NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies
Basis of Presentation: Visteon Corporation (the "Company" or "Visteon") financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. 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 consolidated subsidiaries. Investments in affiliates over 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 investments are measured at cost, less impairment, with changes in fair value recognized in net income.
The Company determines whether the joint venture 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 U.S. 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. Events and changes in circumstances arising after December 31, 2021, including those resulting from the impacts of COVID-19 and related subsequent semiconductor supply shortage, as further described in Note 19, "Commitments and Contingencies", will be reflected in management's estimates for future periods.
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. 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 increased net income by $2 million and decreased net income by $2 million for the year ended December 31, 2021 and 2020, respectively. Net transaction gains and losses, inclusive of amounts associated with discontinued operations, decreased net income by $3 million for the years ended December 31, 2019.
Revenue Recognition: The Company generates revenue from the production of automotive vehicle cockpit electronics parts sold to Original Equipment Manufacturers ("OEMs"), 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 and do not include significant financing components. 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, 2021, 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 adjustments 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. Some of these price adjustments are non-routine in nature and 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 consideration at the most likely amount to which the Company expects to be entitled based on historical experience and input from customer negotiations. The Company records such estimates within Net sales and Accounts receivable, net, within the Consolidated Statements of Operations and Consolidated Balance Sheets, respectively. The Company adjusts its pricing reserves at the earlier of when the most likely amount of consideration changes or when the consideration becomes fixed. In 2021, revenue recognized related to performance obligations satisfied in previous periods represented less than 1% of consolidated net sales.
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.
Restructuring Expense: Restructuring expense includes 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 Sales: Repair and maintenance costs, pre-production costs, and research and development expenses are expensed as incurred. Pre-production costs expensed represent engineering and development costs that are not contractually guaranteed for reimbursement by the customer. 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 $191 million, $201 million, and $300 million in 2021, 2020 and 2019, respectively, which includes recoveries from customers of $134 million, $134 million and $140 million.
Net Earnings (Loss) Per Share Attributable to Visteon: Basic earnings (loss) per share is calculated by dividing net income (loss) attributable to Visteon by the average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to Visteon 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 an original maturity of three months or less, including short-term time deposits, commercial paper, repurchase agreements, and money market funds to be cash and cash equivalents. As of December 31, 2021 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 $1 million related to cash collateral for other corporate purposes as of December 31, 2021. As of December 31, 2020, restricted cash includes $3 million related to a Letter of Credit Facility and $1 million related to cash collateral for other corporate purposes.
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 receives bank notes from certain customers in China to settle trade accounts receivable. The collection on 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. Bank notes are sold with recourse but qualify as a sale as all rights to the notes have passed to the financial institution.
Allowance for Doubtful Accounts: The Company establishes an allowance for doubtful accounts for accounts receivable based on the current expected credit loss impairment model (“CECL”). The Company elected to apply a historical loss rate based on historic write-offs by region to aging categories. The historical loss rate will be adjusted for current conditions and reasonable and supportable forecasts of future losses, as necessary. The Company may also record a specific reserve for individual accounts when the Company becomes aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the customer's operating results or financial position.
The allowance for doubtful accounts related to accounts receivable and related activity are summarized below:
| | | | | | | | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 | | 2019 |
Balance at beginning of year | $ | 4 | | | $ | 10 | | | $ | 6 | |
Provision | — | | | 1 | | | 6 | |
Recoveries | — | | | (3) | | | (1) | |
Write-offs charged against the allowance | — | | | (4) | | | (1) | |
Balance at end of year | $ | 4 | | | $ | 4 | | | $ | 10 | |
Provision for estimated uncollectible accounts receivable are included in Selling, general and administrative expenses in the Company's Consolidated Statements of Operations.
Inventories: Inventories are stated at the lower of cost, determined on a first-in, first-out (“FIFO”) basis, or net realizable value. 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 owned either by the Company or its customers. Company owned tooling is capitalized and depreciated over the shorter of the expected useful life of the assets or the term of the supply arrangement, generally not exceeding six years. The Company had receivables of $21 million and $26 million as of December 31, 2021 and 2020, respectively, related to product tools, 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, in which case costs are capitalized as 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.
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. Fair value is determined using appraisals, management estimates or discounted cash flow calculations. For further detail on the Company’s impairments see Note 4, "Restructuring and Impairments."
Leases: The Company determines if an arrangement is a lease at contract inception. Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company estimates the incremental borrowing rate to discount the lease payments based on information available at lease commencement. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Lease expense is recognized on a straight-line basis over the lease term. The Company has lease agreements containing lease and non-lease components which are accounted for as a single lease component.
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 using a quantitative assessment and concluded that no impairment exists as of December 31, 2021.
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."
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 19, "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 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 reports value added taxes collected from customers and remitted to government authorities, on a net basis within Cost of sales.
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.
Recently Adopted Accounting Pronouncements
Reference Rate Reform - In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting." Subsequently, in 2021, the FASB issued ASU 2021-01, "Reference Rate Reform", to further clarify and expand certain aspects of ASC 848. ASU 2020-04 and ASU 2021-01 provide optional expedients and exceptions related to certain contract modifications and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another rate that is expected to be discontinued. The guidance was effective upon issuance and is generally applied to applicable contract modifications and hedge relationships prospectively through December 31, 2022. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.
Government Assistance - In November 2021, the FASB issued ASU 2021-10, "Government Assistance (Topic 832) - Disclosures by Business Entities about Government Assistance." to increase the transparency of government assistance including the disclosure of the types of assistance, an entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements. The amendments in this update are effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. The Company is current evaluating the impact of the adoption of Topic 848.
NOTE 2. Discontinued Operations
During 2014 and 2015, the Company completed its divestiture of 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.
There were no discontinued operations during 2021 or 2020. During 2019 the Company recognized approximately $2 million of cost of sales for corrections of judicial deposits related to former employees at a closed plant in Brazil and recorded a $1 million release of restructuring expense due to a change in estimate.
NOTE 3. Non-Consolidated Affiliates
Non-Consolidated Affiliate Transactions
Visteon and Yangfeng Automotive Trim Systems Co. Ltd. ("YF") each own 50% of a joint venture under the name of Yanfeng Visteon Investment Co., Ltd. ("YFVIC"). In October 2014, YFVIC 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 YFVIC Transaction"). The purchase by YFVIC was financed through a shareholder loan from YF and external borrowings, guaranteed by Visteon, which were paid in 2019.
The Company has committed to make investments totaling $15 million in two entities principally focused on the automotive sector pursuant to limited partnership agreements. As a limited partner in each entity, the Company will periodically make capital contributions toward this total commitment amount. Through December 31, 2021, the Company had contributed approximately $9 million to these entities. These investments are classified as equity method investments.
Investments in Affiliates
The Company recorded equity in the net income of non-consolidated affiliates of $6 million for each of the years ended December 31, 2021, 2020 and 2019, 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, 2021, the Company determined that no such indicators were present.
Variable Interest Entities
The Company determined that 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 non-consolidated equity method affiliates is provided below:
| | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 |
YFVIC (50%) | $ | 36 | | | $ | 50 | |
Limited partnerships | 10 | | | 4 | |
Others | 8 | | | 6 | |
Total investments in non-consolidated affiliates | $ | 54 | | | $ | 60 | |
A summary of transactions with affiliates is shown below:
| | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 |
Billings to affiliates (a) | $ | 76 | | | $ | 95 | |
Purchases from affiliates (b) | $ | 61 | | | $ | 58 | |
(a) Primarily relates to parts production and engineering reimbursement |
(b) Primarily relates to engineering services as well as selling, general and administrative expenses |
A summary of the Company's investments in YFVIC is provided below:
| | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 |
Payables due to YFVIC | $ | 20 | | | $ | 9 | |
Exposure to loss in YFVIC | | | |
Investment in YFVIC | $ | 36 | | | $ | 50 | |
Receivables due from YFVIC | 48 | | | 53 | |
Subordinated loan receivable | — | | | 6 | |
Maximum exposure to loss in YFVIC | $ | 84 | | | $ | 109 | |
NOTE 4. Restructuring and Impairments
Given the economically-sensitive and highly competitive nature of the automotive electronics industry, the Company continues to closely monitor current market factors and industry trends, including potential impacts related to COVID-19, taking action as necessary which may include 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.
Current restructuring actions include the following:
•During 2021 the Company approved various restructuring programs, primarily impacting Europe and Brazil in order to improve efficiencies and rationalize the Company's footprint. Accordingly, the Company recorded $4 million of restructuring expense related to these actions. As of December 31, 2021, $3 million remains accrued related to these programs.
•During 2020 the Company approved various restructuring programs impacting engineering, administrative and manufacturing functions to improve efficiency and rationalize the Company’s footprint. The Company recorded $1 million and $76 million of net restructuring expenses for cash severance, retention, and termination costs for the years ended December 31, 2021 and December 31, 2020, respectively related to these programs. As of December 31, 2021, $12 million remains accrued related to these programs.
•During 2019, the Company approved a restructuring program impacting two European manufacturing facilities due to the end of certain product lines. During the year ended December 31, 2019, the Company recorded net restructuring expense of $2 million related to this program
•During 2018, the Company approved a restructuring program impacting legacy employees at a South America facility due to the wind-down of certain products. As of December 31, 2021, $1 million remains accrued related to this program.
As of December 31, 2021, the Company retained restructuring reserves as part of the Company's divestiture of the majority of its Interiors Divestiture of $2 million associated with completed programs for the fundamental reorganization of operations at facilities in Brazil and France.
Restructuring Reserves
Restructuring reserve balances of $16 million and $2 million as of December 31, 2021 are classified as Other Current Liabilities and Other non-current liabilities, respectively. Restructuring reserve balances of $39 million and $10 million as of December 31, 2020 are classified as Other current liabilities and Other non-current liabilities, respectively. The Company anticipates that the activities associated with the current restructuring reserve balance will be substantially complete by end of 2022.
The Company’s consolidated restructuring reserves and related activity are summarized below, including amounts associated with discontinued operations.
| | | | | |
(In millions) | |
December 31, 2018 | $ | 23 | |
Expense | $ | 5 | |
Change in estimates | $ | (2) | |
Utilization | $ | (15) | |
Foreign currency | $ | (1) | |
December 31, 2019 | $ | 10 | |
Expense | $ | 67 | |
Change in estimates | $ | 9 | |
Utilization | $ | (39) | |
Foreign currency | $ | 2 | |
December 31, 2020 | $ | 49 | |
Expense | $ | 4 | |
Change in estimates | $ | 1 | |
Utilization | $ | (34) | |
Foreign currency and other | $ | (2) | |
December 31, 2021 | $ | 18 | |
Impairment of Long-lived Assets
The Company evaluates its long-lived assets for impairment whenever events or circumstances indicate the value of these long-lived asset groups are not recoverable. During the fourth quarter of 2021, the Company concluded impairment triggers had occurred for a long-lived asset group in Brazil due to rising costs and deteriorating business conditions. The Company determined the cash flows related to certain long-lived assets were not sufficient to recover the carrying value. As such, the Company estimated the fair values of this asset group at December 31, 2021 and compared the fair value to its net carrying value. As the net carrying value of the long-lived asset group exceeded the fair value, the Company recorded a non-cash impairment charge of $9 million to write-down property and equipment to its fair value as of December 31, 2021.
NOTE 5. Inventories
Inventories, net consist of the following components:
| | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 |
Raw materials | $ | 206 | | | $ | 114 | |
Work-in-process | 29 | | | 25 | |
Finished products | 27 | | | 38 | |
| $ | 262 | | | $ | 177 | |
NOTE 6. Other Assets
Other current assets are comprised of the following components:
| | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 |
Joint venture receivables | $ | 48 | | | $ | 53 | |
Recoverable taxes | 40 | | | 52 | |
Contractually reimbursable engineering costs | 34 | | | 31 | |
Prepaid assets and deposits | 21 | | | 18 | |
Royalty agreements | 4 | | | 7 | |
China bank notes | 3 | | | 15 | |
Derivative financial instruments | 2 | | | — | |
Other | 6 | | | 4 | |
| $ | 158 | | | $ | 180 | |
The Company receives bank notes from certain customers in China to settle trade accounts receivable. 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 redeemed $149 million and $163 million of China bank notes during the years ended December 31, 2021 and 2020, respectively. Remaining amounts outstanding at third-party institutions relate to sold bank notes will mature by June 30, 2022.
Other non-current assets are comprised of the following components:
| | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 |
Deferred tax assets | $ | 47 | | | $ | 55 | |
Contractually reimbursable engineering costs | 34 | | | 31 | |
Recoverable taxes | 9 | | | 21 | |
Pension assets | 7 | | | 2 | |
Royalty agreements | 2 | | | 8 | |
Joint venture note receivables | — | | | 7 | |
Other | 12 | | | 11 | |
| $ | 111 | | | $ | 135 | |
Current and non-current contractually reimbursable engineering costs 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 $34 million in 2022, $24 million in 2023, $8 million in 2024, $2 million in 2025 and less than $1 million in 2026 and beyond.
NOTE 7. Property and Equipment
Property and equipment, net consists of the following:
| | | | | | | | | | | | | | | | | |
| | | December 31, |
(In millions) | Estimated Useful Life (years) | | 2021 | | 2020 |
Land | | | $ | 10 | | | $ | 12 | |
Buildings and improvements | 40 | | 91 | | | 96 | |
Machinery, equipment and other | 3-15 | | 716 | | | 706 | |
Product tooling | 3-5 | | 66 | | | 62 | |
Construction in progress | | | 47 | | | 44 | |
Total property and equipment | | | 930 | | | 920 | |
Accumulated depreciation and amortization | | | (542) | | | (484) | |
Property and equipment, net | | | $ | 388 | | | $ | 436 | |
Depreciation and product tooling amortization expenses are summarized as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 | | 2019 |
Depreciation | $ | 88 | | | $ | 83 | | | $ | 78 | |
Amortization | 6 | | | 7 | | | 6 | |
| $ | 94 | | | $ | 90 | | | $ | 84 | |
The net book value of capitalized internal use software costs was approximately $12 million and $18 million as of December 31, 2021 and 2020, respectively. Related amortization expense was approximately $8 million, $9 million and $9 million for the years ended 2021, 2020 and 2019, respectively. Amortization expense of approximately $5 million, $3 million, $2 million, $1 million, and $1 million is expected for the annual periods ended December 31, 2022, 2023, 2024, 2025, and 2026 respectively.
NOTE 8. Intangible Assets
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
(In millions) | Estimated Useful Life | Estimated Weighted Average Useful Life (years) | Gross Intangibles | | Accumulated Amortization | | Net Intangibles | | Gross Intangibles | | Accumulated Amortization | | Net Intangibles |
Definite-Lived: | | | | | | | | | | | | | |
Developed technology | 10-12 years | 10 | $ | 41 | | | $ | (39) | | | $ | 2 | | | $ | 41 | | | $ | (38) | | | $ | 3 | |
Customer related | 7-12 years | 10 | 96 | | | (75) | | | 21 | | | 95 | | | (64) | | | 31 | |
Capitalized software development | 3-5 years | 5 | 48 | | | (10) | | | 38 | | | 44 | | | (7) | | | 37 | |
Other | | 32 | 15 | | | (8) | | | 7 | | | 14 | | | (7) | | | 7 | |
Subtotal | | | 200 | | | (132) | | | 68 | | | 194 | | | (116) | | | 78 | |
Indefinite-Lived: | | | | | | | | | | | | | |
Goodwill | | | 50 | | | — | | | 50 | | | 49 | | | — | | | 49 | |
Total | | | $ | 250 | | | $ | (132) | | | $ | 118 | | | $ | 243 | | | $ | (116) | | | $ | 127 | |
Capitalized software development consists of software development costs intended for integration into customer products.
The Company recorded approximately $14 million, $14 million, and $16 million of amortization expense related to definite-lived intangible assets for the years ended December 31, 2021, 2020, and 2019, respectively. The Company currently estimates annual amortization expense to be $16 million for 2022, $15 million 2023, $9 million for both 2024 and 2025, and $7 million for 2026.
NOTE 9. Leases
The Company has operating leases primarily for corporate offices, technical and engineering centers, customer centers, vehicles, and certain equipment. As of December 31, 2021 and 2020 assets and related accumulated depreciation recorded under finance leasing arrangements were not material.
Certain of the Company's lease agreements include rental payments adjusted periodically primarily for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company subleases certain real estate to third parties, which primarily consists of operating leases in the United States, Germany, and Brazil.
For the years ended December 31, 2021 and 2020, the weighted average remaining lease term and discount rate were 6 years and 4.01% and 6 years and 4.1%, respectively.
The components of lease expense are as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 |
Operating lease expense (includes immaterial variable lease costs) | $ | (42) | | | $ | (42) | |
Short-term lease expense | (1) | | | (1) | |
Sublease income | 5 | | | 5 | |
Total lease expense | $ | (38) | | | $ | (38) | |
Other information related to leases is as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 |
Cash flows from operating leases | $ | 37 | | | $ | 40 | |
Right-of-use assets obtained in exchange for lease obligations | $ | 6 | | | $ | 38 | |
Future minimum lease payments under non-cancellable leases is as follows:
| | | | | |
(In millions) | |
2022 | $ | 33 | |
2023 | 30 | |
2024 | 28 | |
2025 | 24 | |
2026 | 21 | |
2027 and thereafter | 27 | |
Total future minimum lease payments | 163 | |
Less imputed interest | (18) | |
Total lease liabilities | $ | 145 | |
| |
NOTE 10. Other Liabilities
Other current liabilities are summarized as follows:
| | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 |
Deferred income | $ | 69 | | | $ | 46 | |
Product warranty and recall accruals | 30 | | | 52 | |
Non-income taxes payable | 26 | | | 15 | |
Joint venture payables | 20 | | | 9 | |
Restructuring reserves | 16 | | | 39 | |
Royalty reserves | 12 | | | 13 | |
Income taxes payable | 8 | | | 5 | |
Other | 37 | | | 30 | |
| $ | 218 | | | $ | 209 | |
Other non-current liabilities are summarized as follows:
| | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 |
Product warranty and recall accruals | $ | 20 | | | $ | 12 | |
Deferred income | 15 | | | 7 | |
Derivative financial instruments | 13 | | | 38 | |
Income tax reserves | 8 | | | 6 | |
Royalty agreements | 5 | | | 6 | |
Restructuring reserves | 2 | | | 10 | |
Other | 12 | | | 13 | |
| $ | 75 | | | $ | 92 | |
NOTE 11. Debt
The Company’s short and long-term debt consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Average Interest Rate | | Carrying Value |
(In millions) | 2021 | | 2020 | | 2021 | | 2020 |
Short-Term Debt: | | | | | | | |
| | | | | | | |
Short-term borrowings | 8.1% | | —% | | $ | 4 | | | $ | — | |
| | | | | | | |
Long-Term Debt: | | | | | | | |
Term facility, net | 1.9% | | 1.9% | | $ | 349 | | | $ | 349 | |
Short-Term Debt
Short-term borrowings are related to affiliate borrowings and are primarily payable in Brazilian real and the Chinese renminbi. As of December 31, 2021, the Company has $4 million short-term borrowing and there is $168 million available capacity under affiliate credit facilities.
Long-Term Debt
As of December 31, 2021, the Company has an amended credit agreement ("Credit Agreement") which includes a $350 million Term Facility maturing March 24, 2024 and a $400 million Revolving Credit Facility which matures the earlier of (i) December 24, 2024, (ii) 90 days prior to the scheduled maturity of the Term Facility, or (iii) the date of the termination of the Company's credit agreement.
On March 19, 2020, the Company borrowed the entire amount of revolving loans available under the Revolving Credit Facility to increase its cash position and maximize its flexibility in response to unprecedented uncertainty related to the impact of COVID-19. On September 24, 2020, the Company fully repaid the amount borrowed under the Revolving Credit Facility following stronger than expected industry recovery and improved Company performance in the third quarter of 2020. The Company has no outstanding borrowings on the Revolving Credit Facility as of December 31, 2021 and 2020.
Interest on the Term Facility loan accrue at a rate equal to a LIBOR-based rate plus an applicable margin of 1.75% per annum. Loans under the Company's Revolving Credit Facility accrue interest at a rate equal to a LIBOR-based rate plus an applicable margin of between 1.00% - 2.00%, as determined by the Company's total gross leverage ratio.
The Credit Agreement requires compliance 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 3.50:1.00. During any period when the Company’s corporate and family ratings meet investment grade ratings, certain of the negative covenants are suspended. As of December 31, 2021, the Company was in compliance with all its debt covenants.
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 borrowings. Any amount of the facility utilized for letters of credit or swing line loans outstanding will reduce the amount available under the existing Revolving Credit Facility. The Company may request increases in the limits under the Credit Agreement and may request the addition of one or more term loan facilities. 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.
All obligations under the Credit Agreement and obligations with respect to certain cash management services and swap transaction agreements between the Company and its lenders are unconditionally guaranteed by certain of the Company’s subsidiaries. Under the terms of the Credit Agreement, any amounts outstanding are secured by a first-priority perfected lien on substantially all property of the Company and the subsidiaries party to the security agreement, subject to certain limitations.
Other
The Company has a $5 million letter of credit facility, whereby the Company is required to maintain a cash collateral account equal to 103% (110% for non-U.S. dollar denominated letters) of the aggregate stated amount of issued letters of credit and must reimburse any amounts drawn under issued letters of credit. The Company had $2 million of outstanding letters of credit issued under this facility secured by restricted cash, as of December 31, 2021. Additionally, the Company had $10 million of locally issued letters of credit with less than $1 million of collateral as of December 31, 2021 to support various tax appeals, customs arrangements, and other obligations at its local affiliates.
NOTE 12. 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, |
(In millions, except percentages) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
Costs Recognized in Income: | | | | | | | | | | | |
Pension service cost: | | | | | | | | | | | |
Service cost | $ | — | | | $ | — | | | $ | — | | | $ | (1) | | | $ | (2) | | | $ | (2) | |
Pension financing benefit (cost): | | | | | | | | | | | |
Interest cost | (17) | | | (24) | | | (30) | | | (5) | | | (7) | | | (8) | |
Expected return on plan assets | 37 | | | 40 | | | 40 | | | 8 | | | 8 | | | 10 | |
Amortization of losses and other | (3) | | | (1) | | | — | | | (2) | | | (2) | | | (1) | |
Settlements and curtailments | — | | | (5) | | | — | | | — | | | — | | | — | |
Restructuring related pension cost: | | | | | | | | | | | |
Special termination benefits (a) | — | | | (3) | | | — | | | (1) | | | (4) | | | (1) | |
Net pension income (expense) | $ | 17 | | | $ | 7 | | | $ | 10 | | | $ | (1) | | | $ | (7) | | | $ | (2) | |
Weighted Average Assumptions: | | | | | | | | | | |
Discount rate | 2.60 | % | | 3.34 | % | | 4.33 | % | | 1.78 | % | | 2.39 | % | | 3.34 | % |
Compensation increase | N/A | | N/A | | N/A | | 2.14 | % | | 3.16 | % | | 3.51 | % |
Long-term return on assets | 6.15 | % | | 6.60 | % | | 6.78 | % | | 3.30 | % | | 3.98 | % | | 4.73 | % |
(a) Primarily related to restructuring actions |
The Company's total accumulated benefit obligations for all defined benefit plans was $1,121 million and $1,199 million as of
December 31, 2021 and 2020, 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, |
(In millions) | 2021 | | 2020 |
Accumulated benefit obligation | $ | 892 | | | $ | 1,177 | |
Projected benefit obligation | $ | 895 | | | $ | 1,190 | |
Fair value of plan assets | $ | 711 | | | $ | 886 | |
Assumptions used by the Company in determining its defined benefit pension obligations as of December 31, 2021 and 2020 are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | Year Ended December 31, | | Year Ended December 31, |
Weighted Average Assumptions | | 2021 | | 2020 | | 2021 | | 2020 |
Discount rate | | 2.93 | % | | 2.60 | % | | 2.31 | % | | 1.78 | % |
Rate of increase in compensation | | N/A | | N/A | | 2.30 | % | | 2.14 | % |
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, |
(In millions) | 2021 | | 2020 | | 2021 | | 2020 |
Change in Benefit Obligation: | | | | | | | |
Benefit obligation — beginning | $ | 891 | | | $ | 838 | | | $ | 322 | | | $ | 300 | |
Service cost | — | | | — | | | 1 | | | 2 | |
Interest cost | 17 | | | 24 | | | 5 | | | 7 | |
Actuarial loss (gain) | (40) | | | 97 | | | (10) | | | 15 | |
Settlements | — | | | (37) | | | (4) | | | (4) | |
Special termination benefits | — | | | 3 | | | 1 | | | 4 | |
Foreign exchange translation | — | | | — | | | (9) | | | 8 | |
Benefits paid and other | (39) | | | (34) | | | (7) | | | (10) | |
Benefit obligation — ending | $ | 829 | | | $ | 891 | | | $ | 299 | | | $ | 322 | |
Change in Plan Assets: | | | | | | | |
Plan assets — beginning | $ | 659 | | | $ | 630 | | | $ | 250 | | | $ | 232 | |
Actual return on plan assets | 61 | | | 82 | | | 16 | | | 21 | |
Sponsor contributions | 12 | | | 18 | | | 8 | | | 6 | |
Settlements | — | | | (37) | | | (4) | | | (2) | |
Foreign exchange translation | — | | | — | | | (5) | | | 3 | |
Benefits paid and other | (39) | | | (34) | | | (7) | | | (10) | |
Plan assets — ending | $ | 693 | | | $ | 659 | | | $ | 258 | | | $ | 250 | |
Total funded status at end of period | $ | (136) | | | $ | (232) | | | $ | (41) | | | $ | (72) | |
Balance Sheet Classification: | | | | | | | |
Other non-current assets | — | | | $ | — | | | $ | 7 | | | $ | 2 | |
Accrued employee liabilities | — | | | — | | | (1) | | | (1) | |
Employee benefits | (136) | | | (232) | | | (47) | | | (73) | |
| | | | | | | |
Accumulated other comprehensive loss: | | | | | | | |
Actuarial loss | 59 | | | 127 | | | 32 | | | 52 | |
Tax effects/other | $ | — | | | — | | | (10) | | | (14) | |
| $ | 59 | | | $ | 127 | | | $ | 22 | | | $ | 38 | |
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, 2021 and 2020, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| Year Ended December 31, | | Year Ended December 31, |
(In millions) | 2021 | | 2020 | | 2021 | | 2020 |
Actuarial (gain) loss | $ | (65) | | | $ | 55 | | | $ | (18) | | | $ | 1 | |
Deferred taxes | — | | | — | | | 4 | | | — | |
Currency/other | — | | | — | | | — | | | 3 | |
Reclassification to net income | (3) | | | (1) | | | (2) | | | (2) | |
Settlements | — | | | (5) | | | — | | | — | |
| $ | (68) | | | $ | 49 | | | $ | (16) | | | $ | 2 | |
Actuarial loss for the year ended December 31, 2021 is primarily related to a decrease in discount rates partially offset by an increase in return on assets. 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.
During 2020 the Company transferred a portion of the benefit obligation related to its defined benefit U.S. pension plan to a third-party issuer. The transaction met the criteria for settlement accounting, and accordingly, the Company recognized a $5 million pension settlement charge.
Benefit payments, which reflect expected future service, are expected to be paid by the Company plans as follows:
| | | | | | | | | | | |
(In millions) | U.S. Plans | | Non-U.S. Plans |
2022 | $ | 38 | | | $ | 7 | |
2023 | 38 | | | 8 | |
2024 | 39 | | | 9 | |
2025 | 40 | | | 8 | |
2026 | 40 | | | 9 | |
Years 2027 - 2031 | 217 | | | 53 | |
During the year ended December 31, 2021, the Company contributed $12 million to its U.S. employee retirement pension plans and $8 million to its non-U.S. employee retirement pension plans. Contributions related to certain non-U.S. plans of approximately $2 million have been deferred until 2024 due to COVID-19 relief measures. Additionally, the Company expects to make contributions to its non-US defined benefit pension plans of $4 million during 2022.
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 long-term nature of these plan 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, 2021 and 2020 and target allocation for 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Target Allocation | | Percentage of Plan Assets |
| U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| 2022 | | 2022 | | 2021 | | 2020 | | 2021 | | 2020 |
Equity securities | 38 | % | | 34 | % | | 38 | % | | 41 | % | | 15 | % | | 29 | % |
Fixed income | 15 | % | | 43 | % | | 14 | % | | 15 | % | | 63 | % | | 51 | % |
Alternative strategies | 46 | % | | 14 | % | | 47 | % | | 39 | % | | 11 | % | | 12 | % |
Cash | 1 | % | | 3 | % | | 1 | % | | 5 | % | | 4 | % | | 2 | % |
Other | — | % | | 6 | % | | — | % | | — | % | | 7 | % | | 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 17, "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 0.8% to 8.75% to determine its pension and other benefit obligations as of December 31, 2021.
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. Matching contributions were suspended from May 1, 2020 to September 30, 2020 as a part of the cost saving actions in response to the COVID-19 pandemic. The expense related to all matching contributions was approximately $6 million in 2021, $5 million in 2020, and $8 million in 2019.
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 $1 million at December 31, 2021 and 2020, respectively.
NOTE 13. Stock-Based Compensation
The Visteon Corporation 2010 Incentive Plan (the “2010 Incentive Plan”) provided 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. At the Company’s annual meeting of shareholders in June 2020, the shareholders approved the Visteon Corporation 2020 Incentive Plan (the “2020 Incentive Plan”), replacing the 2010 Incentive Plan. Pursuant to the 2020 Incentive Plan, the Company may grant up to 1.5 million shares of common stock for RSA, RSUs, Stock Options, SARs, 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 a net settlement basis. 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 2020 Incentive Plan, which 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.
The total recognized and unrecognized stock-based compensation expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Unrecognized Stock-Based Compensation Expense |
(In millions) | 2021 | | 2020 | | 2019 | | December 31, 2021 |
Performance based share units | $ | 5 | | | $ | 6 | | | $ | 6 | | | $ | 8 | |
Restricted stock units | 12 | | | 10 | | | 9 | | | 11 | |
Stock options | 1 | | | 2 | | | 2 | | | — | |
Total stock-based compensation expense | $ | 18 | | | $ | 18 | | | $ | 17 | | | $ | 19 | |
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 period of three years which may range from 0% to 200% of the target award.
| | | | | | | | | | | |
A summary of PSU activity is provided below: | PSUs | | Weighted Average Grant Date Fair Value |
|
| (In thousands) | | |
Non-vested as of December 31, 2018 | 195 | | | $ | 110.42 | |
Granted | 71 | | | 111.98 | |
Vested | (73) | | | 89.74 | |
Forfeited | (23) | | | 118.87 | |
Non-vested as of December 31, 2019 | 170 | | | 118.77 | |
Granted | 94 | | | 84.20 | |
Vested | (66) | | | 116.35 | |
Forfeited | (18) | | | 100.51 | |
Non-vested as of December 31, 2020 | 180 | | | 106.48 | |
Granted | 55 | | | 148.71 | |
Vested | (52) | | | 131.48 | |
Forfeited | (15) | | | 112.01 | |
Non-vested as of December 31, 2021 | 168 | | | $ | 112.24 | |
The grant date fair value for PSUs was determined using the Monte Carlo valuation model. Unrecognized compensation expense as of December 31, 2021 for PSUs to be settled in shares of the Company's common stock was $8 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 less than $1 million for PSUs expected to be settled in cash during the years ended December 31, 2021 and 2020. Unrecognized compensation expense as of December 31, 2021 was less than $1 million for the non-vested portion of these awards and will be recognized over the remaining vesting period of approximately 1.6 years.
The Monte Carlo valuation model requires management to make various assumptions including the expected volatility, risk-free interest rate and dividend yield. Volatility is based on the Company’s stock history using daily stock prices over a period commensurate with the expected life of the award. 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, 2021 and 2020 are as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
Expected volatility | 54.17 | % | | 41.88 | % |
Risk-free rate | 0.31 | % | | 0.67 | % |
Expected dividend yield | — | % | | — | % |
Restricted Stock Units
The grant date fair value of RSUs is measured as the market closing price of the Company's common stock 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 110,000, 223,000 and 133,000 RSUs, expected to be settled in shares, during the years ended December 31, 2021, 2020 and 2019, respectively, at a weighted average grant date fair value of $116.71, $75.52 and $79.88 per share, respectively. Unrecognized compensation expense as of December 31, 2021 was $11 million for non-vested RSUs and will be recognized over the remaining vesting period of approximately 1.5 years.
The Company granted 6,000, 8,000 and 8,000 RSUs, expected to be settled in cash, during each of the years ended December 31, 2021, 2020 and 2019, respectively, at a weighted average grant date fair value of $112.52, $76.27 and $75.02 per share, respectively. The Company made cash settlement payments of less than $1 million during the years ended December 31, 2021, 2020, and 2019. Unrecognized compensation expense as of December 31, 2021 was $1 million for non-vested RSUs and will be recognized on a weighted average basis over the remaining vesting period of approximately 1.6 years.
A summary of RSU activity is provided below:
| | | | | | | | | | | |
| RSUs | | Weighted Average Grant Date Fair Value |
| (In thousands) | | |
Non-vested as of December 31, 2018 | 164 | | $ | 105.24 | |
Granted | 141 | | | 79.61 | |
Vested | (71) | | | 93.60 | |
Forfeited | (18) | | | 92.18 | |
Non-vested as of December 31, 2019 | 216 | | | 90.98 | |
Granted | 231 | | | 77.57 | |
Vested | (84) | | | 95.70 | |
Forfeited | (46) | | | 77.47 | |
Non-vested as of December 31, 2020 | 317 | | | 82.31 | |
Granted | 117 | | | 124.34 | |
Vested | (106) | | | 84.80 | |
Forfeited | (43) | | | 88.64 | |
Non-vested as of December 31, 2021 | 285 | | | $ | 97.68 | |
Additionally, as of December 31, 2021, the Company has approximately 64,000 outstanding RSU's awarded at a weighted average grant date fair value of $103.02 under the Non-Employee Director Stock Unit Plan which vested immediately but are not settled until the participant terminates board service. Beginning in the third quarter 2020, non-employee director RSU awards were granted under the terms and conditions of the 2020 Incentive Plan, and these awards vest approximately one year from the date of grant. Activity related to non-employee director grants under the 2020 Incentive Plan is included in RSU table above.
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 of the Company's common stock 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 $2 million, $2 million and less than $1 million related to the exercise of Stock Options with total intrinsic value of options exercised of $1 million, less than $1 million, and less than $1 million during the years ended December 31, 2021, 2020, and 2019, respectively. Unrecognized compensation expense for non-vested Stock Options as of December 31, 2021 was less than $1 million and is expected to be recognized over a weighted average period of 0.9 years.
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. Volatility is based on the Company’s stock history using daily stock prices over a period commensurate with the expected life of the award.
Weighted average assumptions used to estimate the fair value of awards granted during the years ended December 31, 2020 and 2019 are as follows:
| | | | | | | | | | | |
| |
| 2020 | | 2019 |
Expected term (in years) | 5 | | 5 |
Expected volatility | 35.23 | % | | 27.69 | % |
Risk-free interest rate | 0.75 | % | | 2.43 | % |
Expected dividend yield | — | % | | — | % |
| | | |
No stock options were granted in 2021.
A summary of Stock Options and SAR activity is provided below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price | | SARs | | Weighted Average Exercise Price |
| (In thousands) | | | | (In thousands) | | |
December 31, 2018 | 213 | | | $ | 99.36 | | | 7 | | | $ | 72.84 | |
Granted | 106 | | | 80.97 | | | — | | | — | |
Exercised | (4) | | | 59.37 | | | — | | | — | |
Forfeited or expired | (32) | | | 96.02 | | | — | | | — | |
December 31, 2019 | 283 | | | 93.51 | | | 7 | | | 72.84 | |
Granted | 112 | | | 66.98 | | | — | | | — | |
Exercised | (27) | | | 84.98 | | | (1) | | | 56.59 | |
Forfeited or expired | (20) | | | 96.12 | | | — | | | — | |
December 31, 2020 | 348 | | | 85.46 | | | 6 | | | 74.77 | |
Exercised | (19) | | | 80.74 | | | (6) | | | 74.77 | |
Forfeited or expired | (17) | | | 89.17 | | | — | | | — | |
December 31, 2021 | 312 | | | $ | 85.56 | | | — | | | $ | — | |
| | | | | | | |
Exercisable at December 31, 2021 | 217 | | | $ | 91.93 | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | Stock Options and SARs Outstanding |
Exercise Price | | Number Outstanding | | Weighted Average Remaining Life | | Weighted Average Exercise Price |
| | (In thousands) | | (In years) | | |
$60.01 - $80.00 | | 133 | | | 4.3 | | $ | 68.41 | |
$80.01 - $100.00 | | 123 | | | 3.5 | | $ | 86.27 | |
$100.01 - $130.00 | | 56 | | | 3.3 | | $ | 124.35 | |
| | 312 | | | | | |
NOTE 14. 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, |
(In millions) | 2021 | | 2020 | | 2019 |
Income (Loss) Before Income Taxes: (a) | | | | | |
U.S | $ | (26) | | | $ | (65) | | | $ | 5 | |
Non-U.S | 101 | | | 39 | | | 95 | |
Total income (loss) before income taxes | $ | 75 | | | $ | (26) | | | $ | 100 | |
Current Tax Provision: | | | | | |
| | | | | |
Non-U.S | $ | 31 | | | 21 | | | $ | 29 | |
| | | | | |
| | | | | |
Deferred Tax Provision (Benefit): | | | | | |
| | | | | |
Non-U.S | — | | | 7 | | | (5) | |
| | | | | |
Total deferred tax provision (benefit) | — | | | 7 | | | (5) | |
Provision for income taxes | $ | 31 | | | $ | 28 | | | $ | 24 | |
| | | | | |
(a) Income (loss) before income taxes excludes equity in net income from non-consolidated affiliates. |
A summary of the differences between the provision for income taxes calculated at the U.S. statutory tax rate of 21% and the consolidated income tax provision from continuing operations is shown below:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 | | 2019 |
Tax provision (benefit) at U.S. statutory rate of 21% | $ | 16 | | | $ | (5) | | | $ | 21 | |
Impact of foreign operations | 18 | | | (15) | | | 23 | |
Non-U.S withholding taxes | 8 | | | 5 | | | 10 | |
Tax holidays in foreign operations | (5) | | | (4) | | | (5) | |
Tax reserve adjustments | 2 | | | 1 | | | 2 | |
Change in valuation allowance | (10) | | | 46 | | | (10) | |
Impact of U.S. tax reform | — | | | — | | | (18) | |
Impact of tax law change | 1 | | | — | | | — | |
| | | | | |
Research credits | (1) | | | (1) | | | (1) | |
| | | | | |
| | | | | |
Other | 2 | | | 1 | | | 2 | |
Provision for income taxes | $ | 31 | | | $ | 28 | | | $ | 24 | |
The Company’s provision for income taxes for continuing operations was $31 million for the year ended December 31, 2021. The tax expense related to foreign operations of $18 million reflects $9 million related to U.S. income taxes in connection with global intangible low-tax income ("GILTI") and Subpart F inclusions; $6 million related to income tax expense, net of foreign tax credits, associated with income from foreign subsidiaries treated as branches for U.S. income tax purposes; net $2 million
income tax expense related primarily to adjusting prior year tax returns to deduct foreign taxes prior to expiration; and $1 million tax expense on foreign earnings taxed at rates higher than the U.S. statutory rate. Of the $18 million income tax expense items above, $17 million were offset by a corresponding income tax benefit associated with a reduction in the U.S. valuation allowance.
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 included, but were not limited to, a corporate tax rate decrease from 35% to 21% effective January 1, 2018, and require a one-time transition tax on accumulated, unremitted non-U.S. earnings. During 2019, the Company further adjusted its estimate of the impact of U.S. tax reform primarily related to assumptions made in calculating its 2018 GILTI inclusion resulting in an $18 million income tax benefit, the impact of which was entirely offset by a corresponding income tax charge associated with an increase in the U.S. valuation allowance. The Company has made policy elections to account for the GILTI as a period cost when incurred and apply the incremental cash tax savings approach when analyzing the impact GILTI could have on its U.S. valuation allowance assessment.
Items impacting the Company’s 2020 effective tax rate include tax benefits related to foreign operations of $15 million which reflects $10 million income tax benefit related to electing to deduct expiring foreign tax credits previously derecognized; and $5 million income tax benefit to reflect reduction in outside basis deferred tax liabilities and foreign tax credits associated with income from foreign subsidiaries treated as branches for U.S. income tax purposes. These amounts were entirely offset by a corresponding $15 million income tax expense associated with an increase in the U.S. valuation allowance.
Items impacting the Company’s 2019 effective tax rate include tax expense related to foreign operations of $23 million which reflects $6 million tax expense on foreign earnings taxed at rates higher than the U.S. statutory rate; $8 million related to income tax expense, net of foreign tax credits, associated with income from foreign subsidiaries treated as branches for U.S. income tax purposes; and $9 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. These amounts were offset by a corresponding $17 million income tax benefit associated with a reduction in the U.S. valuation allowance. Tax reserve adjustments of $2 million primarily relates to certain transfer pricing positions taken between affiliates in Europe and the U.S.
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 $24 million and $27 million as of December 31, 2021 and 2020, 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 Company evaluates its deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. This assessment considers, among other matters, the nature, frequency, and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. If (i) recent improvements to financial results continue in the U.S., or (ii) recovery of the global economy after the COVID-19 pandemic including the semiconductor shortages occurs faster than expected, the Company believes it is possible that sufficient positive evidence may be available to release all, or a portion, of its U.S. valuation allowance in the next twelve to 24 months.
In March 2019, the closure of tax audits in Germany allowed the Company to initiate a tax planning strategy previously determined not to be prudent. This strategy provided the necessary positive evidence to support the future utilization of a portion of the Company's deferred tax assets in Germany resulting in a $12 million valuation allowance release during the first quarter of 2019. In September 2020, the Company approved a restructuring program impacting engineering and administrative functions globally, including German operations. The September action, combined with earlier 2020 actions, necessitated a reassessment of the future utilization of deferred tax assets in Germany resulting in recording a $4 million discrete income tax expense adjustment during the third quarter of 2020 to increase the valuation allowance. During the fourth quarter of 2020, the Company completed an analysis related to its Brazil affiliate, Visteon Amazonas (“Amazonas”), resulting in the permanent
exclusion of certain incentive income from taxable profits. Consequently, the Company concluded the generation of future taxable income is no longer sufficient to realize the Company’s net deferred tax assets at Amazonas resulting in recording a $3 million valuation allowance during the fourth quarter of 2020.
The components of deferred income tax assets and liabilities are as follows:
| | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 |
Deferred Tax Assets: | | | |
Net operating losses and credit carryforwards | $ | 1,163 | | | $ | 1,192 | |
Employee benefit plans | 46 | | | 80 | |
Lease liability | 47 | | | 59 | |
Fixed assets and intangibles | 17 | | | 12 | |
Warranty | 11 | | | 14 | |
Inventory | 9 | | | 9 | |
Restructuring | 6 | | | 13 | |
Capitalized expenditures for tax reporting | 5 | | | 5 | |
Deferred income | 13 | | | 10 | |
Other | 55 | | | 63 | |
Valuation allowance | (1,207) | | | (1,263) | |
Total deferred tax assets | $ | 165 | | | $ | 194 | |
Deferred Tax Liabilities: | | | |
Outside basis investment differences, including withholding tax | $ | 63 | | | $ | 65 | |
Right-of-use assets | 46 | | | 57 | |
Fixed assets and intangibles | 14 | | | 18 | |
All other | 22 | | | 27 | |
Total deferred tax liabilities | 145 | | | 167 | |
Net deferred tax assets | $ | 20 | | | $ | 27 | |
Consolidated Balance Sheet Classification: | | | |
Other non-current assets | $ | 47 | | | $ | 55 | |
| | | |
| | | |
| | | |
Deferred tax liabilities non-current | 27 | | | 28 | |
| | | |
Net deferred tax assets | $ | 20 | | | $ | 27 | |
At December 31, 2021, the Company had available non-U.S. net operating loss carryforwards and capital loss carryforwards of $1.4 billion and $17 million, respectively, which have remaining carryforward periods ranging from 1 year to indefinite. The Company had available U.S. federal net operating loss carryforwards of $1.8 billion at December 31, 2021, which have remaining carryforward periods ranging from 6 years to indefinite. U.S. foreign tax credit carryforwards are $375 million at December 31, 2021, which have remaining carryforward periods ranging from 1 to 8 years. U.S. research tax credit carryforwards are $22 million at December 31, 2021. These credits will begin to expire in 2030. The Company had available tax-effected U.S. state operating loss carryforwards of $32 million at December 31, 2021, which will expire at various dates between 2022 and 2041.
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 $375 million of U.S. foreign tax credits and approximately $26 million of U.S. federal net operating loss carryforwards that are not subject to any current limitation since they were realized after the Effective Date.
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, 2021 and 2020 were $16 million and $14 million, respectively. Of these amounts, approximately $9 million and $7 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. During 2021 and 2020, the Company recorded a $2 million and $1 million, respectively, net increase in tax expense related to uncertain tax positions attributable to certain related party transactions. 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, 2021 and 2020 was $2 million in both years.
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 carried forward into open tax years technically remain open to adjustment. Although it is not possible to predict the timing of the resolution of all ongoing tax audits with accuracy, it is reasonably possible that certain tax proceedings in the U.S., 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 $8 million is included in Other non-current liabilities on the Consolidated Balance Sheet, while $3 million is reflected as a reduction of a deferred tax asset related to a net operating loss included in Other non-current assets on the Consolidated Balance Sheets.
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, |
(In millions) | 2021 | | 2020 |
Beginning balance | $ | 14 | | | $ | 13 | |
Tax positions related to current period | | | |
Additions | 3 | | | — | |
Tax positions related to prior periods | | | |
Additions | — | | | 1 | |
Reductions | (1) | | | — | |
Ending balance | $ | 16 | | | $ | 14 | |
During 2012, Brazil tax authorities issued tax assessment notices to Visteon Sistemas Automotivos (“Sistemas”) related to the sale of its chassis business, and in connection with this assessment the Company recorded a long-term tax income tax deposit during 2013. During 2021, the Company received a favorable judgement related to this deposit. Adjusted for currency impacts and interest, the Company received net $9 million cash settlement from the Brazilian government during the fourth quarter of 2021, while $2 million was applied against other long-term labor-related tax debts pursuant to the judgement. Income tax refund claims associated with other jurisdictions, total $7 million as of December 31, 2021, and are included in Other non-current assets on the condensed consolidated balance sheets.
NOTE 15. Stockholders’ Equity and Non-controlling Interests
Share Repurchase Program
In January 2018, the Company's Board of Directors authorized a total of $700 million of share repurchases which expired on December 31, 2020. A total of 3,361,420 shares at an average price of $99.91 for an aggregate purchase amount of $336 million was purchased from third-party financial institutions under this authorization.
Treasury Stock
As of December 31, 2021 and 2020, respectively, the Company held 27,014,711 and 27,156,537 shares of common stock in treasury which may be used for 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 Visteon Corporation are as follows:
| | | | | | | | | | | |
| December 31, |
(In millions) | 2021 | | 2020 |
Yanfeng Visteon Automotive Electronics Co., Ltd. | $ | 33 | | | $ | 57 | |
Shanghai Visteon Automotive Electronics Co., Ltd. | 45 | | | 44 | |
Changchun Visteon FAWAY Automotive Electronics Co., Ltd. | 20 | | | 20 | |
Other | 2 | | | 2 | |
| $ | 100 | | | $ | 123 | |
Stock Warrants
In October 2010, the Company issued ten-year warrants at an exercise price of $9.66 per share. Pursuant to the Ten-Year Warrant Agreement, the original exercise price of $9.66 for the ten-year warrants was subject to adjustment as a result of the special distribution of $43.40 per share to shareholders at the beginning of 2016. Remaining warrants of 909 expired unexercised as of December 31, 2020.
Accumulated Other Comprehensive Income (Loss)
Changes in AOCI and reclassifications out of AOCI by component includes:
| | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 |
Changes in AOCI: | | | |
Beginning balance | $ | (304) | | | $ | (267) | |
Other comprehensive income (loss) before reclassification, net of tax | 70 | | | (44) | |
Amounts reclassified from AOCI | 5 | | | 7 | |
| | | |
Ending balance | $ | (229) | | | $ | (304) | |
Changes in AOCI by component: | | |
Foreign currency translation adjustments | | | |
Beginning balance | $ | (115) | | | $ | (153) | |
Other comprehensive income (loss) before reclassification (a) | (34) | | | 38 | |
| | | |
Ending balance | (149) | | | (115) | |
Net investment hedge | | | |
Beginning balance | (15) | | | 4 | |
Other comprehensive income (loss) before reclassification (a) | 25 | | | (14) | |
Amounts reclassified from AOCI (b) | (6) | | | (5) | |
Ending balance | 4 | | | (15) | |
Benefit plans | | | |
Beginning balance | (165) | | | (114) | |
Other comprehensive income (loss) before reclassification, net of tax (c) | 79 | | | (59) | |
Amounts reclassified from AOCI | 5 | | | 8 | |
| | | |
Ending balance | (81) | | | (165) | |
Unrealized hedging gain (loss) | | | |
Beginning balance | (9) | | | (4) | |
Other comprehensive income (loss) before reclassification, net of tax (d) | — | | | (9) | |
Amounts reclassified from AOCI | 6 | | | 4 | |
Ending balance | (3) | | | (9) | |
AOCI ending balance | $ | (229) | | | $ | (304) | |
(a) There were no income tax effects for either period due to the valuation allowance.
(b) Amounts are included in "Interest expense" within the Consolidated Statements of Operations.
(c) Amount included in the computation of net periodic pension cost. (See Note 12, "Employee Benefit Plans" for additional details.) Net of tax expense of $4 million, and tax benefit of less than $1 million related to benefit plans for the years ended December 31, 2021 and 2020, respectively.
(d) There were no income tax effects for the periods ended December 31, 2021 and 2020.
NOTE 16. Earnings Per Share
A summary of information used to compute basic and diluted earnings per share attributable to Visteon is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions, except per share amounts) | 2021 | | 2020 | | 2019 |
Numerator: | | | | | |
Net income (loss) from continuing operations attributable to Visteon | $ | 41 | | | $ | (56) | | | $ | 71 | |
Net income (loss) from discontinued operations attributable to Visteon | — | | | — | | | (1) | |
Net income (loss) attributable to Visteon | $ | 41 | | | $ | (56) | | | $ | 70 | |
Denominator: | | | | | |
Average common stock outstanding - basic | 28.0 | | | 27.9 | | | 28.1 |
Dilutive effect of performance based share units and other | 0.4 | | | — | | | 0.1 | |
Diluted shares | 28.4 | | | 27.9 | | | 28.2 |
| | | | | |
Basic and Diluted Per Share Data: | | | | | |
Basic earnings (loss) per share attributable to Visteon: | | | | | |
Continuing operations | $ | 1.46 | | | $ | (2.01) | | | $ | 2.53 | |
Discontinued operations | — | | | — | | | (0.04) | |
| $ | 1.46 | | | $ | (2.01) | | | $ | 2.49 | |
Diluted earnings (loss) per share attributable to Visteon: | | | | | |
Continuing operations | $ | 1.44 | | | $ | (2.01) | | | $ | 2.52 | |
Discontinued operations | — | | | — | | | (0.04) | |
| $ | 1.44 | | | $ | (2.01) | | | $ | 2.48 | |
For the year ended December 31, 2020, performance based share units of approximately 276,000 were excluded from the calculation of diluted loss per share because the effect of including them would have been anti-dilutive.
NOTE 17. 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, 2021 |
(In millions) | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total |
Asset Category: | | | | | | | | | | |
Retirement plan assets | | $ | 11 | | | $ | 303 | | | $ | 18 | | | $ | 619 | | | $ | 951 | |
Foreign currency instruments | | — | | | 2 | | | — | | | — | | | 2 | |
| | | | | | | | | | |
Liability Category: | | | | | | | | | | |
Foreign currency instruments | | $ | — | | | $ | 9 | | | $ | — | | | $ | — | | | $ | 9 | |
Interest rate swaps | | $ | — | | | $ | 4 | | | $ | — | | | $ | — | | | $ | 4 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
(In millions) | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total |
Asset Category: | | | | | | | | | | |
Retirement plan assets | | $ | 114 | | | $ | 228 | | | $ | 18 | | | $ | 549 | | | $ | 909 | |
Foreign currency instruments | | $ | — | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
Liability Category: | | | | | | | | | | |
Foreign currency instruments | | $ | — | | | $ | 27 | | | $ | — | | | $ | — | | | $ | 27 | |
Interest rate swaps | | $ | — | | | $ | 11 | | | $ | — | | | $ | — | | | $ | 11 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | December 31, 2021 |
Asset Category | | Level 1 | | Level 2 | | NAV | | Total |
| | | | | | | | |
Common trust funds | | — | | | — | | | 463 | | | 463 | |
LDI | | — | | | 93 | | | — | | | 93 | |
Limited partnerships and hedge funds | | — | | | — | | | 127 | | | 127 | |
Cash and cash equivalents | | — | | | 10 | | | — | | | 10 | |
Total | | $ | — | | | $ | 103 | | | $ | 590 | | | $ | 693 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | December 31, 2020 |
Asset Category | | Level 1 | | Level 2 | | NAV | | Total |
Registered investment companies | | $ | 4 | | | $ | — | | | $ | — | | | $ | 4 | |
| | | | | | | | |
Common trust funds | | — | | | — | | | 436 | | | 436 | |
LDI | | — | | | 100 | | | — | | | 100 | |
Limited partnerships and hedge funds | | — | | | — | | | 84 | | | 84 | |
Cash and cash equivalents | | 1 | | | 34 | | | — | | | 35 | |
Total | | $ | 5 | | | $ | 134 | | | $ | 520 | | | $ | 659 | |
The fair values of the Company’s Non-U.S. retirement plan assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | December 31, 2021 |
Asset Category | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total |
Registered investment companies | | $ | — | | | $ | 21 | | | $ | — | | | $ | — | | | $ | 21 | |
Treasury and government securities | | — | | | 10 | | | — | | | — | | | 10 | |
Cash and cash equivalents | | 9 | | | 1 | | | — | | | — | | | 10 | |
Corporate debt securities | | — | | | 7 | | | — | | | — | | | 7 | |
Common and preferred stock | | 2 | | | — | | | — | | | — | | | 2 | |
Common trust funds | | — | | | 138 | | | — | | | 5 | | | 143 | |
Limited partnerships | | — | | | — | | | — | | | 24 | | | 24 | |
Insurance contracts | | — | | | — | | | 18 | | | — | | | 18 | |
Derivative instruments | | — | | | 23 | | | — | | | — | | | 23 | |
Total | | $ | 11 | | | $ | 200 | | | $ | 18 | | | $ | 29 | | | $ | 258 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | December 31, 2020 |
Asset Category | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total |
Registered investment companies | | $ | 10 | | | $ | 68 | | | $ | — | | | $ | — | | | $ | 78 | |
Treasury and government securities | | 91 | | | 13 | | | — | | | — | | | 104 | |
Cash and cash equivalents | | 6 | | | — | | | — | | | — | | | 6 | |
Corporate debt securities | | — | | | 6 | | — | | | — | | | 6 | |
Common and preferred stock | | 2 | | | — | | | — | | | — | | | 2 | |
Common trust funds | | — | | | 11 | | | — | | | 14 | | | 25 | |
Limited partnerships | | — | | | 1 | | | 1 | | | 15 | | | 17 | |
Insurance contracts | | — | | | — | | | 17 | | | — | | | 17 | |
Derivative instruments | | — | | | (5) | | | — | | | — | | | (5) | |
Total | | $ | 109 | | | $ | 94 | | | $ | 18 | | | $ | 29 | | | $ | 250 | |
The change in fair value of insurance contracts which used significant unobservable inputs was primarily due to purchases during the years ended December 31, 2021.
Items Measured at Fair Value on a Non-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.
The Company evaluates its long-lived assets for impairment whenever events or circumstances indicate the value of these long-lived asset groups are not recoverable. During the fourth quarter of 2021, the Company recognized an impairment charge of $9 million. The fair value measurements related to the long-lived asset group rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets, as observable inputs are not available (Level 3). To determine the fair value of the long-lived asset group, the Company utilized a cost and market approach, measuring fair value on the standalone basis value premise. The Company believes the assumptions and estimates used to determine the estimated fair value of the long-lived asset group is reasonable; however, these estimates and assumptions are subject to a high degree of uncertainty. Due to many variables inherent in estimating fair value, differences in assumptions could have a material effect on the analysis.
As the net carrying value of the long-lived asset group in Brazil exceeded its fair values, the Company recorded a long-lived asset impairment charge of $9 million related to property and equipment during the year ended December 31, 2021. Refer to Note 4, “Restructuring and Impairment” for additional information on asset impairments. No impairment charges were recorded for the year ended December 31, 2020.
Fair Value of Debt
The fair value of debt was $354 million and $347 million as of December 31, 2021 and 2020, 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.
NOTE 18. 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 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
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. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument or may derived from observable data. Accordingly, the Company's currency instruments are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.
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 Sheets. When the underlying hedged transaction is realized, the gain or loss previously included in AOCI is recorded in earnings and reflected in the Consolidated Statements 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 Statements 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 Sheets. 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.
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 are included in the Company’s Consolidated Balance Sheets. There is no cash collateral on any of these derivatives.
Foreign Currency Exchange Rate Risk
The Company is exposed to various market risks including, but not limited to, changes in currency exchange rates arising from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt, dividends and investments in subsidiaries. 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 related to transactions, excluding those transactions as related to the payment of variable interest on existing debt, is eighteen months. The maximum length of time over which the Company hedges forecasted transactions related to variable interest payments is the term of the underlying debt.
Currency Exchange Rate Instruments: The Company primarily uses forward contracts denominated in euro, Japanese yen, Thai baht and Mexican peso intended to mitigate the variability of cash flows denominated in currency other than the hedging entity's functional currency.
As of December 31, 2021 and 2020, the Company had foreign currency hedge economic derivative instruments, with notional amounts of approximately $32 million and $18 million, respectively. The aggregate fair value of these derivatives is a liability of less than $1 million and an asset of $1 million as of December 31, 2021 and 2020, respectively. The difference between the gross and net value of these derivatives after offset by counter party is not material.
Cross Currency Swaps: The Company has executed cross-currency swap transactions intended to mitigate the variability of the U.S. dollar value of its investment in certain of its non-U.S. entities. These transactions are designated as net investment hedges and the Company has elected to assess hedge effectiveness under the spot method. Accordingly, periodic changes in the fair value of the derivative instruments attributable to factor other than spot exchange rate variability are excluded from the measure of hedge ineffectiveness and reported directly in earnings each reporting period.
As of December 31, 2021 and 2020, the Company had cross currency swaps with an aggregate notional value of $250 million. The aggregate fair value of these derivatives is an asset of $2 million and a non-current liability of $9 million as of December 31, 2021 and a non-current liability of $27 million as of December 31, 2020. As of December 31, 2021, a gain of approximately $4 million is expected to be reclassified out of accumulated other comprehensive income into earnings within the next 12 months.
Interest Rate Risk
The Company utilizes interest rate swap instruments to manage its exposure and to mitigate the impact of interest rate variability. The instruments are designated as cash flow hedges, accordingly, the effective portion of the periodic changes in fair value is recognized in accumulated other comprehensive income, a component of shareholders' equity. Subsequently, the accumulated gains and losses recorded in equity are reclassified to income in the period during which the hedged cash flow impacts earnings.
As of December 31, 2021 and 2020, the Company had interest rate swaps with an aggregate notional value of $300 million. The aggregate fair value of these derivative transactions is a non-current liability of approximately $4 million and $11 million, as of December 31, 2021 and 2020, respectively. As of December 31, 2021, a loss of approximately $4 million is expected to be reclassified out of accumulated other comprehensive income into earnings within the next 12 months.
Financial Statement Presentation
Gains and losses on derivative financial instruments for the years ended December 31, 2021 and 2020 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) |
(In millions) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Foreign currency risk – Cost of sales: | | | | | | | | | | | |
Cash flow hedges | — | | | — | | | — | | | — | | | 1 | | | — | |
Interest rate risk - Interest expense, net: | | | | | | | | | | | |
Net investment hedges | 25 | | | (14) | | | 6 | | | 5 | | | — | | | — | |
Interest rate swap | — | | | (9) | | | (6) | | | (4) | | | — | | | — | |
| $ | 25 | | | $ | (23) | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | — | |
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, 2021 and 2020 is not material.
The following is a summary of the percentage of net sales and accounts receivable from the Company's customers with a percentage of net sales greater than 10 percent:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Percentage of Total Net Sales | | Percentage of Total Accounts Receivable |
| December 31, | | December 31, 2021 | | December 31, 2020 |
| 2021 | | 2020 | | 2019 | |
Ford | 22 | % | | 22 | % | | 22 | % | | 18 | % | | 13 | % |
BMW | 11 | % | | 11 | % | | 8 | % | | 5 | % | | 8 | % |
NOTE 19. 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 (the “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 October 2019, the Township notified the Company that the Township had incurred a shortfall under the bonds of less than $1 million and requested that the Company meet to discuss payment. The parties met in November 2019 but no agreement was reached. On December 9, 2019, the Township commenced litigation against the Company in Michigan’s Wayne County Circuit Court claiming damages of $28 million related to what the Township alleges to be the current shortfall and projected future shortfalls under the bonds. The Company disputes the factual and legal assertions made by the Township and will defend the matter vigorously. The Company is not able to estimate the possible loss or range of loss in connection with this matter.
In November 2013, the Company and Halla 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, 2021, the Company maintained accruals of approximately $8 million for claims aggregating approximately $51 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.
The adverse impacts of the COVID-19 pandemic led to a significant reduction in vehicle production in the first half of 2020, which was followed by increased consumer demand and vehicle production schedules in the second half of 2020. Because semiconductor suppliers have been unable to rapidly reallocate production to serve the automotive industry, the surge in demand has led to a worldwide semiconductor supply shortage. The Company's semiconductor suppliers, along with most automotive component supply companies that use semiconductors, have been unable to fully meet the vehicle production demands of our customers due to events which are outside the Company's control, including but not limited to, the COVID-19 pandemic, the global semiconductor shortage, a fire at a semiconductor fabrication facility in Japan, significant weather events impacting semiconductor supplier facilities in the southern United States, and other extraordinary events. The Company is working closely with suppliers and customers to attempt to minimize potential adverse impacts of these events. Certain customers have communicated that they expect the Company to absorb some of the financial impact of their reduced production and are reserving their rights to claim damages arising from supply shortages, however, the Company believes it has a number of legal defenses to such claims and intends to defend any such claims vigorously. The Company has also notified semiconductor suppliers that it will seek compensation from them for failure to deliver sufficient quantities. The Company is not able to estimate the possible loss or range of loss in connection with this matter at this time.
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 provisions 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. These estimates do not include amounts which may ultimately be recovered from the Company's suppliers. The Company can provide no assurances that it will not experience material obligations in the future or that it will not incur significant costs to defend or settle such obligations beyond the amounts accrued or beyond what the Company may recover from its suppliers.
The following table provides a reconciliation of changes in the product warranty and recall liability:
| | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 |
Beginning balance | $ | 64 | | | $ | 49 | |
Provisions | 16 | | | 38 | |
Change in estimates | (1) | | | (7) | |
Currency/other | (4) | | | 3 | |
Settlements | (25) | | | (19) | |
Ending balance | $ | 50 | | | $ | 64 | |
Guarantees and Commitments
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, 2021, the Company has approximately $2 million and $2 million of outstanding guarantees, related to the divested Climate and Interiors entities, respectively. The guarantees represent the maximum potential amount that the Company could be required to pay under the guarantees in the event of default by the guaranteed parties. These guarantees will generally cease upon expiration of current lease agreement which expire in 2026 and 2024 for the Climate and Interiors entities, 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; customs classifications, governmental regulations relating to safety; employment-related matters; customer, supplier and other contractual relationships; intellectual property rights; product warranties; product recalls; tax matters; 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, 2021 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 20. Segment Information and Revenue Recognition
The Company’s reportable segment is Electronics. The Electronics segment provides vehicle cockpit electronics products to customers, including instrument clusters, information displays, infotainment systems, audio systems, telematics solutions, battery monitoring systems, and head-up displays. As the Company has one reportable segment, net sales, total assets, depreciation, amortization and capital expenditures are equal to consolidated results.
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-U.S. GAAP financial measure, as defined below) and operating assets.
The accounting policies for the reportable segments are the same as those described in the Note 1, "Summary of Significant Accounting Policies” to the Company’s consolidated financial statements.
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 and impairment 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.
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 U.S. 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 was $228 million, $192 million and $234 million for the years ended December 31, 2021, 2020 and 2019.
The reconciliation of Adjusted EBITDA to Net income attributable to Visteon for the years ended December 31, 2021, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 | | 2019 |
Net income (loss) attributable to Visteon Corporation | $ | 41 | | | $ | (56) | | | $ | 70 | |
Depreciation and amortization | 108 | | | 104 | | | 100 | |
Restructuring and impairment expense | 14 | | | 76 | | | 4 | |
Provision for income taxes | 31 | | | 28 | | | 24 | |
Non-cash, stock-based compensation expense | 18 | | | 18 | | | 17 | |
Interest expense, net | 8 | | | 11 | | | 9 | |
Net income attributable to non-controlling interests | 9 | | | 8 | | | 11 | |
Net (income) loss from discontinued operations, net of tax | — | | | — | | | 1 | |
Equity in net income of non-consolidated affiliates | (6) | | | (6) | | | (6) | |
Other, net | 5 | | | 9 | | | 4 | |
Adjusted EBITDA | $ | 228 | | | $ | 192 | | | $ | 234 | |
Financial Information by Geographic Region
Financial information about net sales and net tangible long-lived assets by country are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales (a) | | Tangible Long-Lived Assets, Net (b) |
| Year Ended December 31, | | December 31, |
(In millions) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
United States | $ | 586 | | | $ | 536 | | | $ | 663 | | | $ | 110 | | | $ | 122 | |
Mexico | 55 | | | 29 | | | 38 | | | 49 | | | 50 | |
Total North America | 641 | | | 565 | | | 701 | | | 159 | | | 172 | |
Portugal | 608 | | | 635 | | | 602 | | | 94 | | | 110 | |
Slovakia | 257 | | | 251 | | | 237 | | | 49 | | | 51 | |
Tunisia | 53 | | | 41 | | | 71 | | | 13 | | | 12 | |
Other Europe | 44 | | | 40 | | | 68 | | | 40 | | | 59 | |
Total Europe | 962 | | | 967 | | | 978 | | | 196 | | | 232 | |
China Domestic | 576 | | | 479 | | | 527 | | | | | |
China Export | 199 | | | 196 | | | 262 | | | | | |
Total China | 775 | | | 675 | | | 789 | | | 74 | | | 85 | |
Japan | 234 | | | 244 | | | 393 | | | 28 | | | 31 | |
India | 151 | | | 93 | | | 110 | | | 50 | | | 51 | |
Other Asia-Pacific | 39 | | | 41 | | | 57 | | | 10 | | | 12 | |
Total Other Asia-Pacific | 424 | | | 378 | | | 560 | | | 88 | | | 94 | |
South America | 80 | | | 71 | | | 91 | | | 10 | | | 25 | |
Eliminations | (109) | | | (108) | | | (174) | | | | | |
| $ | 2,773 | | | $ | 2,548 | | | $ | 2,945 | | | $ | 527 | | | $ | 608 | |
(a) Company sales based on geographic region where sale originates and not where customer is located. |
(b) Tangible long-lived assets include property, plant and equipment and right-of-use assets. |
Disaggregated revenue by product lines is as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 |
Product Lines | | | |
Instrument clusters | $ | 1,356 | | | $ | 1,197 | |
Infotainment | 370 | | | 384 | |
Information displays | 402 | | | 423 | |
Cockpit domain controller | 226 | | | 155 | |
Body and security | 127 | | | 99 | |
Telematics | 64 | | | 57 | |
Other | 228 | | | 233 | |
| $ | 2,773 | | | $ | 2,548 | |
NOTE 21. Other Income, Net
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2021 | | 2020 | | 2019 |
Pension financing benefits, net | $ | 18 | | | $ | 14 | | | $ | 10 | |
Pension settlement charge | — | | | (5) | | | — | |
| $ | 18 | | | $ | 9 | | | $ | 10 | |
Pension financing benefits, net include return on assets net of interest costs and other amortization.
During 2020, the Company transferred a portion of the benefit obligation related to its defined benefit U.S. pension plan to a third-party issuer. The transaction met the criteria for settlement accounting, and accordingly, the Company recognized a $5 million pension settlement charge.