year loss position is not solely determinative and, accordingly, management considers all other available positive and negative evidence in its analysis. In regards to the full valuation allowance recorded against the U.S. net deferred tax assets, despite recent improvement in the U.S. financial results, management concluded that the weight of negative evidence continues to outweigh the positive evidence, in part attributable to relative uncertainty surrounding global production volumes in 2019 and later years. Additionally, the Company has made a policy election to apply the incremental cash tax savings approach when analyzing the impact GILTI could have on its U.S. valuation allowance assessment. As a result of future expected GILTI inclusions, and because of the Act’s ordering rules, U.S. companies may now expect to utilize tax attribute carryforwards (e.g. net operating losses and foreign tax credits) for which a valuation allowance has historically been recorded (this is referred to as the “tax law ordering approach”). However, due to the mechanics of the GILTI rules, companies that have a GILTI inclusion may realize a reduced (or no) cash tax savings from utilizing such tax attribute carryforwards (this view is referred to as the “incremental cash tax savings approach”). These positions, along with management’s analysis of all other available evidence, resulted in the conclusion that the Company maintain the valuation allowance against deferred tax assets in the U.S. Based on the Company’s current assessment, it is possible that within the next 12 to 24 months, the existing valuation allowance against the U.S. net deferred tax assets could be partially released. Any such release is dependent upon the sustained improvement in U.S. operating results, and, if such a release of the valuation allowance were to occur, it could have a significant impact on net income in the quarter in which it is deemed appropriate to partially release the reserve.
The components of deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Deferred Tax Assets:
|
|
|
|
Employee benefit plans
|
$
|
64
|
|
|
$
|
74
|
|
Capitalized expenditures for tax reporting
|
3
|
|
|
3
|
|
Net operating losses and credit carryforwards
|
1,090
|
|
|
1,178
|
|
Fixed assets and intangibles
|
9
|
|
|
10
|
|
Restructuring
|
8
|
|
|
7
|
|
Inventory
|
9
|
|
|
7
|
|
Deferred income
|
5
|
|
|
9
|
|
Warranty
|
10
|
|
|
13
|
|
Other
|
57
|
|
|
39
|
|
Valuation allowance
|
(1,144
|
)
|
|
(1,242
|
)
|
Total deferred tax assets
|
$
|
111
|
|
|
$
|
98
|
|
Deferred Tax Liabilities:
|
|
|
|
Fixed assets and intangibles
|
$
|
17
|
|
|
$
|
15
|
|
Outside basis investment differences, including withholding tax
|
57
|
|
|
54
|
|
All other
|
15
|
|
|
6
|
|
Total deferred tax liabilities
|
$
|
89
|
|
|
$
|
75
|
|
Net deferred tax assets (liabilities)
|
$
|
22
|
|
|
$
|
23
|
|
Consolidated Balance Sheet Classification:
|
|
|
|
Other non-current assets
|
45
|
|
|
46
|
|
Deferred tax liabilities non-current
|
23
|
|
|
23
|
|
Net deferred tax assets (liabilities)
|
$
|
22
|
|
|
$
|
23
|
|
At December 31, 2018, the Company had available non-U.S. net operating loss carryforwards and capital loss carryforwards of
$1.5 billion
and
$20 million
, respectively, which have carryforward periods ranging from
5
years to
indefinite
. The Company had available U.S. federal net operating loss carryforwards of
$1.4 billion
at December 31, 2018, which will expire at various dates between
2028
and
2030
. U.S. foreign tax credit carryforwards are
$374 million
at December 31, 2018. These credits will begin to expire in
2020
. U.S. research tax credit carryforwards are
$19 million
at December 31, 2018. These credits will begin to expire in 2030. The Company had available tax-effected U.S. state operating loss carryforwards of
$30 million
at December 31, 2018, which will expire at various dates between
2019
and
2038
.
In connection with the Company's emergence from bankruptcy and resulting change in ownership on the Effective Date, an annual limitation was imposed on the utilization of U.S. net operating losses, U.S. credit carryforwards and certain U.S. built-in losses (collectively referred to as “tax attributes”) under Internal Revenue Code (“IRC”) Sections 382 and 383. The collective limitation is approximately
$120 million
per year on tax attributes in existence at the date of change in ownership. Additionally, the Company has approximately
$374 million
of U.S. foreign tax credits that are not subject to any current limitation since they were realized after the Effective Date.
As of December 31, 2018, valuation allowances totaling
$1.1 billion
have been recorded against the Company’s deferred tax assets. Of this amount,
$764 million
relates to the Company’s deferred tax assets in the U.S. and
$380 million
relates to deferred tax assets in certain foreign jurisdictions, primarily Germany and France.
Unrecognized Tax Benefits, Inclusive of Discontinued Operations
The Company operates in multiple jurisdictions throughout the world and the income tax returns of its subsidiaries in various tax jurisdictions are subject to periodic examination by respective tax authorities. The Company regularly assesses the status of these examinations and the potential for adverse and/or favorable outcomes to determine the adequacy of its provision for income taxes. The Company believes that it has adequately provided for tax adjustments that it believes are more likely than not to be realized as a result of any ongoing or future examination. Accounting estimates associated with uncertain tax positions require the Company
to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If the Company determines it is more likely than not a tax position will be sustained based on its technical merits, the Company records the largest amount that is greater than 50% likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. Due to the complexity of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the liabilities recorded.
Gross unrecognized tax benefits at December 31,
2018
and
2017
were
$10 million
and
$18 million
, respectively. Of these amounts, approximately
$4 million
and
$9 million
, respectively, represent the amount of unrecognized benefits that, if recognized, would impact the effective tax rate. The gross unrecognized tax benefit differs from that which would impact the effective tax rate due to uncertain tax positions embedded in other deferred tax attributes carrying a full valuation allowance. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense and related amounts accrued at December 31,
2018
and
2017
were
$2 million
and
$3 million
, respectively.
During 2018, there were several items that impacted the Company’s unrecognized tax benefits resulting in a
$10 million
net reduction in income tax expense, inclusive of interest and penalties, of which
$6 million
and
$4 million
of income tax benefits were reflected in continuing operations and discontinued operations, respectively. The
$6 million
income tax benefit in continuing operations primarily reflects the favorable audit developments in connection with uncertain tax positions related to goodwill tax amortization at an affiliate in Asia. The
$4 million
income tax benefit in discontinued operations relates to expiring statutes in connection with former climate operations in Europe.
During 2017, there were several items that impacted the Company’s unrecognized tax benefits resulting in a
$2 million
net reduction in income tax expense, inclusive of interest and penalties, which was substantially reflected in discontinued operations. During 2017, the IRS completed the audit of the Company's U.S. tax returns for the 2012 and 2013 tax years. The closing of the audit did not have a material impact on the Company's effective tax rate due to the valuation allowances maintained against the Company's U.S. tax attributes resulting in a decrease in unrecognized tax benefits of
$16 million
. Also during 2017, the Company settled tax assessments for
$2 million
related to audits in Mexico and for
$1 million
related to audits in Spain and France in connection with the Company’s former operations in those jurisdictions.
With few exceptions, the Company is no longer subject to U.S. federal tax examinations for years before 2014 or state, local, or non-U.S. income tax examinations for years before 2003 although U.S. net operating losses and other tax attributes carried forward into open tax years technically remain open to adjustment. During the first quarter of 2018, the IRS informed the Company that the 2016 tax year would be added to the ongoing examination of the Company’s U.S. tax returns for 2014 and 2015. Although it is not possible to predict the timing of the resolution of all other ongoing tax audits with accuracy, it is reasonably possible that certain tax proceedings in Europe, Asia, and Mexico could conclude within the next twelve months and result in a significant increase or decrease in the balance of gross unrecognized tax benefits. Given the number of years, jurisdictions and positions subject to examination, the Company is unable to estimate the full range of possible adjustments to the balance of unrecognized tax benefits. The long-term portion of uncertain income tax positions (including interest) in the amount of
$6 million
is included in Other non-current liabilities on the consolidated balance sheet.
A reconciliation of the beginning and ending amount of unrecognized tax benefits including amounts attributable to discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Beginning balance
|
$
|
18
|
|
|
$
|
35
|
|
Tax positions related to current period
|
|
|
|
Additions
|
—
|
|
|
3
|
|
Tax positions related to prior periods
|
|
|
|
Reductions
|
(4
|
)
|
|
(18
|
)
|
Settlements with tax authorities
|
—
|
|
|
(3
|
)
|
Lapses in statute of limitations
|
(4
|
)
|
|
—
|
|
Effect of exchange rate changes
|
—
|
|
|
1
|
|
Ending balance
|
$
|
10
|
|
|
$
|
18
|
|
During 2012, Brazil tax authorities issued tax assessment notices to Visteon Sistemas Automotivos (“Sistemas”) related to the sale of its chassis business to a third party, which required a deposit in the amount of
$14 million
during 2013 necessary to open a judicial proceeding against the government in order to suspend the debt and allow Sistemas to operate regularly before the tax authorities after attempts to reopen an appeal of the administrative decision failed. Adjusted for currency impacts and accrued interest, the deposit amount is approximately
$14 million
, as of December 31, 2018. The Company believes that the risk of a negative outcome is remote once the matter is fully litigated at the highest judicial level. These appeal payments, as well as income tax refund claims associated with other jurisdictions, total
$18 million
as of December 31, 2018, and are included in Other non-current assets on the consolidated balance sheet.
NOTE 17. Stockholders’ Equity and Non-controlling Interests
Share Repurchase Program
In 2016, Visteon entered into stock repurchase 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
.
In 2017 the Company entered various stock repurchase programs to purchase shares of common stock for an aggregate purchase price of
$200 million
. Under these programs the Company purchased
1,978,144
shares at an average price of
$101.10
.
In 2018, the Company entered into various programs with third-party financial institutions to purchase an aggregate amount of $300 million of the Company's common stock as further described below:
|
|
•
|
On March 6, 2018 the Company entered into an accelerated stock buyback ("ASB") program with a third-party financial institution to purchase shares of Visteon common stock for an aggregate purchase price of
$150 million
with an initial delivery on March 7, 2018. The program concluded on July 20, 2018, in total the Company purchased
1,218,372
shares at an average price of
$123.12
under this ASB program.
|
|
|
•
|
During 2018 the Company entered into various share repurchase programs to purchase shares of the Company's common stock for an aggregate purchase price of
$150 million
. Under these programs the Company purchased
1,587,159
shares at an average price of
$94.49
.
|
As of
December 31, 2018
,
$400 million
of the authorization remains outstanding through 2020. 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 considerations.
Treasury Stock
As of December 31,
2018
and
2017
, the Company held
26,817,543
and
24,141,088
shares of common stock in treasury for use in satisfying obligations under employee incentive compensation arrangements. The Company values shares of common stock held in treasury at cost.
Non-Controlling Interests
Non-controlling interests in the Visteon Corporation economic entity are as follows:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Yanfeng Visteon Automotive Electronics Co., Ltd.
|
$
|
56
|
|
|
$
|
77
|
|
Shanghai Visteon Automotive Electronics Co., Ltd.
|
43
|
|
|
44
|
|
Changchun Visteon FAWAY Automotive Electronics Co., Ltd.
|
15
|
|
|
—
|
|
Other
|
3
|
|
|
3
|
|
Total non-controlling interests
|
$
|
117
|
|
|
$
|
124
|
|
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,
2018
,
2017
, and
2016
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,
2018
is reduced to a nominal
$0.01
and each warrant is entitled to approximately
1.3
shares of stock upon exercise based on share price as of December 31,
2018
.
Restricted Net Assets
Restricted net assets related to the Company’s consolidated subsidiaries were approximately
$177 million
and
$179 million
, respectively as of December 31, 2018 and 2017. Restricted net assets of consolidated subsidiaries are attributable to the Company’s consolidated joint ventures in China, where certain regulatory requirements and governmental restraints result in significant restrictions on the Company’s consolidated subsidiaries ability to transfer funds to the Company.
Accumulated Other Comprehensive Income (Loss)
Changes in AOCI and reclassifications out of AOCI by component includes:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Changes in AOCI:
|
|
|
|
Beginning balance
|
$
|
(174
|
)
|
|
$
|
(233
|
)
|
Other comprehensive income (loss) before reclassification, net of tax
|
(42
|
)
|
|
49
|
|
Amounts reclassified from AOCI
|
—
|
|
|
5
|
|
Divestitures
|
—
|
|
|
5
|
|
Ending balance
|
$
|
(216
|
)
|
|
$
|
(174
|
)
|
Changes in AOCI by component:
|
|
|
Foreign currency translation adjustments
|
|
|
|
Beginning balance
|
$
|
(100
|
)
|
|
$
|
(163
|
)
|
Other comprehensive income (loss) before reclassification (a)
|
(42
|
)
|
|
62
|
|
Divestitures (b)
|
—
|
|
|
1
|
|
Ending balance
|
(142
|
)
|
|
(100
|
)
|
Net investment hedge
|
|
|
|
Beginning balance
|
(12
|
)
|
|
10
|
|
Other comprehensive income (loss) before reclassification (a)
|
9
|
|
|
(22
|
)
|
Amounts reclassified from AOCI (c)
|
(2
|
)
|
|
—
|
|
Ending balance
|
(5
|
)
|
|
(12
|
)
|
Benefit plans
|
|
|
|
Beginning balance
|
(63
|
)
|
|
(75
|
)
|
Other comprehensive income (loss) before reclassification, net of tax (d)
|
(10
|
)
|
|
10
|
|
Amounts reclassified from AOCI
|
2
|
|
|
(2
|
)
|
Divestitures (b)
|
—
|
|
|
4
|
|
Ending balance
|
(71
|
)
|
|
(63
|
)
|
Unrealized hedging gain (loss)
|
|
|
|
Beginning balance
|
1
|
|
|
(5
|
)
|
Other comprehensive income (loss) before reclassification, net of tax (e)
|
1
|
|
|
(1
|
)
|
Amounts reclassified from AOCI (f)
|
—
|
|
|
7
|
|
Ending balance
|
2
|
|
|
1
|
|
AOCI ending balance
|
$
|
(216
|
)
|
|
$
|
(174
|
)
|
(a) There were no income tax effects for either period due to the valuation allowance.
(b) Amounts are included in "Loss on divestiture" within the consolidated statements of operations.
(c) Amounts are included in "Interest expense" within the consolidated statements of operations.
(d) Amount included in the computation of net periodic pension cost. (See Note 14 Employee benefit plans for additional details.) Net of tax expense of
$1 million
related to benefit plans for the years ended December 31,
2018
and
2017
.
(e) Net tax expense of less than a
$1 million
and
$1 million
million are related to unrealized hedging gain (loss) for the years ended December 31, 2018 and December 31,
2017
, respectively.
(f) Amounts are included in "Cost of sales" and "Interest Expense, net" within the consolidated statements of operations.
NOTE 18. Earnings (Loss) Per Share
A summary of information used to compute basic and diluted earnings (loss) per share attributable to Visteon is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
(In Millions, Except Per Share Amounts)
|
Numerator:
|
|
|
|
|
|
Net income from continuing operations attributable to Visteon
|
$
|
163
|
|
|
$
|
159
|
|
|
$
|
115
|
|
Net income (loss) from discontinued operations attributable to Visteon
|
1
|
|
|
17
|
|
|
(40
|
)
|
Net income attributable to Visteon
|
$
|
164
|
|
|
$
|
176
|
|
|
$
|
75
|
|
Denominator:
|
|
|
|
|
|
Average common stock outstanding - basic
|
29.5
|
|
|
31.6
|
|
|
35.0
|
|
Dilutive effect of performance based share units and other
|
0.2
|
|
|
0.6
|
|
|
0.4
|
|
Diluted shares
|
29.7
|
|
|
32.2
|
|
|
35.4
|
|
|
|
|
|
|
|
Basic and Diluted Per Share Data:
|
|
|
|
|
|
Basic earnings (loss) per share attributable to Visteon:
|
|
|
|
|
|
Continuing operations
|
$
|
5.53
|
|
|
$
|
5.03
|
|
|
$
|
3.28
|
|
Discontinued operations
|
0.03
|
|
|
0.54
|
|
|
(1.14
|
)
|
|
$
|
5.56
|
|
|
$
|
5.57
|
|
|
$
|
2.14
|
|
Diluted earnings (loss) per share attributable to Visteon:
|
|
|
|
|
|
Continuing operations
|
$
|
5.49
|
|
|
$
|
4.94
|
|
|
$
|
3.25
|
|
Discontinued operations
|
0.03
|
|
|
0.53
|
|
|
(1.13
|
)
|
|
$
|
5.52
|
|
|
$
|
5.47
|
|
|
$
|
2.12
|
|
NOTE 19. Fair Value Measurements
Fair Value Hierarchy
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs.
|
|
•
|
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
|
|
|
•
|
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
|
|
|
•
|
Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
|
Assets which are valued at net asset value per share ("NAV"), or its equivalent, as a practical expedient are reported outside the fair value hierarchy, but are included in the total assets for reporting and reconciliation purposes.
The fair value hierarchy for assets and liabilities measured at fair value on a recurring basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
|
(Dollars in Millions)
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
Retirement plan assets
|
|
$
|
112
|
|
|
$
|
271
|
|
|
$
|
14
|
|
|
$
|
370
|
|
|
$
|
767
|
|
Foreign currency instruments
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Liability Category:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency instruments
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
|
(Dollars in Millions)
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
Retirement plan assets
|
|
$
|
139
|
|
|
$
|
366
|
|
|
$
|
13
|
|
|
$
|
349
|
|
|
$
|
867
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Liability Category:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency instruments
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25
|
|
Foreign currency instruments and interest rate swaps are valued using industry-standard models that consider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying and non-performance risk. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The carrying amounts of all other non-retirement plan financial instruments approximate their fair values due to their relatively short-term maturities.
Retirement plan assets pertain to a diverse set of securities and investment vehicles held by the Company’s defined benefit pension plans. These assets possess varying fair value measurement attributes such that certain portions are categorized within each level of the fair value hierarchy as based upon the level of observability of the inputs utilized in the valuation of the particular asset. The Company may, as a practical expedient, estimate the fair value of certain investments using NAV of the investment as of the reporting date. This practical expedient generally deals with investments that permit an investor to redeem its investment directly with, or receive distributions from, the investee at times specified in the investee’s governing documents. Examples of these investments (often referred to as alternative investments) may include ownership interests in real assets, certain credit strategies, and hedging and diversifying strategies. They are commonly in the form of limited partnership interests. The Company uses NAV
as a practical expedient when valuing investments in alternative asset classes and funds which are a limited partnership or similar investment vehicle.
Retirement Plan Assets
Retirement plan assets consist of the following:
|
|
•
|
Short-term investments, such as cash and cash equivalents, are immediately available or are highly liquid and not subject to significant market risk. Assets comprised of cash, short-term sovereign debt, or high credit-quality money market securities and instruments held directly by the plan are categorized as Level 1. Assets in a registered money market fund are reported as registered investment companies. Assets in a short-term investment fund ("STIF") are categorized as Level 2. Cash and cash equivalent assets denominated in currencies other than the U.S. dollar are reflected in U.S. dollar terms at the exchange rate prevailing at the balance sheet dates.
|
|
|
•
|
Registered investment companies are mutual funds that are registered with the Securities and Exchange Commission. Mutual funds may invest in various types of securities or combinations thereof including equities, fixed income securities, and other assets that are subject to varying levels of market risk and are categorized as Level 1. The share prices for mutual funds are published at the close of each business day.
|
|
|
•
|
Treasury and government securities consist of debt securities issued by the U.S. and non-U.S. sovereign governments and agencies, thereof. Assets with a high degree of liquidity and frequent trading activity are categorized as Level 1 while others are valued by independent valuation firms that employ standard methodologies associated with valuing fixed-income securities and are categorized as Level 2.
|
|
|
•
|
Corporate debt securities consist of fixed income securities issued by corporations. Assets with a high degree of liquidity and frequent trading activity are categorized as Level 1 while others are valued by independent valuation firms that employ standard methodologies associated with valuing fixed-income securities and are categorized as Level 2.
|
|
|
•
|
Common and preferred stocks consist of shares of equity securities. These are directly-held assets that are generally publicly traded in regulated markets that provide readily available market prices and are categorized as Level 1.
|
|
|
•
|
Common trust funds are comprised of shares or units in commingled funds that are not publicly traded. The underlying assets in these funds, including equities and fixed income securities, are generally publicly traded in regulated markets that provide readily available market prices. The entire balance of an investment in a common trust fund that does not have a readily observable market prices as available on a third-party information source, notwithstanding whether the investment has daily liquidity, is categorized as Level 2; unless the investment fund has investment holdings significant to its valuation that are considered as Level 3; or the fund is considered as an alternative strategy (including hedge and diversifying strategies) for which valuation is established by NAV as a practical expedient.
|
|
|
•
|
Liability Driven Investing (“LDI”) is an investment strategy that utilizes certain instruments and securities, interest-rate swaps and other financial derivative instruments intended to hedge a portion of the changes in pension liabilities associated with changes in the actuarial discount rate as applied to the plan’s liabilities. The instruments and securities used typically include total return swaps and other financial derivative instruments. The valuation methodology of the financial derivative instruments contained in this category of assets utilizes standard pricing models associated with fixed income derivative instruments and are categorized as Level 2.
|
|
|
•
|
Other investments include miscellaneous assets and liabilities and are primarily comprised of pending transactions and collateral settlements and are categorized as Level 2.
|
|
|
•
|
Limited partnerships and hedge funds represent investment vehicles with underlying exposures in alternative credit, hedge and diversifying strategies (including hedge fund of funds), real assets, and certain equity exposures. The underlying assets in these funds may include securities transacted in active markets as well as other assets that have values less readily observable and may require valuation techniques that require inputs that are not readily observable. Investment in these funds may be subject to a specific notice period prior to the intended transaction date. In addition, transactions in these funds may require longer settlement terms than traditional mutual funds. These assets are valued based on their respective NAV as a practical expedient to estimate fair value due to the absence of readily available market prices.
|
|
|
•
|
Insurance contracts are reported at cash surrender value and have significant unobservable inputs and are categorized as Level 3.
|
The fair values of the Company’s U.S. retirement plan assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Asset Category
|
|
Level 1
|
|
Level 2
|
|
NAV
|
|
Total
|
|
|
(Dollars in Millions)
|
Registered investment companies
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Common and preferred stocks
|
|
22
|
|
|
—
|
|
|
—
|
|
|
22
|
|
Common trust funds
|
|
—
|
|
|
100
|
|
|
127
|
|
|
227
|
|
LDI
|
|
—
|
|
|
104
|
|
|
—
|
|
|
104
|
|
Limited partnerships and hedge funds
|
|
—
|
|
|
—
|
|
|
205
|
|
|
205
|
|
Cash and cash equivalents
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Total
|
|
$
|
25
|
|
|
$
|
210
|
|
|
$
|
332
|
|
|
$
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Asset Category
|
|
Level 1
|
|
Level 2
|
|
NAV
|
|
Total
|
|
|
(Dollars in Millions)
|
Registered investment companies
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Common trust funds
|
|
—
|
|
|
185
|
|
|
94
|
|
|
279
|
|
LDI
|
|
—
|
|
|
103
|
|
|
—
|
|
|
103
|
|
Common and preferred stock
|
|
27
|
|
|
—
|
|
|
—
|
|
|
27
|
|
Limited partnerships and hedge funds
|
|
—
|
|
|
—
|
|
|
226
|
|
|
226
|
|
Cash and cash equivalents
|
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
Total
|
|
$
|
30
|
|
|
$
|
297
|
|
|
$
|
320
|
|
|
$
|
647
|
|
The fair values of the Company’s Non-U.S. retirement plan assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Asset Category
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
|
(Dollars in Millions)
|
Registered investment companies
|
|
$
|
29
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46
|
|
Treasury and government securities
|
|
50
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
74
|
|
Cash and cash equivalents
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Corporate debt securities
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Common and preferred stock
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Common trust funds
|
|
—
|
|
|
22
|
|
|
—
|
|
|
21
|
|
|
43
|
|
Limited partnerships
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
17
|
|
Insurance contracts
|
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
Derivative instruments
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Total
|
|
$
|
87
|
|
|
$
|
61
|
|
|
$
|
14
|
|
|
$
|
38
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Asset Category
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
|
(Dollars in Millions)
|
Registered investment companies
|
|
$
|
52
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70
|
|
Treasury and government securities
|
|
45
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
69
|
|
Cash and cash equivalents
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Corporate debt securities
|
|
3
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Common and preferred stock
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Common trust funds
|
|
—
|
|
|
20
|
|
|
—
|
|
|
14
|
|
|
34
|
|
Limited partnerships
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
15
|
|
Insurance contracts
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
13
|
|
Derivative instruments
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total
|
|
$
|
109
|
|
|
$
|
69
|
|
|
$
|
13
|
|
|
$
|
29
|
|
|
$
|
220
|
|
Fair value measurements which used significant unobservable inputs are as follows:
|
|
|
|
|
|
|
|
Insurance Contracts
|
|
|
(Dollars in Millions)
|
December 31, 2015
|
|
$
|
10
|
|
Purchases, sales and settlements
|
|
1
|
|
December 31, 2016
|
|
$
|
11
|
|
Return on assets held at the reporting date, including currency impacts
|
|
1
|
|
Purchases
|
|
1
|
|
December 31, 2017
|
|
$
|
13
|
|
Purchases
|
|
1
|
|
December 31, 2018
|
|
$
|
14
|
|
Items Measured at Fair Value on a Non-recurring Basis
In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included in the table above. As these non-recurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. As further described in Note 3, "Business Acquisitions", the Company utilized a third party to assist in the fair value determination of the purchase price allocation for the VFAE Acquisition and the AllGo Acquisition. Management’s allocation of fair values to asset and liabilities was completed through a combination of cost, market and income approaches. These fair value measurements are classified within Level 3 of the fair value hierarchy. As further described in Note 4, "Divestitures", the fair value of the assets subject to the France Transaction was less than carrying value and therefore, the long-lived assets were reduced to zero and impairment charges of
$13 million
were recorded in the year ended December 31, 2017.
Fair Value of Debt
The fair value of debt, excluding amounts classified as held for sale, was approximately
$388 million
and
$401 million
as of December 31,
2018
and
2017
, respectively. Fair value estimates were based on quoted market prices or current rates for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities. Accordingly, the Company's debt is classified as Level 1 "Market Prices," and Level 2 "Other Observable Inputs" in the fair value hierarchy, respectively.
Equity Investment
In the fourth quarter of 2018, the Company made an equity investment of
$1 million
in a private radar imaging firm for an ownership interest of
12.5%
, which is accounted for in accordance with ASU 2016-01, as described in Note 2, "Summary of Significant Accounting Policies." This investment does not have a readily determinable fair value and is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer.
During the year ended December 31, 2018, there were no material transactions, events or changes in circumstances requiring an impairment or an observable price change adjustment to the investment. The Company continues to monitor this investment to identify potential transactions which may indicate an impairment or an observable price change requiring an adjustment to its carrying value.
NOTE 20. Financial Instruments
The Company is exposed to various market risks including, but not limited to, changes in foreign currency exchange rates and market interest rates. The Company manages these risks, in part, through the use of derivative financial instruments. The maximum length of time over which the Company hedges the variability in the future cash flows for forecast transactions, excluding those forecast transactions related to the payment of variable interest on existing debt, is up to eighteen months from the date of the forecast transaction. The maximum length of time over which the Company hedges forecast transactions related to the payment of variable interest on existing debt is the term of the underlying debt. The use of derivative financial instruments creates exposure to credit loss in the event of nonperformance by the counter-party to the derivative financial instruments. The Company limits this exposure by entering into agreements including master netting arrangements directly with a variety of major financial institutions with high credit standards that are expected to fully satisfy their obligations under the contracts. Additionally, the Company’s ability to utilize derivatives to manage risks is dependent on credit and market conditions. The Company presents its derivative positions and any related material collateral under master netting arrangements that provide for the net settlement of contracts, by counterparty, in the event of default or termination. Derivative financial instruments designated and non-designated as hedging instruments are included in the Company’s consolidated balance sheets at fair value. The Company is not required to maintain cash collateral with its counterparties in relation to derivative transactions.
Accounting for Derivative Financial Instruments
The Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction, including designation of the instrument as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. Additionally, at inception and at least quarterly thereafter, the Company formally assesses whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure.
Derivative financial instruments are measured at fair value on a recurring basis under an income approach using industry-standard models that consider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying and non-performance risk.
For a designated cash flow hedge, the effective portion of the change in the fair value of the derivative instrument is recorded in AOCI in the consolidated balance sheet. When the underlying hedged transaction is realized, the gain or loss previously included in AOCI is recorded in earnings and reflected in the consolidated statement of operations on the same line as the gain or loss on the hedged item attributable to the hedged risk. The gain or loss associated with changes in the fair value of undesignated cash flow hedges are recorded immediately in the consolidated statement of operations, on the same line as the associated risk. For a designated net investment hedge, the effective portion of the change in the fair value of the derivative instrument is recorded as a cumulative translation adjustment in AOCI in the consolidated balance sheet. Derivatives not designated as a hedge are adjusted to fair value through operating results. Cash flows associated with designated hedges are reported in the same category as the underlying hedged item. Cash flows associated with derivatives are reported in net cash provided from operating activities in the Company’s consolidated statements of cash flows except for cash flows associated with net investment hedges, which are reported in net cash used by investing activities.
Foreign Currency Exchange Rate Risk
Foreign Exchange Risk:
The Company’s net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, subsidiary dividends, 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 current primary hedged foreign currency exposures include the Japanese Yen, Euro, Thai Baht, and Mexican Peso. Where possible, the Company utilizes a strategy of partial coverage for transactions in these currencies. The Company's policy requires that hedge transactions relate to a specific portion of the exposure not to exceed the aggregate amount of the underlying transaction.
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.
The Company had foreign currency hedge economic derivative instruments, with notional amounts of approximately
$23 million
as of December 31,
2018
and foreign currency hedge derivative instruments with notional amounts of approximately
$119 million
of which
$101 million
was designated as cash flow hedges as of December 31, 2017 with the effective portion of the gain or loss reported in the "AOCI" component of Shareholders' equity in the Company's consolidated balance sheet. There was no ineffectiveness associated with such designated derivatives, and the fair value of all derivatives was an asset of less than
$1 million
and a liability of
$2 million
as of December 31, 2018 and 2017, respectively. The difference between the gross amounts recognized and the gross amounts subject to offsetting of these derivatives is not material.
At December 31, 2017, the Company had cross currency swaps intended to mitigate the variability of the value of the Company's investment in certain European subsidiaries with an aggregate notional value of
$150 million
, designated as net investment hedges under the forward method of effectiveness assessment. The aggregate fair value was a non-current liability, net of
$23 million
at December 31, 2017.
In connection with the Company's early adoption of ASU 2017-12, on March 29, 2018 the Company re-designated the hedging relationships of its existing cross currency swaps as net investment hedges of certain of the Company's European affiliates. Upon its adoption of the new standard, the Company elected to change the method of hedge effectiveness from the forward rate to the spot method.
On May 30, 2018, concurrent with the fourth amendment of its Credit Agreement, the Company elected to de-designate its net investment hedge relationships and modify its existing cross currency swaps to more closely align with certain terms of the amended facility. The amended swaps are designated as net investment hedges of the Company's investments in certain European affiliates. These existing off-market swap transactions had an aggregate liability fair value of approximately
$22 million
at the time of designation as net investment hedges. At inception of the hedge relationship the amount of excluded component related to the off-market swap transactions was
$3 million
. This amount is amortized into earnings on a straight-line basis through expiration of the swaps in August 2022. Additionally, on May 30, 2018, the Company executed an incremental
$50 million
in notional value of cross currency swaps which are also designated as net investment hedges of certain of its European affiliates.
In October 2018, the Company executed an incremental
$50 million
in notional value cross currency swap transaction that is designated as net investment hedges of its Japanese subsidiary.
The Company uses the spot method to assess the effectiveness of its net investment hedge transactions. Accordingly, the effective portion of periodic changes in the fair value of the designated cross currency swaps are recorded to other comprehensive income. At December 31, 2018, the Company's outstanding cross currency swaps, maturing in August 2022, with an aggregate notional value of
$250 million
and aggregate fair value of
$16 million
is classified in other non-current liabilities. The amount of accumulated other income expected to be reclassified into earnings within the next 12 months is approximately
$7 million
.
Interest Rate Risk:
The Company is subject to interest rate risk principally in relation to its outstanding variable-rate debt. The Company uses derivative financial instruments to manage exposure to fluctuations in interest rates in connection with its risk management policies.
At December 31, 2017, the Company had an aggregate notional value of
$150 million
of interest rate swaps intended to mitigate the variability of interest expense related to the floating rate debt under the Term Facility. There was no ineffectiveness associated with these derivatives and the fair value was an asset of $1 million as of December 31, 2017. On May 30, 2018, concurrent with the amendment of its Term Facility, the Company terminated the interest rate swaps and received
$4 million
of proceeds upon settlement. Simultaneously, the Company executed interest rate swaps with an aggregate notional value of
$200 million
to effectively convert designated floating rate interest payments to fixed cash flows. On July 17, 2018, the Company executed an incremental interest rate swap transaction with a notional value of
$50 million
.
These swaps mature in August 2022 and do not exceed the underlying floating rate debt obligations under the amended Term Facility. The instruments are designated as cash flow hedges, accordingly, the effective portion of the periodic changes in the fair value of the swap transactions are recognized in accumulated other comprehensive income, a component of shareholders' equity. Amounts initially reported to accumulated other comprehensive income are reclassified to income in the period during which the hedged cash flow impacts earnings. At December 31, 2018, the Company had outstanding interest rate swaps with aggregate notional values of
$250 million
. The aggregate fair value of these instruments recorded as other non-current liabilities approximately
$2 million
liability. The amount of accumulated other loss expected to be reclassified into earnings within the next 12 months is less than
$1 million
.
Financial Statement Presentation
Gains and losses on derivative financial instruments for the years ended December 31,
2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
Recorded Income (Loss) in AOCI, net of tax
|
|
Reclassified from AOCI into Income (Loss)
|
|
Recorded in Income (Loss)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Foreign currency risk – Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-designated cash flow hedges
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Interest rate risk - Interest expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges
|
9
|
|
|
(22
|
)
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest rate swap
|
1
|
|
|
1
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
$
|
10
|
|
|
$
|
(23
|
)
|
|
$
|
2
|
|
|
$
|
(7
|
)
|
|
$
|
2
|
|
|
$
|
2
|
|
Concentrations of Credit Risk
Financial instruments including cash equivalents, derivative contracts, and accounts receivable, expose the Company to counter-party credit risk for non-performance. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s requirement of high credit standing. The Company’s counterparties for derivative contracts are substantially investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counter-party and through monitoring counter-party credit risks. The Company’s concentration of credit risk related to derivative contracts as of December 31,
2018
and
2017
is not material.
The following is a summary of the percentage of sales and accounts receivable from the Company's largest ultimate customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Net Sales
|
|
Percentage of Total Accounts Receivable
|
|
December 31,
|
|
December 31, 2018
|
|
December 31, 2017
|
|
2018
|
|
2017
|
|
2016
|
|
Ford
|
26
|
%
|
|
28
|
%
|
|
30
|
%
|
|
14
|
%
|
|
14
|
%
|
Mazda
|
18
|
%
|
|
17
|
%
|
|
17
|
%
|
|
9
|
%
|
|
10
|
%
|
Renault/Nissan
|
12
|
%
|
|
14
|
%
|
|
15
|
%
|
|
11
|
%
|
|
10
|
%
|
NOTE 21. Commitments and Contingencies
Litigation and Claims
In 2003, the Local Development Finance Authority of the Charter Township of Van Buren, Michigan issued approximately
$28 million
in bonds finally maturing in 2032, the proceeds of which were used at least in part to assist in the development of the Company’s U.S. headquarters located in the Township. During January 2010, the Company and the Township entered into a settlement agreement that, among other things, reduced the taxable value of the headquarters property to current market value. The Settlement Agreement also provided that the Company would negotiate in good faith with the Township in the event that property tax payments were inadequate to permit the Township to meet its payment obligations with respect to the bonds. In September 2013, the Township notified the Company that it is estimating a shortfall in tax revenues of between
$25 million
and
$36 million
, which could render it unable to satisfy its payment obligations under the bonds. On May 12, 2015, the Township commenced litigation with regard to the foregoing. The Township sought damages or, alternatively, declaratory judgment that, among other things, the Company is responsible under the Settlement Agreement for payment of any shortfall in the bond debt service payments. On February 2, 2016, the trial court dismissed the Township’s lawsuit without prejudice on the basis that the Township’s claims were not ripe for adjudication. The appeals court affirmed the dismissal of the Township’s lawsuit. The Township has sought leave to appeal from the Michigan Supreme Court, which directed supplemental briefing and oral argument “on whether to grant the application or take other action.” The parties filed supplemental briefs and oral argument was held on October 9, 2018. The Supreme Court has not yet issued a ruling. The Company is not able to estimate the possible loss or range of loss in connection with this matter.
The dispute between the Company and its former President and Chief Executive Officer, Timothy D. Leuliette, was resolved in the first quarter of 2018. Pursuant to the resolution, the Company recognized
$17 million
of pre-tax income, representing the forfeiture of stock based awards and release of other liabilities accrued during prior periods. The benefit is classified as a reduction to selling, general and administrative expenses of
$10 million
, a benefit to "Other income (expense), net" of
$4 million
, and a benefit to discontinued operations of
$3 million
.
In November 2013, the Company and Halla Visteon Visteon Climate Corporation ("HVCC"), jointly filed an Initial Notice of Voluntary Self-Disclosure statement with the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) regarding certain sales of automotive HVAC components by a minority-owned, Chinese joint venture of HVCC into Iran. The Company updated that notice in December 2013, and subsequently filed a voluntary self-disclosure regarding these sales with OFAC in March 2014. In May 2014, the Company voluntarily filed a supplementary self-disclosure identifying additional sales of automotive HVAC components by the Chinese joint venture, as well as similar sales involving an HVCC subsidiary in China, totaling approximately
$12 million
, and filed a final voluntary-self disclosure with OFAC on October 17, 2014. OFAC is currently reviewing the results of the Company’s investigation. Following that review, OFAC may conclude that the disclosed sales resulted in violations of U.S. economic sanctions laws and warrant the imposition of civil penalties, such as fines, limitations on the Company's ability to export products from the United States, and/or referral for further investigation by the U.S. Department of Justice. Any such fines or restrictions may be material to the Company’s financial results in the period in which they are imposed, but is not able to estimate the possible loss or range of loss in connection with this matter. Additionally, disclosure of this conduct and any fines or other action relating to this conduct could harm the Company’s reputation and have a material adverse effect on our business, operating results and financial condition. The Company cannot predict when OFAC will conclude its own review of our voluntary self-disclosures or whether it may impose any of the potential penalties described above.
The Company's operations in Brazil are subject to highly complex labor, tax, customs and other laws. While the Company believes that it is in compliance with such laws, it is periodically engaged in litigation regarding the application of these laws. As of December 31,
2018
, the Company maintained accruals of approximately
$13 million
for claims aggregating approximately
$99
million
in Brazil. The amounts accrued represent claims that are deemed probable of loss and are reasonably estimable based on the Company's assessment of the claims and prior experience with similar matters.
While the Company believes its accruals for litigation and claims are adequate, the final amounts required to resolve such matters could differ materially from recorded estimates and the Company's results of operations and cash flows could be materially affected.
Product Warranty and Recall
Amounts accrued for product warranty and recall claims are based on management’s best estimates of the amounts that will ultimately be required to settle such items. The Company’s estimates for product warranty and recall obligations are developed with support from its sales, engineering, quality and legal functions and include due consideration of contractual arrangements, past experience, current claims and related information, production changes, industry and regulatory developments and various other considerations. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued or beyond what the Company may recover from its suppliers. Specific cause actions represent customer actions related to defective supplier parts and related software.
The following table provides a reconciliation of changes in the product warranty and recall claims liability:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
Beginning balance
|
$
|
49
|
|
|
$
|
55
|
|
Accruals for products shipped
|
19
|
|
|
20
|
|
Change in estimates
|
(5
|
)
|
|
4
|
|
Specific cause actions
|
9
|
|
|
6
|
|
Recoverable warranty/recalls
|
2
|
|
|
3
|
|
Currency/other
|
—
|
|
|
2
|
|
Settlements
|
(26
|
)
|
|
(41
|
)
|
Ending balance
|
$
|
48
|
|
|
$
|
49
|
|
Guarantees and Commitments
The Company provided a
$11 million
loan guarantee to YFVIC. The guarantee contains standard non-payment provisions to cover the borrowers in event of non-payment of principal, accrued interest, and other fees, and the loan is expected to be fully paid by September 2019.
As part of the agreements of the Climate Transaction and Interiors Divestiture, the Company continues to provide lease guarantees to divested Climate and Interiors entities. As of December 31,
2018
, the Company has approximately
$5 million
and
$2 million
outstanding guarantees respectively, related to divested Climate and Interiors entities. These guarantees will generally cease upon expiration of current lease agreements.
Operating Leases
As of December 31,
2018
, the Company had the following minimum rental commitments under non-cancelable operating leases:
2019
-
$37 million
;
2020
-
$30 million
;
2021
-
$23 million
;
2022
-
$19 million
;
2023
-
$18 million
; thereafter -
$59 million
. Rent expense was approximately
$39 million
,
$33 million
, and
$35 million
for the years ended December 31,
2018
,
2017
and 2016, respectively.
Other Contingent Matters
Various legal actions, governmental investigations and proceedings and claims are pending or may be instituted or asserted in the future against the Company, including those arising out of alleged defects in the Company’s products; governmental regulations relating to safety; employment-related matters; customer, supplier and other contractual relationships; intellectual property rights; product warranties; product recalls; and environmental matters. Some of the foregoing matters may involve compensatory, punitive or antitrust or other treble damage claims in very large amounts, or demands for recall campaigns, environmental remediation programs, sanctions, or other relief which, if granted, would require very large expenditures. The Company enters into agreements that contain indemnification provisions in the normal course of business for which the risks are considered nominal and impracticable to estimate.
Contingencies are subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Reserves have been established by the Company for matters discussed in the immediately foregoing paragraph where losses are deemed probable and reasonably estimable. It is possible, however, that some of the matters discussed in the foregoing paragraph could be decided unfavorably to the Company and could require the Company to pay damages or make other expenditures in amounts, or a range of amounts, that cannot be estimated as of December 31, 2018 and that are in excess of established reserves. The Company does not reasonably expect, except as otherwise described herein, based on its analysis, that any adverse outcome from such matters would have a material effect on the Company’s financial condition, results of operations or cash flows, although such an outcome is possible.
NOTE 22. Revenue Recognition
Disaggregated revenue by geographical market and product lines is as follows:
|
|
|
|
|
|
2018
|
|
(Dollars in Millions)
|
Geographical Markets (a)
|
|
Europe
|
$
|
981
|
|
Americas
|
800
|
|
China Domestic
|
405
|
|
China Export
|
309
|
|
Other Asia-Pacific
|
678
|
|
Eliminations
|
(189
|
)
|
|
$
|
2,984
|
|
(a) Company sales based on geographic region where sale originates and not where customer is located.
|
|
|
|
|
|
|
2018
|
|
(Dollars in Millions)
|
Product Lines
|
|
Instrument clusters
|
$
|
1,209
|
|
Audio and infotainment
|
772
|
|
Information displays
|
509
|
|
Climate controls
|
122
|
|
Body and security
|
110
|
|
Telematics
|
68
|
|
Other (includes HUD)
|
194
|
|
|
$
|
2,984
|
|
The Company has no material contract assets, contract liabilities or capitalized contract acquisition costs as of December 31, 2018.
NOTE 23. Segment Information
Financial results for the Company's reportable segment have been prepared using a management approach, which is consistent with the basis and manner in which financial information is evaluated by the Company's chief operating decision maker in allocating resources and in assessing performance. The Company’s chief operating decision maker, the Chief Executive Officer, evaluates the performance of the Company’s segment primarily based on net sales, before elimination of inter-company shipments, Adjusted EBITDA (a non-GAAP financial measure, as defined below) and operating assets. As the Company has one reportable segment, total assets, depreciation, amortization and capital expenditures are equal to consolidated results.
The accounting policies for the reportable segments are the same as those described in the Note 2, "Summary of Significant Accounting Policies” to the Company’s consolidated financial statements.
The Company’s current reportable segment is Electronics. The Company's Electronics segment provides vehicle cockpit electronics products to customers, including instrument clusters, information displays, infotainment systems, audio systems, telematics solutions and head-up displays. Prior to 2017, the Company also had Other operations consisting primarily of South Africa and South America climate operations substantially exited during the fourth quarter of 2016.
Key financial measures reviewed by the Company’s chief operating decision maker are as follows.
Segment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
(Dollars in Millions)
|
Electronics
|
$
|
2,984
|
|
|
$
|
3,146
|
|
|
$
|
3,107
|
|
Other
|
—
|
|
|
—
|
|
|
54
|
|
Total consolidated sales
|
$
|
2,984
|
|
|
$
|
3,146
|
|
|
$
|
3,161
|
|
Segment Adjusted EBITDA
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, equity in net income of non-consolidated affiliates, loss on divestiture, provision for income taxes, discontinued operations, net income attributable to non-controlling interests, non-cash stock-based compensation expense, and other gains and losses not reflective of the Company's ongoing operations. The Company has changed the presentation of the reconciliation of Adjusted EBITDA to Net income attributable to Visteon Corporation, due to the adoption of ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost."
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. Not all companies use identical calculations and, accordingly, the Company's presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA is not a recognized term under GAAP 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) the Company's credit agreements use measures similar to Adjusted EBITDA to measure compliance with certain covenants.
Segment Adjusted EBITDA for the years ended December 31,
2018
,
2017
and
2016
is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
(Dollars in Millions)
|
Electronics
|
$
|
330
|
|
|
$
|
370
|
|
|
$
|
346
|
|
Other
|
—
|
|
|
—
|
|
|
(9
|
)
|
Adjusted EBITDA
|
$
|
330
|
|
|
$
|
370
|
|
|
$
|
337
|
|
The reconciliation of Adjusted EBITDA to net income attributable to Visteon for the years ended December 31,
2018
,
2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2018
|
|
2017
|
|
2016
|
|
(Dollars in Millions)
|
Net income attributable to Visteon Corporation
|
$
|
164
|
|
|
176
|
|
|
$
|
75
|
|
Depreciation and amortization
|
91
|
|
|
87
|
|
|
84
|
|
Restructuring expense, net
|
29
|
|
|
14
|
|
|
49
|
|
Interest expense, net
|
7
|
|
|
16
|
|
|
12
|
|
Equity in net income of non-consolidated affiliates
|
(13
|
)
|
|
(7
|
)
|
|
(2
|
)
|
Loss on divestiture
|
—
|
|
|
33
|
|
|
—
|
|
Provision for income taxes
|
43
|
|
|
48
|
|
|
30
|
|
Net income (loss) from discontinued operations, net of tax
|
(1
|
)
|
|
(17
|
)
|
|
40
|
|
Net income attributable to non-controlling interests
|
10
|
|
|
16
|
|
|
16
|
|
Non-cash, stock-based compensation expense
|
8
|
|
|
12
|
|
|
8
|
|
Other
|
(8
|
)
|
|
(8
|
)
|
|
25
|
|
Adjusted EBITDA
|
$
|
330
|
|
|
$
|
370
|
|
|
$
|
337
|
|
Financial Information by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
(a)
|
|
Property and Equipment, net
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
(Dollars in Millions)
|
United States
|
$
|
654
|
|
|
$
|
776
|
|
|
$
|
822
|
|
|
$
|
14
|
|
|
$
|
11
|
|
Mexico
|
67
|
|
|
70
|
|
|
72
|
|
|
60
|
|
|
54
|
|
Total North America
|
721
|
|
|
846
|
|
|
894
|
|
|
74
|
|
|
65
|
|
Portugal
|
563
|
|
|
508
|
|
|
443
|
|
|
84
|
|
|
75
|
|
Slovakia
|
235
|
|
|
294
|
|
|
288
|
|
|
38
|
|
|
36
|
|
Tunisia
|
96
|
|
|
109
|
|
|
151
|
|
|
7
|
|
|
10
|
|
France
|
70
|
|
|
84
|
|
|
113
|
|
|
7
|
|
|
7
|
|
Other Europe
|
20
|
|
|
20
|
|
|
49
|
|
|
10
|
|
|
10
|
|
Germany
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
4
|
|
Intra-region eliminations
|
(3
|
)
|
|
(11
|
)
|
|
(31
|
)
|
|
—
|
|
|
—
|
|
Total Europe
|
981
|
|
|
1,004
|
|
|
1,013
|
|
|
152
|
|
|
142
|
|
China Domestic
|
405
|
|
|
381
|
|
|
315
|
|
|
—
|
|
|
—
|
|
China Export
|
309
|
|
|
363
|
|
|
389
|
|
|
—
|
|
|
—
|
|
Total China
|
714
|
|
|
744
|
|
|
704
|
|
|
86
|
|
|
86
|
|
Japan
|
494
|
|
|
495
|
|
|
516
|
|
|
20
|
|
|
21
|
|
India
|
114
|
|
|
92
|
|
|
66
|
|
|
30
|
|
|
29
|
|
Thailand
|
69
|
|
|
81
|
|
|
82
|
|
|
10
|
|
|
10
|
|
Korea
|
2
|
|
|
12
|
|
|
18
|
|
|
—
|
|
|
—
|
|
Intra-region eliminations
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Other Asia-Pacific
|
678
|
|
|
679
|
|
|
682
|
|
|
60
|
|
|
60
|
|
South America
|
79
|
|
|
68
|
|
|
91
|
|
|
25
|
|
|
24
|
|
Inter-region eliminations
|
(189
|
)
|
|
(195
|
)
|
|
(223
|
)
|
|
—
|
|
|
—
|
|
|
$
|
2,984
|
|
|
$
|
3,146
|
|
|
$
|
3,161
|
|
|
$
|
397
|
|
|
$
|
377
|
|
(a) Company sales based on geographic region where sale originates and not where customer is located.
|
NOTE 24. Summary Quarterly Financial Data (Unaudited)
The following table presents summary quarterly financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
(Dollars in Millions, Except Per Share Amounts)
|
Sales
|
$
|
814
|
|
|
$
|
758
|
|
|
$
|
681
|
|
|
$
|
731
|
|
|
$
|
810
|
|
|
$
|
774
|
|
|
$
|
765
|
|
|
$
|
797
|
|
Gross margin
|
129
|
|
|
104
|
|
|
82
|
|
|
96
|
|
|
129
|
|
|
111
|
|
|
114
|
|
|
137
|
|
Income from continuing operations before income taxes
|
88
|
|
|
49
|
|
|
32
|
|
|
47
|
|
|
75
|
|
|
58
|
|
|
55
|
|
|
35
|
|
Net income from continuing operations
|
67
|
|
|
37
|
|
|
23
|
|
|
46
|
|
|
59
|
|
|
48
|
|
|
47
|
|
|
21
|
|
Net income
|
69
|
|
|
36
|
|
|
24
|
|
|
45
|
|
|
67
|
|
|
48
|
|
|
47
|
|
|
30
|
|
Net income attributable to Visteon Corporation
|
$
|
65
|
|
|
$
|
35
|
|
|
$
|
21
|
|
|
$
|
43
|
|
|
$
|
63
|
|
|
$
|
45
|
|
|
$
|
43
|
|
|
$
|
25
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to Visteon Corporation
|
$
|
2.14
|
|
|
$
|
1.19
|
|
|
$
|
0.71
|
|
|
$
|
1.50
|
|
|
$
|
1.94
|
|
|
$
|
1.43
|
|
|
$
|
1.38
|
|
|
$
|
0.81
|
|
Diluted earnings per share attributable to Visteon Corporation
|
$
|
2.11
|
|
|
$
|
1.17
|
|
|
$
|
0.71
|
|
|
$
|
1.49
|
|
|
$
|
1.91
|
|
|
$
|
1.41
|
|
|
$
|
1.35
|
|
|
$
|
0.79
|
|
The fourth quarter ended December 31, 2018, net income from continuing operations, net income, and net income (loss) attributable to Visteon Corporation includes expense of approximately
$8 million
,
$11 million
and
$11 million
, respectively, for corrections of judicial deposits related to former employees at a closed plant in Brazil.
On December 1, 2017, the Company completed an asset sale related to an Electronics facility in France to a third party (the "France Transaction"). In connection with the France Transaction, the Company recorded pre-tax losses of approximately
$33 million
including a cash contribution of
$13 million
, long-lived asset impairment charges
$13 million
and other working capital and transaction related impacts of
$7 million
.