2010 Annual Report on Form 10 - K
BorgWarner Letter to Stockholders
BorgWarner Vision
To be the global technology leader in powertrain solutions
BorgWarner Mission
Develop leading powertrain technologies that improve
fuel economy, emissions and performance
BorgWarner Beliefs
Respect for Each Other
BorgWarner must operate in a climate of
Passion for Excellence
BorgWarner chooses to be a leader —
openness, trust, and cooperation, in which
in serving our customers, advancing our
each of us freely grants others the same respect
technologies, and rewarding all who invest in
and decency we seek for ourselves. We expect
us. To sustain our leadership, we relentlessly
open, honest, and timely communication. As
seek to improve our performance. We bring
a global company, we invite and embrace
urgency to every business challenge and
the diversity of all our people.
opportunity. We anticipate change and shape
Power of Collaboration
BorgWarner is both a community of
entrepreneurial businesses and a single
enterprise. Our goal is to preserve the
freedom each of us needs to find personal
it to our purpose. We encourage new ideas
that challenge the status quo, and we seek to
involve every mind in the growth of our business.
Personal Integrity
We at BorgWarner demand uncompromising
satisfaction while building a strong business
ethical standards in all we do and say. We are
that comes from unity of purpose. True unity
committed to doing what is right — in good
is more than a melding of self-interests; it
times and in bad. We are accountable for the
results when goals and values are shared.
commitments we make. We are, above all,
an honorable company of honorable people.
Responsibility to
Our Communities
BorgWarner is committed to good corporate
citizenship. We strive to supply goods and
services of superior value to our customers;
to create jobs that provide meaning for those
who do them; and to contribute generously of
our talents and our wealth in the communities
in which we do business.
T O O U R S T O C K H O L D E R S
February 2011
“ Our goal is to ensure
that our company’s future
is secure, and to seize
the opportunities that will
maximize value creation
for our stakeholders.”
Timothy M. Manganello
Chairman and Chief
Executive Officer
S A L E S G R O W T H
The year 2010 was a remarkable one
was a mix shift in Europe back toward
for BorgWarner. The global automotive
vehicles with higher BorgWarner
market made a solid recovery, growing
content, boosting BorgWarner’s
Dollars in Billions
over 20% in 2010 compared with 2009.
performance. Mid-sized and large-
3
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5
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1
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$
During that same period, BorgWarner
sized vehicles, the segments in which
sales grew 43%, a clear indication that
BorgWarner has significant content,
our strategy to focus on improving fuel
represented approximately 66% of the
economy and reducing emissions is a
total number of vehicles produced in
winning approach.
Europe in 2010, up from 62% in 2009.
Last year began with tempered
The other markets in which we compete
expectations with regard to vehicle
also had a strong year. Production
'03
'04
'05
'06
'07
'08
‘09
'10
production in Europe, our largest market.
volume in North America grew by
E A R N I N G S P E R F O R M A N C E *
continent and there was little visibility
and Korea by approximately 20%. It was
Per Diluted Share
*Excludes special items.
with regard to true market demand.
a better year for the automotive industry
Government-sponsored incentive
approximately 40%, in China and India
programs were expiring across the
by approximately 30%, and in Japan
2
0
.
3
$
Many believed that Europe’s production
than most people anticipated, which is a
volume would be lower in 2010
testament to the resilience of automakers,
compared with 2009, or, at best,
suppliers and consumers alike.
4
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‘03
‘04
‘05
‘06
‘07
‘08
‘09
‘10
0
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$
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unchanged. In the end, European
production actually grew approximately
15% in 2010 compared with 2009.
In addition to the volume growth, there
And while global production volumes
made a strong recovery in 2010, there
was an even stronger undercurrent of
increased demand for BorgWarner
number of years. While the Chinese
record earnings. It is also noteworthy
technologies. Turbocharger and
market grows, its adoption of leading
that our operating income margin, a key
automatic transmission growth continued
powertrain technologies grows as well.
measure of profitability, rose to levels
to outpace the market. Turbocharged
This phenomenon is driving accelerated
that we had not seen recently. These
engines, as a percentage of total engines
growth for our business. We expect our
are remarkable accomplishments
produced, increased from 23% in
business to grow between 20% and
considering they were achieved at
2009 to 25% in 2010. And automatic
25% per year in China over the next five
depressed global industry volumes.
well-positioned to enjoy significant
Our growth has enabled us to create
growth in China in the coming years.
jobs. During the course of the recession
transmissions, as a percentage of total
years, faster than in any other major
transmissions produced, increased from
market. Each of our businesses has
43% in 2009 to 46% in 2010.
established a presence in China and
Turbocharging and the conversion of
we have developed relationships with
manual transmissions to automatics have
domestic Chinese OEMs, such as
been strong trends in the automotive
Great Wall, First Auto Works, Shanghai
industry in recent years and we expect
Automotive Industry Corporation,
this to continue for years to come.
Chery and many others; as well as with
China continues to grow in importance
on the world stage. Frankly, it is the most
dynamic market that I’ve encountered
during my 39 year automotive career.
Over the past five years, China vehicle
production has grown 25% per year,
significantly faster than any other major
automotive market. Furthermore, China is
expected to continue to lead the industry
in vehicle production growth for a
Chinese-Western OEM joint ventures,
such as Shanghai General Motors and
Shanghai Volkswagen. BorgWarner is
Outstanding Performance
From a performance standpoint,
2010 was a fantastic year in which
BorgWarner posted record sales and
T O T A L S H A R E H O L D E R R E T U R N
$100 invested on 12/31/05 in stock or index including
reinvestment of dividends. Fiscal year ending December 31.
$250
$200
$150
$100
$50
$0
12/05
12/06
12/07
12/08
12/09
12/10
BorgWarner Inc.
S&P 500
Peer Group
SIC 3714
We continue to deliver industry-leading
stockholder returns. In 2010, our share
price appreciated 118%, ending the
year at an all-time high of $72.36.
Furthermore, total shareholder return for
BorgWarner stockholders over the last
five years was 148%, compared with
55% for our peer group and 12% for
the S&P 500, providing outstanding
results for you, our stockholders.
we eliminated approximately 5,000 jobs,
or 28% of our workforce worldwide, in
an effort to manage costs downward
commensurate with our drastic decline
in revenue. However, I am pleased to
report that approximately 3,000 jobs
have been restored. Additionally, 1,200
employees joined us with our Dytech
ENSA (“ENSA”) acquisition and 350
employees with our Haldex Traction
Systems acquisition. As we move
forward, we expect to continue to
add employees judiciously to meet
the growing global demand for our
products.
The Benefits of a Strong
Balance Sheet
During the year, our strong balance
sheet and cash flow enabled us to
execute a number of important
initiatives:
(cid:115) We enhanced our emissions business
by acquiring ENSA, a world leader in
B O R G W A R N E R S T O C K H O L D E R S L E T T E R 2 0 1 0
the design and manufacture of exhaust
All of this was done while maintaining
turbochargers for the BMW 535i Gran
gas recirculation (“EGR”) coolers and
our investment grade credit rating, which
Turismo featuring a 3.0-liter six-cylinder
tubes. Those products combined with
is a clear signal that our balance sheet
direct-injected gasoline engine. And, our
BorgWarner’s EGR valves, result in
remains strong and provides opportunities
dual-clutch transmission technology will
EGR systems that are complementary
for the future.
to BorgWarner’s turbochargers, engine
timing systems and the rest of our
portfolio of air management systems
and components.
make its Chinese debut when we launch
production for Shanghai Automotive later
this year.
Accelerating Growth
In the fall, we announced our backlog of
Additionally, our other product
$2.3 billion of net new business over the
technologies continue to grow. Engine
(cid:115) We acquired Haldex Traction Systems,
next three years (2011-2013), a record for
timing systems, variable cam timing,
a leader in advanced front-wheel drive
our company. This backlog encompasses
thermal systems, traditional transmission
(“FWD”), all-wheel drive (“AWD”)
some of the most promising technologies
components and AWD transfer cases
technology. The deal is expected to
and geographies in the auto sector and
are all meaningful contributors to our
accelerate our growth in the global
is representative of how BorgWarner is
backlog of net new business. Notably,
AWD segment as that market continues
leading the way in important powertrain
Chrysler selected BorgWarner to supply
better fuel economy
reduced emissions
great performance
to shift toward FWD-based vehicles.
developments around the world. From
engine timing systems for its all-new
The acquisition adds industry leading
a product perspective, turbochargers
3.6-liter Pentastar V6 engine. And, our
FWD/AWD technologies, with a
and dual-clutch technologies remain
Cool Logic® variable speed fan drives
strong European customer base, to
BorgWarner’s largest growth drivers
are now standard on a number of Mack®
our existing Drivetrain portfolio. This
and we continue to generate important
heavy-duty commercial trucks.
enables BorgWarner to provide our
new business in each of these product
global customers a broader range
families. Turbochargers for gasoline
of AWD solutions to meet their
engines represent a significant share of
vehicle needs.
the turbocharger backlog, which reflects
(cid:115) We purchased over 7 million shares
of treasury stock in 2010, which
are intended to be used to settle our
convertible debt obligations in April
of 2012.
the growing global trend toward
downsized gasoline engines to address
fuel efficiency and emissions reductions.
For example, Ford selected BorgWarner’s
leading gasoline turbocharger technology
for Ford’s new four-cylinder EcoBoost
(cid:115) We issued $250 million of 10-year
engine and for rear-wheel drive trucks
senior notes, taking advantage of
featuring its new six-cylinder EcoBoost
favorable pricing in the debt markets.
engine. We also supply twin scroll
The regional mix of our backlog of
net new business is aligned with the
pace of advanced technology adoption
around the world. Forty-five percent of
the backlog is in Europe which remains
the epicenter of advanced development
for internal combustion engines, fuel
economy and emissions improvements.
Thirty percent is in Asia, which continues
to expand in importance, not only for its
rapid growth, but also for its demand for
leading edge technologies. Lastly, twenty-
five percent of our backlog is in North
America, where we see intensified
Enterprise Strategies
However, we know that being well-
customer focus on programs aimed at
improved fuel economy and lower
emissions.
(cid:115) Accelerate the pace of INNOVATION
positioned today is not enough. We
and product leadership into new
have to keep pushing the envelope.
technologies, markets and geographic
We have to stay in front of the
The Road Ahead
Looking ahead, we expect 2011 to
be another great year for BorgWarner.
Global vehicle production growth will
continue, although we expect it to
normalize from the pace realized in
2010. It will be another year in which
BorgWarner’s sales growth should
outpace the industry, which is typical
for our company over the last decade.
We expect to sustain higher operating
margins than historical levels. Our
historical operating margin guidance
range was 8.5% to 9.0%; we now
expect margins to be 10.5% or better.
The expectation of improved margins
can be attributed to restructuring actions
taken in 2008 and 2009 combined
with an ongoing focus on operating
efficiency.
Longer term, fuel economy and
emissions improvements should remain
key objectives for automakers around
the world. Therefore, the adoption of
downsized turbocharged engines,
automatic transmissions, EGR systems
and enhanced engine timing systems
should continue to drive growth for
our company.
As we consider our position as one
of the world’s premiere automotive
suppliers, we reflect on what has gotten
us here and, more importantly, what will
keep us here. In light of this, our senior
leadership has validated eight Enterprise
Strategies that will guide BorgWarner
to 2020:
regions
(cid:115)(cid:0)(cid:0)Consistently drive profitable sales
GROWTH at least 10 percentage
points above the global industry
growth rate
powertrain technology curve. We
continually watch the market and
contemplate a range of potential
outcomes, from the very likely to the
very remote, to allow us to anticipate
the next technology wave. BorgWarner
(cid:115)(cid:0)(cid:0)Be the supplier / strategic partner
has a history of predicting and
of choice for our CUSTOMERS, while
“riding the wave” of the next leading
meeting our company objectives
powertrain technology.
(cid:115)(cid:0)(cid:0)Realize a QUALITY operating system
Moreover, all of our success, past, present
that focuses on zero defects
and future, is a result of the dedication
(cid:115)(cid:0)(cid:0)Continuously improve the STRUCTURAL
EFFICIENCY of BorgWarner
and hard work of our employees. The
energy, ideas and commitment that
they bring to work everyday is what we
(cid:115)(cid:0)(cid:0)Ensure we have the right TALENT in
call BorgWarner Pride and it is the
the right locations to carry out our
foundation of our company. I would
strategies
(cid:115)(cid:0)(cid:0)Protect, nurture and sustain the unique
and successful CULTURE of BorgWarner
(cid:115)(cid:0)(cid:0)Supplement organic growth with
MERGERS & ACQUISTIONS to achieve
our product, technology, customer and
geographic goals
These strategies have been the
like to personally thank all of the
employees of BorgWarner for their
excellent efforts in 2010.
Our goal is to ensure that our company’s
future is secure, and to seize the
opportunities that will maximize value
creation for our stakeholders. We have
the financial strength to support our
strategic initiatives and we are driven
cornerstone of BorgWarner’s success
to succeed. We fully expect that the
for many years, and have been
re-energized for the future.
strategic decisions we make today will
successfully pave the road ahead for
tomorrow!
It is no coincidence that innovation
and product leadership is the first
strategy listed. This is the key to both
our past and future success. It is at the
core of the entrepreneurial BorgWarner
culture and underpins everything we
do. Our company mission is to
improve fuel economy and reduce
emissions and, as a result, no other
company is better positioned to benefit
from these trends than BorgWarner.
Timothy M. Manganello
Chairman and Chief Executive Officer
www.borgwarner.com
“ We have the
financial strength
to support our
C U S T O M E R D I V E R S I T Y W O R L DW I D E
2011 Sales Outlook*
*Includes NSK-Warner
**Excludes NSK-Warner
15% VW/Audi
Toyota 5%
6% Daimler
5% Renault
3% BMW
3% Fiat
3% Ford
1% GM
1% PSA
4%
Commercial
Vehicles
10% Other
Hyundai/Kia 4%
Honda 2%
Nissan 1%
China 6%
Other 6%
Ford 8%
Chrysler 3%
GM 3%
Commercial
Vehicles 5%
Other 5%
Asian OEMs 2%
Europe
50%*
(56%)**
Americas
25%*
(28%)**
Asia 25%*
(16%)**
strategic initiatives
N E T N EW B U S I N E S S 2 0 1 1 T H R U 2 0 1 3
$2.3 Billion of Net New Business – By Product
32%
Turbochargers:
Gasoline Direct
Injection, Variable
Turbine Geometry
& Regulated
Two-Stage®
13%
Dual Clutch Technology
5%
Transmission Components
3%
All-Wheel Drive
2%
eGearDrive™ for EV
16%
Variable Cam Timing
& Engine Timing
15%
Emissions & Other
Turbochargers
10%
Ignition Systems
and Electronics
4%
Thermal
Engine – 77%
Drivetrain – 23%
and we are driven
to succeed.”
E N G I N E G R O U P The Engine Group develops air management strategies and products to optimize engines for fuel efficiency,
reduced emissions and enhanced performance. BorgWarner’s expertise in engine timing systems, boosting systems, ignition systems,
air and noise management, cooling and controls is the foundation for this collaboration.
E N G I N E
G R O U P S A L E S
Millions of Dollars
.
M
3
1
6
7
3
$
,
M
9
.
4
5
1
3
$
,
.
M
5
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8
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$
,
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0
6
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$
,
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M
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3
8
8
2
$
,
K E Y T E C H N O L O G I E S
Chain Products Global leader
in the design and manufacture
of chain systems for engine
timing, automatic transmissions
and torque transfer, including four-
and all-wheel drive applications.
Engine chain systems include
chains, sprockets, tensioners,
control arms and guides, and
variable cam timing phasers.
Emissions Systems A global
leader in the design and supply
of exhaust gas recirculation
(EGR) systems, secondary air
systems (SAS), and advanced
actuators for enhanced engine
performance, fuel economy, and
reduced emissions.
commercial vehicles. Systems
enhance fuel efficiency, reduce
emissions and enhance vehicle
performance.
Thermal Systems Systems for
thermal management designed
to improve engine cooling, and
reduce emissions and fuel con-
sumption.
Turbochargers Leading designer
and manufacturer of turbocharg-
ers and boosting systems for
passenger cars, light trucks and
BERU Systems A worldwide
leading supplier of diesel cold-
start technology and a leading
European manufacturer of ignition
technology for gasoline vehicles.
Electronics and sensor technology
provide more comfort and stabil-
ity for applications in various
engine and vehicle functions.
‘06
‘07
’08
’09
‘10
Regulated Two-Stage®
Turbocharger
Cooling Systems
Cam Torque
Actuated Variable
Cam Timing
Diesel Cold-Start
Technology
Exhaust Gas
Recirculation
Engine Timing
D R I V E T R A I N G R O U P The Drivetrain Group harnesses a legacy of more than 100 years as an industry innovator in transmission
and all-wheel drive technology. The group is leveraging its understanding of powertrain clutching technology to develop interactive
control systems and strategies for all types of torque management.
D R I V E T R A I N
G R O U P S A L E S
Millions of Dollars
M
8
.
8
9
5
,
1
$
M
4
.
1
6
4
,
1
$
M
4
.
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2
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1
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6
,
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5
.
3
9
0
,
1
$
K E Y T E C H N O L O G I E S
Torque Management Leading
global designer and producer of
torque distribution and manage-
ment systems, including NexTrac®
Torque Management devices for
front-wheel drive vehicles and
transfer cases for rear-wheel
drive applications. These systems
enhance stability, security and
drivability of passenger cars,
crossover vehicles, SUVs and
light trucks.
Transmission Products A global
designer and manufacturer of
automatic transmission compo-
nents and modules and supplier
to virtually every major automatic
transmission manufacturer in
the world. Friction and mechani-
cal products include dual clutch
modules, friction clutch modules,
friction plates, transmission bands,
torque converter clutches, one-way
clutches and torsional vibration
dampers. Controls products feature
electro-hydraulic solenoids for
standard and high pressure
hydraulic systems, transmission
solenoid modules and dual clutch
control modules.
‘06
‘07
’08
’09
‘10
DualTronic®
Transmission
Clutch Modules
NexTrac ®
All-Wheel Drive
All-Wheel Drive
Transfer Cases
Transmission One-
Way Clutches
Transmission
Control Modules
Transmission
Friction Products
BorgWarner will provide its full financial report electronically as part of its environmental initiative to conserve resources and reduce costs.
For more information on the company’s financial performance and sustainability initiatives, please visit our website at www.borgwarner.com.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
� Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2010
OR
� Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 1-12162
BORGWARNER INC.
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
Incorporation or organization
13-3404508
(I.R.S. Employer Identification No.)
3850 Hamlin Road,
Auburn Hills, Michigan 48326
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248) 754-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on
which registered
New York Stock Exchange
Securities registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes � No �
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act.
Yes � No �
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes � No �
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).
Yes � No �
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405
of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. �
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer �
Accelerated filer �
Non-accelerated filer � Smaller reporting company �
(Do not check if a smaller reporting company)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes � No �
The aggregate market value of the voting common stock of the registrant held by stockholders (not
including voting common stock held by directors and executive officers of the registrant) on June 30, 2010 (the
last business day of the most recently completed second fiscal quarter) was approximately $4.3 billion.
As of February 4, 2011, the registrant had 111,738,557 shares of voting common stock outstanding.
Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K
DOCUMENTS INCORPORATED BY REFERENCE
indicated.
Portions of the BorgWarner Inc. Proxy Statement for the 2011 Annual Meeting of Stockholders
Part III
Document
Part of Form 10-K
into which
incorporated
Source: BORGWARNER INC, 10-K, February 10, 2011
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BORGWARNER INC.
Form 10-K
YEAR ENDED DECEMBER 31, 2010
INDEX
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
(Removed and Reserved by the SEC)
Item 5.
Item 6.
Item 7.
PART II.
Market for the Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A.
Item 8.
Item 9A.
Item 9B.
Quantitative and Qualitative Disclosure About Market Risk
Financial Statements and Supplementary Data
Controls and Procedures
Other Information
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions and Director
Independence
Item 14.
Principal Accountant Fees and Services
PART IV.
Exhibits and Financial Statement Schedules
Item 15.
EX-10.24
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
2
Page No.
4
13
18
19
20
20
20
23
24
51
51
110
111
111
111
111
111
111
111
Source: BORGWARNER INC, 10-K, February 10, 2011
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Table of Contents
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Statements contained in this Form 10-K (including Management’s Discussion and Analysis of
Financial Condition and Results of Operations) may contain forward-looking statements as
contemplated by the 1995 Private Securities Litigation Reform Act (the “Act”) that are based on
management’s current outlook, expectations, estimates and projections. Words such as
“anticipates,” “believes,” “continues,” “could,” “designed,” “effect,” “estimates,” “evaluates,”
“expects,” “forecasts,” “goal,” “initiative,” “intends,” “outlook,” “plans,” “potential,” “project,” “pursue,”
“seek,” “should,” “target,” “when,” “would,” variations of such words and similar expressions are
intended to identify such forward-looking statements. All statements, other than statements of
historical fact contained or incorporated by reference in this Form 10-K, that we expect or anticipate
will or may occur in the future regarding our financial position, business strategy and measures to
implement that strategy, including changes to operations, competitive strengths, goals, expansion
and growth of our business and operations, plans, references to future success and other such
matters, are forward-looking statements. Accounting estimates, such as those described under the
heading “Critical Accounting Policies” in Item 7 of this Annual Report on Form 10-K, are inherently
forward-looking. These statements are based on assumptions and analyses made by us in light of
our experience and our perception of historical trends, current conditions and expected future
developments, as well as other factors we believe are appropriate in the circumstances.
You should not place undue reliance on these forward-looking statements, which speak only as
of the date of this Annual Report. Forward-looking statements are subject to risks and uncertainties,
many of which are difficult to predict and generally beyond our control, that could cause actual
results to differ materially from those expressed, projected or implied in or by the forward-looking
statements. Such risks and uncertainties include: fluctuations in domestic or foreign vehicle
production, the continued use by original equipment manufacturers of outside suppliers, fluctuations
in demand for vehicles containing our products, changes in general economic conditions, as well as
the other risks noted under Item 1A, “Risk Factors” and in other reports that we file with the
Securities and Exchange Commission. We do not undertake any obligation to update or announce
publicly any updates to or revision to any of the forward-looking statements in this Form 10-K to
reflect any change in our expectations or any change in events, conditions, circumstances, or
assumptions underlying the statements.
This section and the discussions contained in Item 1A, “Risk Factors,” and in Item 7,
subheading “Critical Accounting Policies” in this report, are intended to provide meaningful
cautionary statements for purposes of the safe harbor provisions of the Act. This should not be
construed as a complete list of all of the economic, competitive, governmental, technological and
other factors that could adversely affect our expected consolidated financial position, results of
operations or liquidity. Additional risks and uncertainties not currently known to us or that we
currently believe are immaterial also may impair our business, operations, liquidity, financial
condition and prospects.
3
Source: BORGWARNER INC, 10-K, February 10, 2011
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Item 1. Business
PART I
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a Delaware corporation that
was incorporated in 1987. We are a leading, global supplier of highly engineered automotive
systems and components, primarily for powertrain applications. Our products help improve vehicle
performance, fuel efficiency, stability and air quality. These products are manufactured and sold
worldwide, primarily to original equipment manufacturers (“OEMs”) of light-vehicles (passenger
cars, sport-utility vehicles, vans and light-trucks). The Company’s products are also sold to other
OEMs of commercial trucks, buses and agricultural and off-highway vehicles. We also manufacture
and sell our products to certain Tier One vehicle systems suppliers and into the aftermarket for light
and commercial vehicles. The Company operates manufacturing facilities serving customers in the
Americas, Europe and Asia, and is an original equipment supplier to every major automotive OEM
in the world.
Financial Information About Reporting Segments
Refer to Note 19, “Reporting Segments and Related Information” of the Notes to the
Consolidated Financial Statements in Item 8 of this report for financial information about business
segments.
Narrative Description of Reporting Segments
The Company reports its results under two reporting segments: Engine and Drivetrain. Net
revenues by segment for the three years ended December 31, 2010, 2009 and 2008 are as follows
:
Net Sales
Engine
Drivetrain
Inter-segment eliminations
Net sales
2010
Year Ended December 31,
2009
(Millions of dollars)
$ 4,060.8 $ 2,883.2 $ 3,861.5
1,426.4
(24.0)
$ 5,652.8 $ 3,961.8 $ 5,263.9
1,611.4
(19.4)
1,093.5
(14.9)
2008
The sales information presented above excludes the sales by the Company’s unconsolidated
joint ventures (See “Joint Ventures” section). Such unconsolidated sales totaled approximately
$779 million in 2010, $599 million in 2009 and $792 million in 2008.
Engine
The Engine Group develops and manufactures products to manage engines for fuel efficiency,
reduced emissions, and enhanced performance. Concern about fuel prices and availability, and the
need to lower CO2 emissions are driving demand for the Company’s products in smaller, more
efficient gasoline and diesel engines and alternative powertrains. Engine Group products currently
fall into the following major categories: turbochargers, timing devices and chain products, emissions
systems, thermal systems, diesel cold start and gasoline ignition technology and cabin heaters.
The Engine Group provides turbochargers for light-vehicle, commercial-vehicle and off-road
applications for diesel and gasoline engine manufacturers in Europe, North America, South America
and Asia. The Engine Group has greatly benefited from the growth in turbocharger demand in
Europe. This growth is linked to increasing demand for diesel engines in light vehicles, which
typically use turbochargers, and for turbocharged gasoline engines. Benefits of turbochargers in
both light-vehicle and commercial-vehicle applications include increased power for a given engine
size, improved fuel economy and significantly reduced emissions.
Sales of turbochargers for light-vehicles represented approximately 26%, 27%, and 24% of the
Company’s total revenues for 2010, 2009 and 2008, respectively. The Company currently supplies
light-
4
Source: BORGWARNER INC, 10-K, February 10, 2011
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vehicle turbochargers to many OEMs including Volkswagen, Renault, PSA, Daimler, Hyundai, Fiat,
BMW, Ford and General Motors. The Company also supplies commercial-vehicle turbochargers to
Caterpillar, John Deere, Daimler, Navistar, Deutz and MAN.
The Company’s newest technologies are its regulated two-stage turbocharging system known
as R2S®, variable turbine geometry (“VTG”) turbochargers and turbochargers for gasoline direct
injected engines. In 2008, the Company announced the start of production of its award winning R2S
technology for Daimler’s four-cylinder diesel engine range. The Company also began shipping VTG
turbochargers for VW’s common-rail engine range and announced the launch of a VTG
turbocharger for use with low-pressure exhaust gas recirculation to reduce emissions on VW’s Jetta
Clean Diesel TDI. In 2010, the Company began shipping turbochargers for Ford’s 3.5 liter V6
direct-injected gasoline EcoBoost engine for rear-wheel drive cars and trucks. Ford selected
BorgWarner’s leading gasoline turbocharger technology for their new four-cylinder EcoBoost
engine, which made its global debut in 2010.
The Engine Group also designs and manufactures products to control emissions and improve
fuel economy. These products include electric air pumps, turbo actuators that use integrated
electronics to precisely control turbocharger speed and pressure ratio, and exhaust gas
recirculation coolers, tubes and valves for gasoline and diesel applications.
The Engine Group’s chain and chain systems products include timing chain and timing drive
systems, variable cam timing (“VCT”) systems, crankshaft and camshaft sprockets, tensioners,
guides and snubbers, HY-VO ® front-wheel drive (“FWD”) transmission chain and four-wheel drive
(“4WD”) chain, and MORSE GEMINI ® chain systems for light-vehicle and commercial-vehicle
applications.
The Company’s timing chain systems are used on Ford’s family of engines, including the
Duratec, Modular and in-line four-cylinder engines, as well as on a number of Chrysler’s engines,
including its 3.7 liter and 4.7 liter engines, the four-cylinder World Engine and the new 3.6 liter
Pentastar engine. In addition, the Company provides timing systems to a number of Asian OEMs,
including Honda, Nissan, and Hyundai, and to several European OEMs. The Company believes
that it is the world’s leading manufacturer of timing chain systems.
The Engine Group’s newest technology is its VCT with mid position lock, which allows a greater
range of camshaft positioning thereby enabling greater control over airflow and the opportunity to
improve fuel economy, function and efficiency compared with conventional VCT systems.
BorgWarner is currently working with five OEMs to implement the technology.
The Company believes it is the world’s leading manufacturer of chain for FWD transmissions
and 4WD transfer cases. HY-VO chain is used to transfer power from the engine to the drivetrain.
The chain in a transfer case distributes power between a vehicle’s front and rear output shafts
which, in turn, provide torque to the front and rear wheels. The Company’s MORSE GEMINI
transmission chain system emits significantly less chain pitch frequency noise than conventional
transmission chain systems.
The Company also believes it is a leading global provider of engine thermal solutions for truck,
agricultural and off-highway applications. The group designs, manufactures and markets viscous
fan drives that control fans to sense and respond to multiple cooling requirements. The Engine
Group also manufactures and markets polymer fans for engine cooling systems. The Company’s
thermal products provide improved vehicle fuel economy and reduced engine emissions while
minimizing parasitic horsepower loss. The Company has been awarded the “standard position” (the
OEM-designated preferred supplier of component systems available to the end-customer) at the
major global heavy truck producers.
In 2005, the Company acquired approximately 69.4% of the outstanding shares of BERU
Aktiengesellschaft (“BERU”), headquartered in Ludwigsburg, Germany. Through a series of
transactions and legal actions, the Company became the only shareholder of BERU effective
September 30, 2009. That company’s corporate form and name was changed to BorgWarner
BERU Systems GmbH (“BERU Systems”) in late 2009.
5
Source: BORGWARNER INC, 10-K, February 10, 2011
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BERU System’s operating results are included within the Company’s Engine Group segment.
BERU Systems is a leading global automotive supplier of diesel cold start technology (glow plugs
and instant starting systems). In 2008, BERU launched its new Pressure Sensor Glow Plug with
which the combustion process of a diesel engine is monitored and enhanced, allowing the lowest
CO2 and NOx emissions possible. It also designs and manufactures gasoline ignition technology
(spark plugs and ignition coils); and electronic control units and sensor technology (tire pressure
sensors, diesel cabin heaters and selected sensors).
On June 2, 2009, the Company announced the purchase of advanced gasoline ignition
technology and related intellectual property from Florida-based Etatech, Inc. The high-frequency
ignition technology enables high-performing, lean burning engines to significantly improve fuel
economy and reduce emissions compared with conventional combustion technologies.
On April 10, 2010, the Company acquired 100% of Dytech ENSA S.L. (“Dytech”),
headquartered in Vigo, Spain. Dytech is a leading producer of exhaust gas recirculation (EGR)
coolers, EGR tubes, and integrated EGR modules including valves for automotive and commercial
vehicle applications, both on- and off-road.
In anticipation of market growth expected for its electric cabin heaters, the Company completed
the acquisition of BERU-Eichenauer GmbH by acquiring the shares of its former joint venture
partner, Eichenauer Heizelemente GmbH & Co. KG. The former 50/50 joint venture was formed in
2000 to develop and manufacture electric cabin heaters. The acquisition formally took effect on
May 1, 2010.
Drivetrain
The Drivetrain Group leverages the Company’s expertise in clutching and control systems to
enable efficient transmission of engine torque through the vehicle drivetrain and management of
torque distribution to the driven wheels. The Company’s technology can improve fuel efficiency and
help reduce emissions in all types of powertrains. The Drivetrain Group’s major products are
transmission components and systems, and all-wheel drive (“AWD”) torque management systems.
The Drivetrain Group designs and manufactures automatic transmission components and
modules and is a supplier to virtually every major automatic transmission manufacturer in the world
for both conventional automatic, new dual-clutch transmissions (“DCT”) and automated manual
transmissions.
Friction and mechanical products include dual clutch modules, friction clutch modules, friction
plates, transmission bands, torque converter clutches, one-way clutches and torsional vibration
dampers. Controls products feature electro-hydraulic solenoids for standard and high pressure
hydraulic systems, transmission solenoid modules and dual clutch control modules.
The Company’s 50%-owned joint venture in Japan, NSK-Warner Kabushiki Kaisha
(“NSK-Warner”), is a leading producer of friction plates and one-way clutches in Japan.
NSK-Warner is also the joint venture partner with a 40% interest in the Drivetrain Group’s Korean
subsidiary, BorgWarner Transmission Systems Korea, Inc.
The Company has led the globalization of today’s DCT technology for over ten years. Following
the development of its DCT technology in the 1990s, the Company established its industry-leading
position in Europe in 2003 with the production launch of its award-winning DualTronic® innovations
with VW/Audi. In 2007, the Company launched its first dual-clutch technology application in a
Japanese transmission with Nissan.
The Company has announced DCT programs with customers that include VW, Audi, SAIC and
Nissan, in addition to Getrag DCT programs with BMW, Ford and other global automakers. Also,
the Company is working on several other DCT programs with OEMs around the world. BorgWarner
DualTronic technology enables a conventional, manual gearbox to function as a fully automatic
transmission by eliminating the interruption in power flow that occurs when a single clutch manual
transmission shifts gears. The result is a smooth shifting automatic transmission with the fuel
efficiency and great driving experience of a manual gearbox.
6
Source: BORGWARNER INC, 10-K, February 10, 2011
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On November 18, 2008, we entered into a joint venture agreement with China Automobile
Development United Investment Company, a company owned by leading Chinese automakers, to
produce various dual clutch transmission modules. The joint venture’s operations will be located in
Dalian, China and production is scheduled to begin in 2011. The Company owns 66% of the joint
venture.
In conventional automatic transmissions, there has been a global market trend from four and
five speeds to six, seven, and even eight speed transmissions. Transmissions with more speeds
improve fuel economy and vehicle performance and offer growth opportunities.
The Drivetrain Group’s torque management products include rear-wheel drive (“RWD”)/AWD
transfer case systems, FWD/AWD electromagnetic coupling systems and advanced products. The
Company’s focus is on electronically controlled (active) torque management devices and systems
for their vehicle dynamics, fuel economy and stability benefits.
Transfer cases are installed primarily on light-trucks, sport-utility vehicles (“SUV“s), rear-wheel
drive based cross-over utility vehicles (“CUV“s) and passenger cars. A transfer case attaches to the
transmission and distributes torque to the front and rear axles improving vehicle traction and
stability in dynamic driving conditions.
The Company is involved in the FWD/AWD market with electromagnetic couplings that use
electronically controlled clutches to distribute power to the rear wheels instantly as traction is
required. The NexTrac® AWD device is our latest product innovation that produces outstanding
stability and traction while promoting better fuel economy. The NexTrac AWD device launched in
2008 on the Hyundai Santa Fe, Tucson and KIA Sportage.
With the trend toward vehicle electrification gaining momentum, the Company is also applying
its years of expertise to deliver robust and highly efficient single and multiple speed electric gear
reduction solutions for hybrids and electric vehicles. Currently, we supply our eGearDrive (TM)
single-speed gearbox to the Ford Transit Connect Electric. We are actively engaged with traditional
and non-traditional OEMs on a number of other transmission programs for plug-in hybrid and
electric vehicles.
On January 31, 2011, the Company acquired the Traction Systems division of Haldex Group, a
leading provider of innovative all-wheel drive (AWD) products for the global vehicle industry
headquartered in Stockholm, Sweden. The purchase price was approximately $205 million
(1.425 billion Swedish Krona). The operating results will be reported within the Company’s
Drivetrain reporting segment from the date of acquisition.
This acquisition is expected to accelerate BorgWarner’s growth in the global AWD market as it
continues to shift toward front-wheel drive (FWD) based vehicles. The acquisition will add industry
leading FWD/AWD technologies, with a strong European customer base, to BorgWarner’s existing
portfolio of front and rear-wheel drive based products. This enables BorgWarner to provide global
customers a broader range of all-wheel drive solutions to meet their vehicle needs.
Joint Ventures
As of December 31, 2010, the Company had 11 joint ventures in which it had a less-than-100%
ownership interest. Results from the eight ventures in which the Company is the majority owner are
consolidated as part of the Company’s results. Results from the three ventures in which the
Company’s effective ownership interest is 50% or less, were reported by the Company using the
equity method of accounting.
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Source: BORGWARNER INC, 10-K, February 10, 2011
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Management of the unconsolidated joint ventures is shared with the Company’s respective joint
venture partners. Certain information concerning the Company’s joint ventures is set forth below:
Percentage
Owned by
the
Year
Location
of
Joint Venture
Products
Organized Company (a)
Operation Joint Venture Partner
Unconsolidated:
NSK-Warner K.K.
Turbo Energy
Limited(c)
Transmission components
Turbochargers
1964
1987
50% Japan/China NSK Ltd.
32.6%
India
Sundaram Finance
Limited;
Brakes India Limited
Fiscal 2010
Sales (Millions
of Dollars) (b)
$ 634.7
$ 137.9
BERU Diesel Start
Glow Plugs
Systems Pvt. Ltd.
1996
49%
India
Jayant Dave
$
6.3
Transmission components
1987
60%(d)
Korea
NSK-Warner K.K.
$ 148.1
Consolidated:
BorgWarner
Transmission
Systems Korea,
Inc.
Divgi-Warner Pvt. Ltd.
Borg-Warner
Shenglong (Ningbo)
Co. Ltd.
BorgWarner
TorqTransfer
Systems Beijing Co.
Ltd.
Transfer cases and
automatic locking hubs
Fans and fan drives
1995
1999
60%
70%
India
China
Transfer cases
2000
80%
China
SeohanWarner Turbo
Turbochargers
2003
Systems Ltd.
BorgWarner United
Transmission
Systems Co. Ltd.
Transmission components
2009
BERU Korea Co. Ltd.
Ignition coils and pumps
BorgWarner-Vikas
EGR coolers
Emissions Systems
India Private Limited
2001
2007
71%
66%
51%
60%
Korea
China
Korea
India
Divgi Metalwares, Ltd.
Ningbo Shenglong Group
Co., Ltd.
Beijing Automotive
Industry Corporation
Korea Flange Company
China Automobile
Development
United Investment Co.,
Ltd.
Mr. K.B. Mo and Mr. D.H.
Kim
Kenmore Vikas Pvt. Ltd.
and Man Mohak Fin.
Invest Pvt. Ltd.
$
$
20.8
49.7
$
63.6
$
$
$
$
90.0
—
45.6
5.1
(a) In the second quarter of 2008, the Company and BERU completed a Domination and Profit
Transfer Agreement (“DPTA”), giving BorgWarner full control of BERU. For the joint ventures in
which BERU Systems is a party, the percentage of ownership for each joint venture reflects
BERU System’s ownership percentage.
(b) All sales figures are for the year ended December 31, 2010, except NSK-Warner and Turbo
Energy Limited. NSK-Warner’s sales are reported for the 12 months ended November 30,
2010. Turbo Energy Limited’s sales are reported for the 12 months ended September 30,
2010.
(c) The Company made purchases from Turbo Energy Limited totaling $22.9 million, $24.2 million
and $25.4 million for the years ended December 31, 2010, 2009, and 2008, respectively.
(d) BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner
Transmission Systems Korea, Inc. This gives the Company an additional indirect effective
ownership percentage of 20%. This results in a total effective ownership interest of 80%.
Financial Information About Geographic Areas
Refer to Note 19, “Reporting Segments and Related Information” of the Notes to the
Consolidated Financial Statements in Item 8 of this report for financial information about geographic
areas.
Approximately 74% of the Company’s consolidated sales for 2010 were outside the United
States, including exports. However, a portion of such sales were to OEMs headquartered outside
the United States that produce vehicles that are, in turn, exported to the United States.
Customers
Approximately 77% of the Company’s total sales in 2010 were for light-vehicle applications;
16% of the Company’s sales were to a diversified group of commercial truck, bus, construction and
agricultural vehicle manufacturers; and the remaining 7% to distributors of aftermarket replacement
parts.
8
Source: BORGWARNER INC, 10-K, February 10, 2011
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For the most recent three-year period, the Company’s worldwide sales to the following
customers (including their subsidiaries) were approximately as follows:
Customer
Volkswagen
Ford
2010
2009
19%
11%
22%
12%
2008
19%
9%
No other single customer accounted for more than 10% of our consolidated sales in any year of
the periods presented.
The Company’s automotive products are generally sold directly to OEMs substantially pursuant
to negotiated annual contracts, long-term supply agreements or terms and conditions as may be
modified by the parties. Deliveries are subject to periodic authorizations based upon the production
schedules of the OEMs. The Company typically ships its products directly from its plants to the
OEMs.
Sales and Marketing
Each of the Company’s business units within its two reporting segments has its own sales
function. Account executives for each of our business units are assigned to serve specific OEM
customers for one or more of a business unit’s products. Our account executives spend the majority
of their time in direct contact with OEM purchasing and engineering employees and are responsible
for servicing existing business and for identifying and obtaining new business. Because of their
close relationship with OEMs, account executives are able to identify and meet customers’ needs
based upon their knowledge of our products design and manufacturing capabilities. Upon securing
a new order, account executives participate in product launch team activities and serve as a key
interface with the customers.
In addition, the sales and marketing employees of our Engine segment and Drivetrain segment
often work together to explore cross-development opportunities for the business units. The
development of DualTronic®, the Company’s wet-clutch and control-system technology for a
new-concept automated transmission, is an example of a successful collaboration.
Seasonality
The Company’s business is moderately seasonal because the Company’s largest North
American customers typically halt vehicle production for approximately two weeks in July and one
week in December. Customers in Europe and Asia typically shut down vehicle production during
portions of July or August and one week in the fourth quarter. Accordingly, the Company’s third and
fourth quarters may reflect those practices.
Research and Development
The Company conducts advanced engine and drivetrain research at the reporting segment
level. This advanced engineering function looks to leverage know-how and expertise across product
lines to create new engine and drivetrain systems and modules that can be commercialized. A
venture capital fund that was created by the Company as seed money for new innovation and
collaboration across businesses is managed by this function.
In addition, each of the Company’s business units within its two reporting segments has its own
research and development (“R&D”) organization. The Company has approximately 700 employees,
including engineers, mechanics and technicians, engaged in R&D activities at facilities worldwide.
The Company also operates testing facilities such as prototype, measurement and calibration, life
cycle testing and dynamometer laboratories.
By working closely with the OEMs and anticipating their future product needs, the Company’s
R&D personnel conceive, design, develop and manufacture new proprietary automotive
components and systems. R&D personnel also work to improve current products and production
processes. The Company believes its commitment to R&D will allow it to obtain new orders from its
OEM customers.
9
Source: BORGWARNER INC, 10-K, February 10, 2011
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The following table presents the Company’s gross and net expenditures on R&D activities:
Gross R&D expenditures
Customer reimbursements
Net R&D expenditures
2010
Year Ended December 31,
2009
(Millions of dollars)
$ 233.2 $ 219.0 $ 273.4
(67.7)
$ 185.0 $ 155.2 $ 205.7
(48.2)
(63.8)
2008
The Company’s net R&D expenditures are included in the selling, general, and administrative
expenses of the Consolidated Statements of Operations. Net R&D expenditures as a percentage of
net sales were 3.3% in 2010 and 3.9% in both 2009 and 2008. Customer reimbursements are
netted against gross R&D expenditures upon billing of services performed. The Company has
contracts with several customers at the Company’s various R&D locations. No such contract
exceeded $6.0 million in any of the years presented.
Patents and Licenses
The Company has approximately 4,000 active domestic and foreign patents and patent
applications pending or under preparation, and receives royalties from licensing patent rights to
others. While it considers its patents on the whole to be important, the Company does not consider
any single patent, any group of related patents or any single license essential to its operations in
the aggregate or to the operations of any of the Company’s business groups individually. The
expiration of the patents individually and in the aggregate is not expected to have a material effect
on the Company’s financial position or future operating results. The Company owns numerous
trademarks, some of which are valuable, but none of which are essential to its business in the
aggregate.
The Company owns the “BorgWarner” and “Borg-Warner Automotive” trade names and
housemarks, and variations thereof, which are material to the Company’s business.
Competition
The Company’s operating segments compete worldwide with a number of other manufacturers
and distributors which produce and sell similar products. Many of these competitors are larger and
have greater resources than the Company. Technological innovation, application engineering
development, quality, price, delivery and program launch support are the primary elements of
competition.
The Company’s major competitors by product type follow:
Product Type: Engine
Turbochargers:
Timing devices and chains:
Emissions systems:
Thermal systems:
Diesel cold start, gasoline ignition technology and cabin heaters:
10
Name of Competitor
Holset (Cummins Inc.)
Honeywell
IHI
Mitsubishi Heavy Industries (MHI)
Denso
Iwis
Schaeffler Group
Tsubaki Group
Behr
Pierburg
Valeo
Behr
Horton/Sachs
Usui
Bosch
NGK
Source: BORGWARNER INC, 10-K, February 10, 2011
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Product Type: Drivetrain
Name of Competitor
Torque transfer:
Transmission:
GKN Driveline
JTEKT
Magna Powertrain
Bosch
Denso
Dynax
Schaeffler Group
In addition, a number of the Company’s major OEM customers manufacture, for their own use
and for others, products which compete with the Company’s products. Other current OEM
customers could elect to manufacture products to meet their own requirements or to compete with
the Company. There can be no assurance that the Company’s business will not be adversely
affected by increased competition in the markets in which it operates.
For many of its products, the Company’s competitors include suppliers in parts of the world that
enjoy economic advantages such as lower labor costs, lower health care costs and, in some cases,
export subsidies and/or raw materials subsidies. Also, see Item 1A. Risk Factors.
Workforce
As of December 31, 2010, the Company and its consolidated subsidiaries had a salaried and
hourly workforce of approximately 17,500 (as compared with approximately 12,500 at
December 31, 2009), of which approximately 5,000 were in the U.S. Approximately 23% of the
Company’s U.S. workforce is unionized. The hourly workforces at certain of our international
facilities are also unionized. The Company believes its present relations with our workforce to be
satisfactory.
Our only domestic collective bargaining agreement is for our Ithaca and Cortland, New York
facilities. This agreement expires in September 2012.
Raw Materials
The Company uses a variety of raw materials in the production of its automotive products
including steel, aluminum, copper, plastic resins, and certain alloy elements. Manufacturing
operations for each of the Company’s operating segments are dependent upon natural gas, fuel oil,
and electricity.
Due to a global economic recovery in 2010, commodity prices increased after dropping sharply
in 2009. The 2009 decline in commodity prices was due to falling global demand and oversupply.
As developed economies continue to recover and auto production accelerates, certain
commodities may experience temporary shortages and inflated prices until production volumes
again reach equilibrium with market demands. The Company uses a variety of tactics in order to
limit the impact of supply shortages and inflationary pressures.
The Company’s global procurement organization works to accelerate cost reductions,
purchases from lower cost regions, supplier rationalization, risk mitigation efforts, and collaborative
buying activities. In addition, the Company uses long-term contracts, cost sharing arrangements,
design changes, customer buy programs, and limited financial instruments to help control costs.
The Company intends to use similar measures in 2011 and beyond. Refer to Note 10, “Financial
Instruments” of the Notes to the Consolidated Financial Statements in Item 8 of this report for
information related to the Company’s hedging activities.
For 2011, the Company believes that its supplies of raw materials and energy are adequate and
available from multiple sources to support its manufacturing requirements.
11
Source: BORGWARNER INC, 10-K, February 10, 2011
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Available Information
Through its Internet website (www.borgwarner.com), the Company makes available, free of
charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange
Commission, as soon as reasonably practicable after they are filed or furnished. The Company also
makes the following documents available on its Internet website: the Audit Committee Charter; the
Compensation Committee Charter; the Corporate Governance Committee Charter; the Company’s
Corporate Governance Guidelines; the Company’s Code of Ethical Conduct; and the Company’s
Code of Ethics for CEO and Senior Financial Officers. You may also obtain a copy of any of the
foregoing documents, free of charge, if you submit a written request to Investor Relations, 3850
Hamlin Road, Auburn Hills, Michigan 48326.
Executive Officers of the Registrant
Set forth below are the names, ages, positions and certain other information concerning the
executive officers of the Company as of February 10, 2011.
Name
Timothy M. Manganello
Robin J. Adams
John Sanderson
Roger J. Wood
Jan Bertsch
Daniel CasaSanta
John J. Gasparovic
Ronald T. Hundzinski
Janice K. McAdams
James R. Verrier
Thomas Waldhier
Age
Position With Company
60 Chairman and Chief Executive Officer
57
Executive Vice President, Chief Financial Officer
and Chief Administrative Officer
58 Executive Vice President
48 Executive Vice President
54 Vice President and Treasurer
56 Vice President
53 Vice President, General Counsel & Secretary
52 Vice President and Controller
52 Vice President, Human Resources
48 Vice President
48 Vice President
Mr. Manganello has been Chairman of the Board since June 2003 and Chief Executive Officer
of the Company since February 2003. Mr. Manganello is also a director of Bemis Company, Inc.
and Zep Inc. and he serves as the Board Chairman of Federal Reserve Bank of Chicago, Detroit
branch.
Mr. Adams has been Executive Vice President, Chief Financial Officer and Chief Administrative
Officer since April 2004. Mr. Adams serves as a member of BorgWarner’s Board of Directors.
Mr. Adams also is a director of Carlisle Companies Inc.
Mr. Sanderson has been Executive Vice President of the Company and Group President and
General Manager of the Drivetrain Group since January 2010. From February 2009 until December
2009 he was Vice President of the Company and President and General Manager of BorgWarner
Transmission Systems Inc. From October 1999 until June 2008 he was Chief Executive Officer,
Americas of Siemens VDO.
Mr. Wood has been Executive Vice President of the Company since May 2009 and Group
President of the Engine Group since January 2010. He was President of BorgWarner Turbo
Systems Inc. and BorgWarner Emissions Systems Inc. from August 2005 through December 2009.
Ms. Bertsch has been Vice President and Treasurer of the Company since November 30, 2009.
From July 2008 through November 2009 she was Senior Vice President, Treasurer, and Chief
Information Officer for Chrysler Group, LLC and Chrysler LLC. From May 2006 through June 2008
she was Vice President and Chief Information Officer of Daimler Chrysler’s Chrysler Group and
Mercedes Benz NAFTA organizations and Chrysler LLC. From July 2001 through April 2006 she
was Vice President, Global Sales and Marketing Finance for Chrysler LLC.
Mr. CasaSanta has been Vice President of the Company and President and General Manager
of BorgWarner Thermal Systems Inc. (“Thermal Systems”) since January 2010. He was General
Manager of Thermal Systems from June 2009 through December 2009. He was President and
General Manager of
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BorgWarner TorqTransfer Systems Inc. (“TTS”) from June 2008 until June 2009. He was Vice
President and General Manager of Thermal Systems from January 2003 until June 2008.
Mr. Gasparovic has been Vice President, General Counsel and Secretary of the Company
since January 2007. He was Senior Vice President and General Counsel of Federal-Mogul
Corporation from February 2005 until December 2006.
Mr. Hundzinski has been Vice President and Controller of the Company since April 2010. He
was Vice President of Finance of BorgWarner Turbo Systems from June 2005 to April 2010.
Ms. McAdams has been Vice President, Human Resources since March 2010. She was
Director of Compensation and Benefits from May 2005 to March 2010. She was Vice President of
Human Resources at Metaldyne from January 2004 until December 2004.
Mr. Verrier has been Vice President of the Company and President and General Manager of
BorgWarner Morse TEC Inc. (“Morse TEC”) since January 2010. He was Vice President and
General Manager, Passenger Car of BorgWarner Turbo Systems Inc. from January 2006 through
December 2009. He was Vice President and General Manager of BorgWarner Turbo Europe from
November 2004 until January 2006.
Mr. Waldhier has been Vice President of the Company since November 2008 and President
and General Manager of BorgWarner BERU and Emissions Systems since January 2010. He was
Chief Executive Officer of BERU from October 2007 through December 2009 when it ceased to be
a publicly held German company. He was Executive Vice President and Chief Operating Officer of
SAS Automotive from April 2004 until October 2007.
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K
should be considered. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial
also may impact our business operations. If any of the following risks occur, our business including
its financial performance, financial condition, operating results and cash flows could be materially
adversely affected.
Our industry is cyclical and our results of operations will be adversely affected by industry
downturns.
Automotive and truck production and sales are cyclical and sensitive to general economic
conditions and other factors including interest rates, consumer credit, and consumer spending and
preferences. Economic declines that result in significant reduction in automotive or truck production
would have a material adverse effect on our sales to original equipment manufacturers.
We continue to take steps to realign and resize our production capacity and cost structure to
meet current and projected operational and market requirements. Significant declines in the
automotive industry and financial declines and restructurings by our significant customers may
make it necessary to take restructuring actions and charges.
We are dependent on market segments that use our key products. Decreased demand in
those segments could adversely affect our business.
Some of our products, in particular turbochargers, are currently used primarily in diesel
passenger cars and commercial vehicles. Any significant reduction in production in these market
segments or loss of business in these market segments could have a material adverse effect on our
sales to original equipment manufacturers.
We face strong competition.
We compete worldwide with a number of other manufacturers and distributors that produce and
sell products similar to ours. Price, quality, delivery, technological innovation, application
engineering development and program launch support are the primary elements of competition. Our
competitors include vertically
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integrated units of our major original equipment manufacturer customers, as well as a large number
of independent domestic and international suppliers. We are not as large as a number of these
companies and do not have as many financial or other resources. The competitive environment has
changed dramatically over the past few years as our traditional U.S. original equipment
manufacturer customers, faced with intense international competition, have expanded their
worldwide sourcing of components. As a result, we have experienced competition from suppliers in
other parts of the world that enjoy economic advantages, such as lower labor costs, lower health
care costs and, in some cases, export or raw materials subsidies. Increased competition could
adversely affect our businesses.
We are under substantial pressure from original equipment manufacturers to reduce the
prices of our products.
There is substantial and continuing pressure on original equipment manufacturers to reduce
costs, including costs of products we supply. Although original equipment manufacturers have
indicated that they will continue to rely on outside suppliers, a number of our major original
equipment manufacturer customers manufacture products for their own uses that directly compete
with our products. These original equipment manufacturers could elect to manufacture such
products for their own uses in place of the products we currently supply. We believe that our ability
to develop proprietary new products and to control our costs will allow us to remain competitive.
However, we cannot assure you that we will be able to improve or maintain our gross margins on
product sales to original equipment manufacturers or that the trend by original equipment
manufacturers towards outsourcing will continue.
Annual price reductions to original equipment manufacturer customers appear to have become
a permanent feature of our business environment. To maintain our profit margins, we seek price
reductions from our suppliers, improve production processes to increase manufacturing efficiency,
update product designs to reduce costs and develop new products, the benefits of which support
stable or increased prices. Our ability to pass through increased raw material costs to our original
equipment manufacturer customers is limited, with cost recovery often less than 100% and often on
a delayed basis. We cannot assure you that we will be able to reduce costs in an amount equal to
annual price reductions, increases in raw material costs, and increases in employee wages and
benefits.
We are sensitive to the effects of our major customers’ labor relations.
All three of our primary North American customers, Ford, Chrysler and General Motors, have
major union contracts with the United Automobile, Aerospace and Agricultural Implement Workers
of America. Because of domestic original equipment manufacturers’ dependence on a single union,
we are affected by labor difficulties and work stoppages at original equipment manufacturers’
facilities. Similarly, a majority of our global customers’ operations outside of North America are also
represented by various unions. Any extended work stoppage could have an adverse effect on our
business.
Part of our labor force is unionized which could subject us to work stoppages.
As of December 31, 2010, approximately 23% of our U.S. workforce was unionized. Our only
domestic collective bargaining agreement is for our Ithaca and Cortland, New York facilities. This
agreement expires in September 2012. The hourly employees at certain of our international
facilities are also unionized. While we believe that our relations with our employees are satisfactory,
a prolonged dispute with our employees could have an adverse effect on our business.
We are subject to extensive environmental regulations.
Our operations are subject to laws governing, among other things, emissions to air, discharges
to waters and the generation, handling, storage, transportation, treatment and disposal of waste
and other materials. We believe that our business, operations and activities have been and are
being operated in compliance in all material respects with applicable environmental, health and
safety laws. However, the operation of automotive parts manufacturing plants entails risks in these
areas, and we cannot assure you that we will not incur
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material costs or liabilities as a result. Furthermore, through various acquisitions over the years, we
have acquired a number of manufacturing facilities, and we cannot assure you that we will not incur
material costs and liabilities relating to activities that predate our ownership. In addition, potentially
significant expenditures could be required in order to comply with evolving environmental, health
and safety laws that may be adopted in the future.
We have contingent liabilities related to environmental, product warranties, regulatory
matters, litigation and other claims.
We and certain of our current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by the United States Environmental Protection
Agency and certain state environmental agencies and private parties as potentially responsible
parties at various hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act and equivalent state laws. As a result, as of
December 31, 2010, we may be liable for the cost of clean-up and other remedial activities at 38 of
these sites.
We work with outside experts to determine a range of potential liability for environmental sites.
The ranges for each individual site are then aggregated into a loss range for the total accrued
liability. Management’s estimate of the loss range for environmental liability, including conditional
asset retirement obligations, for 2010 is between approximately $27 million and $42 million. We
record an accrual at the most probable amount within the range unless one cannot be determined;
in which case we record the accrual at the low end of the range. Based on information available to
us, we have established an accrual in our financial statements for indicated environmental liabilities
of $29.2 million, which includes our conditional asset retirement obligation under ASC Topic 410 of
$1.2 million at December 31, 2010. We currently expect the substantial portion of this amount to be
expended over the next three to five years.
We provide warranties to our customers for some of our products. Under these warranties, we
may be required to bear costs and expenses for the repair or replacement of these products. We
cannot assure you that costs and expenses associated with these product warranties will not be
material, or that those costs will not exceed any amounts accrued for such warranties in our
financial statement. Based upon information available to us, we have established an accrual in our
financial statements for product warranties of $66.8 million at December 31, 2010.
We are also party to, or have an obligation to defend a party to, various legal proceedings,
including those described in Note 14 to the Notes to the Consolidated Financial Statements in the
Company’s Annual Report on Form 10-K.
We are currently, and may in the future become, subject to legal proceedings and commercial
or contractual disputes. These claims typically arise in the normal course of business and may
include, but not be limited to, commercial or contractual disputes with our suppliers, intellectual
property matters and employment claims. There is a possibility that such claims may have an
adverse impact on our business that is greater than we anticipate.
Our growth strategy may prove unsuccessful.
We have a stated goal of increasing revenues and operating income at a rate greater than
global vehicle production by increasing content per vehicle with innovative new components and
through select acquisitions. We may not meet our goal because of any of the following: (a) the
failure to develop new products which will be purchased by our customers; (b) technology changes
rendering our products obsolete; (c) a reversal of the trend of supplying systems (which allows us to
increase content per vehicle) instead of components; and (d) the failure to find suitable acquisition
targets or the failure to integrate operations of acquired businesses quickly and cost effectively.
We are subject to risks related to our international operations.
We have manufacturing and technical facilities in many regions and countries, including North
America, Europe, China, India, South Korea, Japan, and Brazil and sell our products worldwide. For
2010,
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approximately 74% of our sales were outside North America. Consequently, our results could be
affected by changes in trade, monetary and fiscal policies, trade restrictions or prohibitions, import
or other charges or taxes, and fluctuations in foreign currency exchange rates, limitations on the
repatriation of funds, changing economic conditions, social unrest, political instability and disputes,
and international terrorism. Compliance with multiple and potentially conflicting laws and regulations
of various countries is burdensome and expensive. See Note 19, “Reporting Segments and Related
Information” to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K,
regarding the size of our international operations.
We may not realize sales represented by awarded business.
We base our growth projections, in part, on commitments made by our customers. These
commitments generally renew yearly during a program life cycle. If actual production orders from
our customers do not approximate such commitments, it could adversely affect our business.
We are impacted by the rising cost of providing pension and other post employment
benefits.
The automotive industry, like other industries, continues to be impacted by the rising cost of
providing pension and other post employment benefits. To partially address this impact, we
continue to make adjustments to certain retiree medical and pension plans. See Note 11,
“Retirement Benefit Plans” to the Consolidated Financial Statements in the Company’s Annual
Report on Form 10-K.
Certain defined benefit pension plans we sponsor are currently underfunded.
We sponsor certain defined benefit pension plans worldwide that are underfunded and will
require cash payments. Additionally, if the performance of the assets in our pension plans does not
meet our expectations, or if other actuarial assumptions are modified, our required contributions
may be higher than we expect. See Note 11, “Retirement Benefit Plans” to the Consolidated
Financial Statements in the Company’s Annual Report on Form 10-K.
Negative or unexpected tax consequences could adversely affect our business.
Adverse changes in the underlying profitability and financial outlook of our operations in several
jurisdictions could lead to changes in our valuation allowances against deferred tax assets and
other tax accruals that could adversely affect our financial performance.
Additionally, we are subject to tax audits by governmental authorities in the U.S. and numerous
non-U.S. jurisdictions. Because the results of tax audits are inherently uncertain, negative or
unexpected results from one or more such tax audits could adversely affect our business.
We rely on sales to major customers.
We rely on sales to original equipment manufacturers around the world. Supply to several of
these customers requires significant investment by the Company in working capital, plant and
equipment. Some of our customers are rated by the credit rating agencies as below investment
grade. The loss of sales to a major customer, due to any of a variety of factors including
non-renewal of purchase orders, the customer’s financial hardship or other unforeseen reasons,
could adversely affect our business.
Furthermore, some of our sales are concentrated. Our worldwide sales in 2010 to Volkswagen
and Ford constituted approximately 19% and 11%, respectively, of our 2010 consolidated sales.
Suppliers’ economic distress could result in the disruption of our operations and could
adversely affect our business.
Rapidly changing industry conditions such as volatile production volumes; credit tightness;
changes in foreign currencies; raw material, commodity, transportation, and energy price
escalation; drastic changes in consumer preferences; and others could adversely affect our supply
chain, and sometimes with little advanced notice. These conditions could also result in increased
commercial disputes and supply
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interruption risks. In certain instances, it would be difficult and expensive for us to change suppliers
that are critical to our business. On occasion, we must provide financial support to distressed
suppliers or take other measures to protect our supply lines. While we have taken definite actions to
mitigate these factors, we cannot predict with certainty the potential adverse effects these costs
might have on our business.
We continue to face highly volatile commodity costs used in the production of our products.
The Company uses a variety of commodities (including steel, nickel, copper, aluminum, plastic
resins, other raw materials and energy) and materials purchased in various forms such as castings,
powder metal, forgings, stampings, and bar stock. Increasing commodity costs will have an impact
on our results. We have sought to alleviate the impact of increasing costs by including a material
pass-through provision in our customer contracts wherever possible or by selectively hedging
certain commodity exposures. Customers frequently challenge these contractual provisions and
rarely pay the full cost of any materials increases. The discontinuation of ability to pass-through or
hedge increasing commodity costs would adversely affect our business.
From time to time, commodity prices may also fall rapidly. When this happens, suppliers may
withdraw capacity from the market until prices improve which may cause periodic supply
interruptions. The same may be true of our transportation carriers and energy providers.
We could be adversely affected by supply shortages of components from our suppliers.
In an effort to manage and reduce the cost of purchased goods and services, we have been
rationalizing our supply base. As a result, we are dependent on fewer sources of supply for certain
components used in the manufacture of our products. The Company selects suppliers based on
total value (including total landed price, quality, delivery, and technology), taking into consideration
their production capacities and financial condition. We expect that they will deliver to our stated
written expectations.
However, there can be no assurance that capacity limitations, labor unrest, weather
emergencies, commercial disputes, government actions, riots, wars, sabotage, non-conforming
parts, acts of terrorism, “Acts of God”, or other problems experienced by our suppliers will not result
in occasional shortages or delays in their supply of components to us. If we were to experience a
significant or prolonged shortage of critical components from any of our suppliers and could not
procure the components from other sources, we would be unable to meet the production schedules
for some of our key products and could miss customer delivery expectations. This would adversely
affect our customer relations and business.
A downgrade in the ratings of our debt could restrict our ability to access the debt capital
markets.
Changes in the ratings that rating agencies assign to our debt may ultimately impact our access
to the debt capital markets and the costs we incur to borrow funds. If ratings for our debt fall below
investment grade, our access to the debt capital markets could become restricted.
Additionally, our revolving credit agreement includes an increase in interest rates if the ratings
for our debt are downgraded. The interest costs on our revolving credit agreement are based on a
rating grid agreed to in our credit agreement. Further, an increase in the level of our indebtedness
and related interest costs may increase our vulnerability to adverse general economic and industry
conditions and may affect our ability to obtain additional financing.
Conditions in the automotive industry may adversely affect our business.
Our financial performance depends on conditions in the global automotive industry. Original
equipment manufacturers have experienced difficulties from a weakened economy and tightened
credit markets. If our customers reduce their orders to us, it would adversely affect our results of
operations. A prolonged downturn in the automotive industry or a significant product mix shift due to
consumer demand could require us to shut down plants or incur impairment charges. Continued
uncertainty relating to the financial condition of automakers may adversely affect our business.
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We are subject to possible insolvency of financial counterparties.
The Company engages in numerous financial transactions and contracts including insurance
policies, letters of credit, credit line agreements, financial derivatives, and investment management
agreements involving various counterparties. The Company is subject to the risk that one or more
of these counterparties may become insolvent and therefore be unable to discharge its obligations
under such contracts.
We are subject to possible insolvency of outsourced service providers.
The Company relies on third party service providers for administration of workers’
compensation claims, health care benefits, pension benefits, stockholder and bondholder
registration and similar services. These service providers contribute to the efficient conduct of the
Company’s business. Insolvency of one or more of these service providers could adversely affect
our business.
Our business success depends on attracting and retaining qualified personnel.
Our ability to sustain and grow our business requires us to hire, retain and develop a highly
skilled and diverse management team and workforce worldwide. Any unplanned turnover or inability
to attract and retain key employees in numbers sufficient for our needs could adversely affect our
business.
We are subject to business continuity risks associated with increasing centralization of our
information technology systems.
To improve efficiency and reduce costs, we have regionally centralized the information systems
that support our business processes such as invoicing, payroll and general management
operations. If the centralized systems are disrupted or disabled, key business processes could be
interrupted, which could adversely affect our business.
A variety of other factors could adversely affect our business.
Any of the following could materially and adversely affect our business: the loss of or changes
in supply contracts or sourcing strategies of our major customers or suppliers; start — up expenses
associated with new vehicle programs or delays or cancellation of such programs, underutilization
of our manufacturing facilities, which can be dependent on a single product line or customer;
inability to recover engineering and tooling costs; market and financial consequences of recalls that
may be required on products we supplied; delays or difficulties in new product development; the
possible introduction of similar or superior technologies by others; and global excess capacity and
vehicle platform proliferation.
Item 1B. Unresolved Staff Comments
The Company has received no written comments regarding its periodic or current reports from
the staff of the Securities and Exchange Commission that were issued 180 days or more preceding
the end of its 2010 fiscal year that remain unresolved.
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Item 2. Properties
As of December 31, 2010, the Company had 57 manufacturing, assembly, and technical
locations worldwide. In addition to its 14 U.S. locations, the Company has nine locations in
Germany; six locations in Korea; five locations in India; four locations in China; three locations in
Japan and Mexico; two locations in United Kingdom, France and Spain and one location in each of
Brazil, Hungary, Ireland, Italy, Monaco, Poland and Portugal. The Company also has several sales
offices, warehouses and technical centers. The Company’s worldwide headquarters are located in a
leased facility in Auburn Hills, Michigan. In general, the Company believes its facilities to be suitable
and adequate to meet its current and reasonably anticipated needs.
The following is additional information concerning the principal manufacturing, assembly, and
technical facilities operated by the Company, its subsidiaries, and affiliates.(a)
ENGINE
Americas:
Asheville, North Carolina
Auburn Hills, Michigan
Cadillac, Michigan
Campinas, Brazil
Cortland, New York
Dixon, Illinois
El Salto Jalisco, Mexico
Fletcher, North Carolina
Ithaca, New York
Juitepec Morelos, Mexico(b)
Marshall, Michigan
Ramos, Mexico
DRIVETRAIN
Americas:
Addison, Illinois(b)
Auburn Hills, Michigan
Bellwood, Illinois
Frankfort, Illinois
Livonia, Michigan
Longview, Texas(b)
Ramos, Mexico
Seneca, South Carolina
Water Valley, Mississippi
Aoyama, Japan
Changwon, South Korea(b)
Chennai, India
Chungju-City, South Korea
Faridabad, India
Nabari City, Japan
Ningbo, China(b)
Pyongtaek, South Korea(b)
Asia:
Europe:
Arcore, Italy
Bradford, England
Bretten, Germany
Chazelles, France
Diss, England
Kirchheimbolanden, Germany Kakkalur, India
Ludwigsburg, Germany
Markdorf, Germany
Muggendorf, Germany
Neuhaus, Germany
Oroszlany, Hungary
Rzeszow, Poland
Tralee, Ireland
Valenca, Portugal (b)
Vigo, Spain
Vitoria, Spain
Europe:
Arnstadt, Germany
Heidelberg, Germany
Ketsch, Germany
Monte Carlo, Monaco
Tulle, France
Asia:
Beijing, China(b)
Eumsung, South Korea
Fukuroi City, Japan
Ochang, South Korea(b)
Pune, India
Shanghai, China(b)
Sirsi, India
(a) The table excludes joint ventures owned less than 50% and administrative offices.
(b)
Indicates leased land rights or a leased facility.
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Item 3. Legal Proceedings
The Company is subject to a number of claims and judicial and administrative proceedings
(some of which involve substantial amounts) arising out of the Company’s business or relating to
matters for which the Company may have a contractual indemnity obligation. Refer to Note 14,
“Contingencies” of the Notes to the Consolidated Financial Statements in Item 8 of this report for a
discussion of environmental, asbestos and other litigation.
In January 2006, BorgWarner Diversified Transmission Products Inc (“DTP”), a subsidiary of
the Company, filed a declaratory judgment action in United States District Court, Southern District
of Indiana (Indianapolis Division) against the United Automobile, Aerospace, and Agricultural
Implements Workers of America (“UAW”) Local No. 287 and Gerald Poor, individually and as the
representative of a defendant class. DTP sought the Court’s affirmation that DTP did not violate the
Labor-Management Relations Act or the Employee Retirement Income Security Act (ERISA) by
unilaterally amending certain medical plans effective April 1, 2006 and October 1, 2006, prior to the
expiration of the then-current collective bargaining agreements. On September 10, 2008, the Court
found that DTP’s reservation of the right to make such amendments reducing the level of benefits
provided to retirees was limited by its collectively bargained health insurance agreement with the
UAW, which did not expire until April 24, 2009. Thus, the amendments were considered untimely. In
2008 the Company recorded a charge of $4.0 million as a result of the Court’s decision.
DTP filed a declaratory judgment action in the United States District Court, Southern District of
Indiana (Indianapolis Division) against the UAW Local No. 287 and Jim Barrett and others,
individually and as representatives of a defendant class, on February 26, 2009 again seeking the
Court’s affirmation that DTP will not violate the Labor — Management Relations Act or ERISA by
modifying the level of benefits provided retirees to make them comparable to other Company retiree
benefit plans after April 24, 2009. Certain retirees, on behalf of themselves and others, filed a
mirror-image action in the United States District Court, Eastern District of Michigan (Southern
Division) on March 11, 2009, for which a class has been certified. During the last quarter of 2009
the action pending in Indiana was dismissed, while the action in Michigan is continuing and in the
discovery phase. The Company is vigorously defending against the suit. This contingency is subject
to many uncertainties, therefore based on the information available to date, the Company cannot
estimate the amount or the range of potential loss, if any.
Environmental, Conditional Asset Retirement Obligations and Product Liability
Refer to Note 14, “Contingencies” in the Notes to the Consolidated Financial Statements in the
Company’s Annual Report on Form 10-K.
Item 4. (Removed and Reserved by the SEC)
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The Company’s Common Stock is listed for trading on the New York Stock Exchange under the
symbol BWA. As of February 4, 2011, there were 2,511 holders of record of Common Stock.
Cash dividends declared and paid per share, adjusted for stock splits in 2007, were as follows:
2010
2009
2008
2007
2006
2005
Dividend Amount
— $ 0.12 $ 0.44 $ 0.34 $ 0.32 $ 0.28
On March 5, 2009, the Company announced the suspension of the Company’s quarterly
dividend of $0.12 per share until global economic conditions improve. The dividend policy is subject
to review and change at the discretion of the Board of Directors.
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High and low sales prices (as reported on the New York Stock Exchange composite tape) for
the Common Stock for each quarter in 2009 and 2010 were:
Quarter Ended
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010
September 30, 2010
December 31, 2010
High
$ 25.65
$ 36.78
$ 36.07
$ 34.73
$ 39.21
$ 44.55
$ 53.42
$ 73.43
Low
$ 14.62
$ 19.40
$ 28.42
$ 27.62
$ 33.43
$ 33.93
$ 35.68
$ 51.06
The line graph below compares the cumulative total shareholder return on our Common Stock
with the cumulative total return of companies on the Standard & Poor’s (S&P’s) 500 Stock Index,
companies within BorgWarner’s peer group, and companies within Standard Industrial Code (“SIC”)
3714 — Motor Vehicle Parts.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among BorgWarner Inc., the S&P 500 Index,
SIC 3714 Motor Vehicle Parts and a Peer Group
*$100 invested on 12/31/05 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
BWA, S&P 500 and Peer Group data gleaned from Capital IQ; SIC Code Index gleaned from
Research Data Group
BorgWarner Inc.(1)
S&P 500(2)
SIC Code Index(3)
Peer Group(4)
2005
100.00
100.00
100.00
100.00
2006
98.41
115.80
117.13
114.27
2007
2008
2009
162.78
122.16
145.32
121.81
74.12
76.96
72.35
49.96
113.86
97.33
108.22
91.74
2010
248.00
111.99
169.08
154.87
(1) BorgWarner Inc.
(2) S&P 500 — Standard & Poor’s 500 Total Return Index
(3) Standard Industrial Code (“SIC”) 3714-Motor Vehicle Parts
(4) Peer Group Companies — Consists of the following companies: American Axle &
Manufacturing Holdings, Inc., Arvin Meritor Inc., Autoliv Inc., Gentex Corp., Johnson Controls
Inc., Lear Corporation (pre-2009 bankruptcy), Magna International, Inc., Modine Manufacturing
Co., Tenneco Automotive, Inc., TRW Automotive Holdings Corp. and Visteon Corporation
(pre-2009 bankruptcy)
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Repurchase of Equity Securities
The Company’s Board of Directors authorized the purchase of up to 14.8 million shares of the
Company’s common stock. As of December 31, 2010, the Company had repurchased
12,563,528 shares.
All shares purchased under this authorization have been and will continue to be repurchased in
the open market at prevailing prices and at times and in amounts to be determined by management
as market conditions and the Company’s capital position warrant. The Company may use
Rule 10b5-1 plans to facilitate share repurchase. Repurchased shares will be deemed treasury
shares and may subsequently be reissued for general corporate purposes.
The following table provides information about Company purchases of its equity securities that
are registered pursuant to Section 12 of the Exchange Act during the quarter ended December 31,
2010, at a total cost of $132.2 million:
ISSUER REPURCHASES OF EQUITY SECURITIES
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or Programs
Maximum
Number of
Shares that May
Yet be Purchased
Period
Month Ended
October 31, 2010
214,300
53.85
214,300
4,143,872
Month Ended
November 30,
2010
Month Ended
December 31,
2010
Total
1,032,400
58.92
1,032,400
3,111,472
875,000
2,121,700 $
68.40
62.32
875,000
2,121,700
2,236,472
2,236,472
NOTE: All purchases were made on the open market.
Equity Compensation Plan Information
As of December 31, 2010, the number of stock options and restricted common stock
outstanding under our equity compensation plans, the weighted average exercise price of
outstanding options and restricted common stock, and the number of securities remaining available
for issuance were as follows:
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Restricted Common Stock
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Restricted Common Stock
Warrants and Rights
(b)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(excluding securities
Reflected in column (a))
(c)
5,123,804
$ 29.34
2,234,723
—
5,123,804
—
$ 29.34
—
2,234,723
22
Plan Category
Equity
compensation
plans approved
by security
holders
Equity
compensation
plans not
approved by
security holders
Total
Source: BORGWARNER INC, 10-K, February 10, 2011
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Item 6. Selected Financial Data
millions of dollars, except share and per share data
For the Year Ended December 31,
Statement of Operations Data
2010*
2009
2008**
2007
2006***
Net sales
Cost of sales
Gross profit
$
5,652.8 $
4,559.5
1,093.3
3,961.8 $
3,401.0
560.8
5,263.9 $
4,425.4
838.5
5,328.6 $
4,378.7
949.9
4,585.4
3,735.5
849.9
Selling, general and
administrative expenses
Restructuring expense
Goodwill impairment charge
Other (income) expense
Operating income
Equity in affiliates’ earnings, net
of tax
Interest income
Interest expense and finance
charges
Earnings before income taxes
and noncontrolling interest
Provision (benefit) for income
taxes
Net earnings (loss)
Net earnings attributable to the
noncontrolling interest, net of
tax
Net earnings (loss) attributable
566.6
—
—
22.4
504.3
459.8
50.3
—
(0.1)
50.8
542.9
127.5
156.8
4.0
7.3
531.9
—
—
(0.1)
418.1
(39.6)
(2.8)
(21.8)
(2.5)
(38.4)
(7.1)
(40.3)
(6.7)
498.1
84.7
—
(4.3)
271.4
(35.9)
(3.2)
68.8
57.2
38.8
34.7
40.2
477.9
17.9
14.0
430.4
270.3
81.7
396.2
(18.5)
36.4
33.3
(19.3)
113.9
316.5
32.4
237.9
18.8
9.4
16.3
28.0
26.3
to BorgWarner Inc.
$
377.4 $
27.0 $
(35.6) $
288.5 $
211.6
Earnings (loss) per share —
basic
$
3.31 $
0.23 $
(0.31) $
2.49 $
1.84
Average shares outstanding
(thousands) — basic
Earnings (loss) per share —
114,155
116,522
116,007
116,002
114,806
diluted
$
3.07 $
0.23 $
(0.31) $
2.45 $
1.83
Average shares outstanding
(thousands) — diluted
Cash dividend declared and paid
129,575
116,939
116,007
117,840
115,942
per share
$
0.00 $
0.12 $
0.44 $
0.34 $
0.32
Balance Sheet Data
Cash
Total assets
Total debt
$
449.9 $
5,555.0
1,180.4
357.4 $
4,811.4
842.3
103.4 $
4,644.0
780.3
188.5 $
4,958.5
636.3
123.3
4,584.0
721.1
*
The Company’s diluted earnings per share for the year ended December 31, 2010 includes the
impact of the Company’s 3.50% convertible notes and associated warrants.
** The Company had a loss for the year ended December 31, 2008. As a result, diluted loss per
share is the same as basic loss per share in the period, as any dilutive securities would reduce
the loss per share.
*** On November 14, 2007, the Company’s Board of Directors approved a two-for-one stock split
effected in the form of a stock dividend on its common stock. To implement this stock split,
shares of common stock were issued on December 17, 2007 to stockholders of record as of
the close of business on December 6, 2007. All prior year share and per share amounts
disclosed in this document have been restated to reflect the two-for-one stock split.
23
Source: BORGWARNER INC, 10-K, February 10, 2011
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a leading global supplier of
highly engineered systems and components primarily for powertrain applications. Our products help
improve vehicle performance, fuel efficiency, air quality and vehicle stability. They are manufactured
and sold worldwide, primarily to original equipment manufacturers (“OEMs”) of light vehicles (i.e.
passenger cars, sport-utility vehicles (“SUVs”), cross-over vehicles, vans and light trucks). Our
products are also manufactured and sold to OEMs of commercial trucks, buses and agricultural and
off-highway vehicles. We also manufacture for and sell our products to certain Tier One vehicle
systems suppliers and into the aftermarket for light and commercial vehicles. We operate
manufacturing facilities serving customers in the Americas, Europe and Asia, and are an original
equipment supplier to every major automaker in the world.
The Company’s products fall into two reporting segments: Engine and Drivetrain. The Engine
segment’s products include turbochargers, timing chain systems, air management, emissions
systems, thermal systems, as well as diesel and gas ignition systems. The Drivetrain segment’s
products include all-wheel drive transfer cases, torque management systems, and components and
systems for automated transmissions.
RESULTS OF OPERATIONS
Overview
A summary of our operating results for the years ended December 31, 2010, 2009 and 2008 is
as follows:
(millions of dollars, except per share data)
Year Ended December 31,
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Restructuring expense
Goodwill impairment charge
Other (income) expense
Operating income
Equity in affiliates’ earnings, net of tax
Interest income
Interest expense and finance charges
Earnings before income taxes and noncontrolling
interest
Provision (benefit) for income taxes
Net earnings (loss)
2010
2009
2008
$ 5,652.8 $ 3,961.8 $ 5,263.9
4,425.4
838.5
542.9
127.5
156.8
4.0
7.3
(38.4)
(7.1)
38.8
4,559.5
1,093.3
566.6
—
—
22.4
504.3
(39.6)
(2.8)
68.8
3,401.0
560.8
459.8
50.3
—
(0.1)
50.8
(21.8)
(2.5)
57.2
477.9
81.7
396.2
17.9
(18.5)
36.4
14.0
33.3
(19.3)
16.3
(35.6)
(0.31)
Net earnings attributable to the noncontrolling interest,
net of tax
Net earnings (loss) attributable to BorgWarner Inc.
Earnings (loss) per share — diluted
18.8
377.4 $
9.4
27.0 $
3.07 $
0.23 $
$
$
24
Source: BORGWARNER INC, 10-K, February 10, 2011
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A summary of major factors impacting the Company’s net earnings for the year ended
December 31, 2010 in comparison to 2009 and 2008 is as follows:
• Global financial market and economic recovery in 2010 significantly impacted consumer
demand for light vehicles and positively increased our sales and operating margins.
• Global financial market and economic crisis in the second half of 2008 and full year of 2009
significantly impacted consumer demand for light vehicles and negatively impacted our sales.
• Continued benefits from our cost reduction programs, including containment of raw material
and energy cost increases, and health care cost inflation in 2010, 2009, and 2008.
• A $28.0 million charge in 2010 for alleged personal injury relating to environmental
contamination.
• The reversal of a valuation allowance on U.S. based foreign tax credit carryforwards in 2010
of $21.2 million.
• An $8.0 million gain in 2010 on the acquisition of BERU-Eichenauer GmbH related to
adjusting the Company’s fifty percent investment to fair value under ASC Topic 805.
• Adjustments to tax accounts in 2010, 2009 and 2008 upon conclusion of certain tax audits
and changes in circumstances, including changes in tax laws.
• Restructuring expenses in the third and fourth quarters of 2008 and second quarter of 2009
to adjust headcount and capacity levels, in North America, Europe and Asia.
• $27.9 million net pre-tax gain in 2009 related to retiree obligations resulting from the closure
of the Muncie, Indiana, Drivetrain facility.
• The establishment of a valuation allowance for foreign tax credit carryforwards in 2009 and
2008 of $7.7 million and $13.5 million, respectively.
• $4.8 million charge in 2009 upon the adoption of ASC Topic 805, Business Combinations.
• $3.0 million net loss in 2009 from interest rate derivative agreements.
• An €111.5 million $(156.8 million) impairment charge in 2008 to adjust BERU’s goodwill to its
estimated fair value.
• An approximate $23.5 million warranty-related charge in 2008 associated with a company’s
transmission product sold in Europe, limited to mid-2007 through May 2008 production.
• The write-offs of the excess purchase price allocated to in-process research and
development (“IPR&D”), order backlog and beginning inventory related to the 2007
acquisition of approximately 12.8% of BERU stock and the 2008 completion of a Domination
and Profit Transfer Agreement (“DPTA”) between the Company and BERU.
• Recognition in 2008 of a $4.0 million charge related to an untimely change in the level of
medical benefits provided to DTP.
25
Source: BORGWARNER INC, 10-K, February 10, 2011
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The Company’s earnings (loss) per diluted share were $3.07, $0.23 and $(0.31) for the years
ended December 31, 2010, 2009 and 2008, respectively. The Company believes the following table
is useful in highlighting non-recurring or non-comparable items that impacted its earnings per
diluted share:
Year Ended December 31,
2010
2009
2008
Non-recurring or non-comparable items:
Environmental litigation settlement
Medicare Part D tax law change
Reversal of foreign tax credit valuation allowance
BERU-Eichenauer equity investment gain
Restructuring expense
Interest rate derivative agreements
Topic 805 adoption
Goodwill impairment charge
Transmission product related warranty charge
Tax valuation allowance
Write-off of the excess purchase price allocated to IPR&D,
order backlog and beginning inventory associated with
acquisitions
Retiree healthcare litigation outcome
Change in retiree obligation related to Muncie closure
Adjustments to tax accounts
Total impact to earnings per share — diluted:
$ (0.14) $
(0.02)
0.17
0.04
—
—
—
—
—
—
— $
—
—
—
(0.29)
(0.03)
(0.03)
—
—
—
—
—
—
—
(0.72)
—
—
(1.35)
(0.14)
(0.12)
—
—
—
—
(0.04)
—
(0.03)
—
—
0.15
0.02
0.03
0.05 $ (0.17) $ (2.38)
$
The Company’s effective tax rate, after giving tax effect to the non-recurring or non-comparable
items shown above, was 21.7%, (12.0)%, and 23.0% for 2010, 2009, and 2008, respectively.
Net Sales
The table below summarizes the overall worldwide light vehicle production percentage changes
for 2010 and 2009:
Worldwide Light Vehicle Year Over Year Increase (Decrease) in Production
North America*
Europe*
Asia*
Total Worldwide*
BorgWarner year over year net sales change
BorgWarner year over year net sales change excluding currency
* Data provided by CSM Worldwide.
2010
2009
38.8%
13.7%
26.5%
23.5%
42.7%
45.0%
(32.4)%
(20.5)%
(2.1)%
(13.7)%
(24.7)%
(21.5)%
Our net sales increase in 2010 of 42.7% was better than the estimated worldwide market
production increase of 23.5%. Our net sales decrease in 2009 of 24.7% was worse than the
estimated worldwide market production decrease of 13.7%. The effect of changing currency rates
had a negative impact on the Company’s net sales and net earnings in 2010 and in 2009. The
effect of non-U.S. currencies, primarily the Euro, decreased net sales by approximately $90 million
in 2010. Non-US currencies had a negligible impact on the Company’s net earnings in 2010. In
2009, non-U.S. currencies, primarily the Euro, decreased net sales by approximately $169 million
and reduced the Company’s net earnings by approximately $4 million.
26
Source: BORGWARNER INC, 10-K, February 10, 2011
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The year over year increase in net sales, excluding the unfavorable impact of currency, was 45% in
2010. The year over year decrease in net sales, excluding the unfavorable impact of currency, was
21.5% in 2009.
Consolidated net sales to a single customer (including their subsidiaries), which exceeded 10%
of our total sales, were to Volkswagen of approximately 19%, 22%, and 19%; and to Ford of
approximately 11%, 12%, and 9% for the years ended December 31, 2010, 2009 and 2008,
respectively. Both of our reporting segments had significant sales to the customers listed above.
Such sales consisted of a variety of products to a variety of customer locations and regions. No
other single customer accounted for more than 10% of consolidated sales in any year of the periods
presented.
Outlook
Our overall outlook for 2011 is positive. The Company expects global production volumes to be
higher in 2011 compared with 2010. Furthermore, we expect that higher adoption rates of
BorgWarner products around the world will result in sales growth for the Company above global
production growth in 2011.
The Company maintains a positive long-term outlook for its global business and is committed to
new product development and strategic capital investments to enhance its product leadership
strategy. The trends that are driving our long-term growth are expected to continue, including the
growth of direct injection diesel and gasoline engines worldwide, the increased adoption of
automated transmissions in Europe and Asia-Pacific, and the move to variable cam and chain
engine timing systems in both Europe and Asia-Pacific.
Results By Reporting Segment
The Company’s business is comprised of two reporting segments: Engine and Drivetrain.
These segments are strategic business groups, which are managed separately as each represents
a specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return
on invested capital (“ROIC”) of its business initiatives. The ROIC is comprised of projected earnings
before interest, income taxes and noncontrolling interest (“EBIT”) adjusted for restructuring,
goodwill impairment charges, affiliates’ earnings and other items not reflective of on-going operating
profit or loss (“Adjusted EBIT”) compared to the projected average capital investment required.
Adjusted EBIT is the measure of segment profit or loss used by the Company. The Company
believes Adjusted EBIT is most reflective of the operational profitability or loss of our reporting
segments.
The following tables present net sales and Segment Adjusted EBIT for the years 2010, 2009
and 2008:
Net Sales
(millions of dollars)
Year Ended December 31,
Engine
Drivetrain
Inter-segment eliminations
Net sales
27
2010
2009
2008
$ 4,060.8 $ 2,883.2 $ 3,861.5
1,426.4
(24.0)
$ 5,652.8 $ 3,961.8 $ 5,263.9
1,611.4
(19.4)
1,093.5
(14.9)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Adjusted Earnings (Loss) Before Interest, Income Taxes and Noncontrolling Interest
(“Adjusted EBIT”)
(millions of dollars)
Year Ended December 31,
Engine
Drivetrain
Adjusted EBIT
Muncie closure retiree obligation net gain
Environmental litigation settlement
BERU-Eichenauer equity investment gain
Corporate, including equity in affiliates’ earnings and
stock-based compensation
Restructuring expense
Goodwill impairment charge
Interest income
Interest expense and finance charges
Earnings before income taxes and noncontrolling interest
Provision (benefit) for income taxes
Net earnings (loss)
Net earnings attributable to the noncontrolling interest, net
of tax
Net earnings (loss) attributable to BorgWarner Inc.
2010
2009
2008
$ 537.9 $ 219.8 $ 394.9
(4.9)
390.0
—
—
—
137.0
674.9
—
28.0
(8.0)
(13.5)
206.3
(27.9)
—
—
111.0
—
—
(2.8)
68.8
477.9
81.7
396.2
18.8
111.3
50.3
—
(2.5)
57.2
17.9
(18.5)
36.4
60.0
127.5
156.8
(7.1)
38.8
14.0
33.3
(19.3)
9.4
16.3
27.0 $ (35.6)
$ 377.4 $
The Engine segment 2010 net sales increased $1,177.6 million, or 40.8%, and segment EBIT
increased $318.1 million, or 144.7%, from the year ended December 31, 2009. Excluding the
impact of weaker foreign currencies, primarily the Euro, sales increased approximately 44%. The
sales increase was primarily driven by strong global growth in all major product groups as well as
the second quarter 2010 acquisition of Dytech ENSA SL. The Segment EBIT margin was 13.2% in
2010, up from 7.6% in 2009, due to a significant increase in customer production schedules in the
U.S. and European market and continued cost management.
The Engine segment 2009 net sales were down 25.3% from 2008, with a 44.3% decrease in
Segment EBIT over the same period. The Engine segment decrease was primarily driven by
reduced global vehicle production and depressed demand for engine products. The Segment EBIT
margin was 7.6% in 2009, down from 10.2% in 2008, due to the significant reduction in customer
production schedules in the U.S. and European markets.
The Drivetrain segment 2010 net sales increased $517.9 million, or 47.4%, and segment EBIT
increased $150.5 million from the year ended December 31, 2009. Excluding the impact of weaker
foreign currencies, primarily the Euro, sales increased approximately 49%. The sales increase was
primarily driven by strong growth of transmission components and torque management devices in
Europe, Asia and the U.S. Segment EBIT margin was 8.5% in 2010, up from (1.2)% in 2009,
primarily due to higher global production of light trucks and sport-utility vehicles equipped with its
torque transfer products and continued cost management.
The Drivetrain segment 2009 net sales decreased 23.3% from 2008 with a 175.5% decrease in
Segment EBIT over the same period. The group was negatively impacted by lower global
production of light trucks and SUVs equipped with its torque transfer products and lower sales of its
traditional transmission products. Segment EBIT margin was (1.2)% in 2009, down from (0.3)% in
the prior year, primarily due to lower global production of light trucks and sport-utility vehicles
equipped with its torque transfer products.
28
Source: BORGWARNER INC, 10-K, February 10, 2011
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Corporate represents corporate headquarters’ expenses, expenses not directly attributable to
the individual segments, expenses associated with divested operations and equity in affiliates’
earnings. This net expense was $111.0 million in 2010, $111.3 million in 2009 and $60.0 million in
2008. The increase in Corporate expenses in 2009 from 2008 is primarily related to a decline in
affiliate earnings, an increase in pension and other postemployment expenses and an increase in
performance related compensation.
Other Factors Affecting Results of Operations
The following table details our results of operations as a percentage of sales:
Year Ended December 31,
2010
2009
2008
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Restructuring expense
Goodwill impairment charge
Other (income) expense
Operating income
Equity in affiliates’ earnings, net of tax
Interest income
Interest expense and finance charges
Earnings before income taxes and noncontrolling
interest
Provision (benefit) for income taxes
Net earnings (loss)
Net earnings attributable to the noncontrolling interest,
net of tax
Net earnings (loss) attributable to BorgWarner Inc.
100.0%
80.7
19.3
10.0
—
—
0.4
8.9
(0.7)
—
1.2
8.4
1.4
7.0
0.3
6.7%
100.0%
85.8
14.2
11.6
1.3
—
—
1.3
(0.6)
—
1.4
0.5
(0.4)
0.9
0.2
0.7%
100.0%
84.1
15.9
10.3
2.4
3.0
—
0.2
(0.7)
(0.1)
0.7
0.3
0.7
(0.4)
0.3
(0.7)%
Gross profit as a percentage of net sales was 19.3%, 14.2% and 15.9% in 2010, 2009 and
2008, respectively. The gross margin percentage increase is primarily due to higher sales in 2010
and successful cost reduction actions taken in 2009 and 2008, offset by higher raw material costs.
Cost reduction actions taken in 2009 and 2008 to reduce our cost structure included headcount
reductions, global pay cuts, selected plant shutdowns and reduced work weeks outside of the U.S.
Selling, general and administrative expenses (“SG&A”) as a percentage of net sales were
10.0%, 11.6% and 10.3% in 2010, 2009 and 2008 respectively. 2010 SG&A expenses increased
$106.8 million or 23.2% compared to 2009. The 2010 decrease in SG&A as a percentage of net
sales was primarily due to a significant year over year increase in sales, offset by an increase in
performance related compensation.
Research and development (“R&D”) is a major component of our SG&A expenses. R&D
spending, net of customer reimbursements, was $185.0 million or 3.3% of sales in 2010, compared
to $155.2 million, or 3.9% of sales in 2009, and $205.7 million, or 3.9% of sales in 2008. We
currently intend to continue to increase our spending in R&D, although the growth rate in the future
may not necessarily match the rate of our sales growth. We also intend to continue to invest in a
number of cross-business R&D programs, as well as a number of other key programs, all of which
are necessary for short and long-term growth. Our current long-term expectation for R&D spending
is approximately 4.0% of sales. We intend to maintain our commitment to R&D spending while
continuing to focus on controlling other SG&A costs.
Restructuring expense of $50.3 million in 2009 and $127.5 million in 2008 was in response to
declines in global customer production levels, customer restructurings and a subsequent evaluation
of our headcount levels in North America, Europe and Asia and our long-term capacity needs.
29
Source: BORGWARNER INC, 10-K, February 10, 2011
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On July 31, 2008, the Company announced a restructuring of its operations to align ongoing
operations with a continuing, fundamental market shift in the auto industry. As a continuation of the
Company’s third quarter restructuring, on December 11, 2008, the Company announced plans for
additional restructuring actions. As a result of these third and fourth quarter 2008 restructuring
actions, the Company had reduced its North American workforce by approximately 2,400 people, or
33%; its European workforce by approximately 1,600 people, or 18%; and its Asian workforce by
approximately 400 people, or 17%. The restructuring expense recognized for employee termination
benefits was $54.6 million. In addition to employee termination costs, the Company recorded
$72.9 million of asset impairment charges related to the North American and European
restructuring. The combined 2008 restructuring expenses of $127.5 million are broken out by
segment as follows: Engine $85.3 million, Drivetrain $40.9 million and Corporate $1.3 million.
In the second quarter of 2009, the Company took additional restructuring actions. The
Company reduced its North American workforce by approximately 550 people, or 12%; its
European workforce by approximately 150 people, or 2%; and its Asian workforce by approximately
60 people, or 3% in the second quarter. The net restructuring expense recognized in the second
quarter was $9.0 million for employee termination benefits. In addition to employee termination
costs, the Company recorded $36.3 million of asset impairment and $5.0 million of other charges in
the second quarter of 2009 related to the North American and European restructuring. The
combined 2009 restructuring expenses of $50.3 million are broken out by segment as follows:
Engine $27.2 million, Drivetrain $19.7 million and Corporate $3.4 million.
Included in the second quarter of 2009 asset impairment charge is $22.3 million related to one
of the Company’s European locations. During the second quarter of 2009 circumstances caused
the Company to evaluate the long range outlook of the facility using an undiscounted and
discounted cash flow model, both of which indicated that assets were impaired. The Company then
used a replacement cost technique to determine the fair value of the assets at the facility. This
reduction of asset value was included in the Engine segment.
Refer to Note 17, “Restructuring” of the Notes to the Consolidated Financial Statements in
Item 8 of this report for further discussion.
Equity in affiliates’ earnings, net of tax was $39.6 million, $21.8 million and $38.4 million in
2010, 2009 and 2008, respectively. This line item is primarily driven by the results of our 50%
owned Japanese joint venture, NSK-Warner, and our 32.6% owned Indian joint venture, Turbo
Energy Limited (“TEL”). The significant increase in equity in affiliates’ earnings in 2010 is primarily
due to higher vehicle production in Asia. For more discussion of NSK-Warner, see Note 5 of the
Consolidated Financial Statements.
Interest expense and finance charges were $68.8 million, $57.2 million and $38.8 million in
2010, 2009 and 2008, respectively. The increase in 2010 over 2009 and 2009 over 2008 was
primarily due to accretion of the discounted carrying value of our $373.8 million convertible senior
notes and higher debt levels.
The provision for income taxes The provision for income taxes resulted in an effective tax
rate for 2010 of 17.1% compared with rates of (103.4)% in 2009 and 237.9% in 2008. The 2010 tax
rate differs from the U.S. statutory rate primarily due to foreign rates, which differ from those in the
U.S., the realization of certain business tax credits including foreign tax credits and favorable
permanent differences between book and tax treatment for items, including equity in affiliates’
earnings. Excluding the impacts of the reversal of the valuation allowance on U.S. based foreign tax
credits, the change in tax treatment for Medicare Part D subsidies, the BERU-Eichenauer equity
investment gain and the Company’s environmental litigation settlement, the Company’s annual
effective tax rate associated with on-going business operations was 21.7%.
The effective tax rate of (103.4%) for 2009 differs from the U.S. statutory rate primarily due a
reduction in U.S. income; foreign rates, which differ from those in the U.S.; the realization of certain
business tax credits including R&D and U.S. based foreign tax credits; and favorable permanent
differences between book and tax treatment for items, including equity in affiliates’ earnings.
Noncontrolling interest, net of tax of $18.8 million increased by $9.4 million from 2009 and
$2.5 million from 2008. The increase between 2010 and 2009 is primarily related to higher sales
and earnings by the Company’s joint ventures. The increase between 2010 and 2008 is primarily
related to higher sales by the Company’s joint ventures, offset by the Company’s increased
ownership to 100% of BERU.
30
Source: BORGWARNER INC, 10-K, February 10, 2011
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LIQUIDITY AND CAPITAL RESOURCES
Capitalization
(millions of dollars)
2010
2009
% Change
Notes payable and other short-term debt
Long-term debt
Total debt
Total equity
Total capitalization
Total debt to capital ratio
$
128.5
1,051.9
1,180.4
2,309.8
$ 3,490.2
$
69.1
773.2
842.3
2,222.7
$ 3,065.0
33.8%
27.5%
40.1%
3.9%
13.9%
The $338.1 million increase in debt primarily relates to the January 1, 2010 adoption of ASC
Topic 860, which required the Company to reflect its receivable securitization facility in its
financial statements, as well as the Company’s September 16, 2010 issuance of $250 million in
4.625% senior notes. The impact of the adoption of ASC Topic 860 is an increase in receivables,
net of $80 million and an increase in notes payable and other short-term debt of $80 million in the
Company’s 2010 Consolidated Balance Sheet. The Company’s debt to capital increase also
relates to the Company’s second quarter 2010 $147.6 million acquisition of Dytech as well as the
repurchasing of 7,066,100 shares of common stock for $325.7 million.
Total equity increased by $87.1 million in 2010 as follows:
(millions of dollars)
Balance, January 1, 2010
Net earnings
Stock compensation
Reissuance of treasury stock
Defined benefit post employment plans
Purchases of treasury stock
Currency translation and hedged instruments, net
All other, net
Balance, December 31, 2010
$ 2,222.7
377.4
66.3
34.1
7.8
(325.7)
(77.1)
4.3
$ 2,309.8
The currency translation component of other comprehensive income decreased in 2010
primarily due to the weakening of the Euro and British Pound in relation to the U.S. Dollar.
Operating Activities
Net cash provided by operating activities was $538.9 million, $351.0 million and $400.8 million
in 2010, 2009 and 2008, respectively. The $187.9 million increase in 2010 from 2009 primarily
reflects higher earnings, offset by higher working capital needs as compared to 2009. The
$538.9 million of net cash provided by operating activities in 2010 consists of net earnings of
$396.2 million, increased for non-cash charges of $249.5 million and a $106.8 million decrease in
net operating assets and liabilities. Non-cash charges are primarily comprised of $252.9 million in
depreciation and amortization.
The $49.8 million decrease in 2009 from 2008 was primarily due to lower operational earnings,
somewhat offset by lower working capital needs.
Inventory increased in 2010 by $79.0 million excluding the impact of currency due to higher
business levels in all regions of the world. Inventory management continues to remain an area of
focus for the Company as sales volumes continue to stabilize.
31
Source: BORGWARNER INC, 10-K, February 10, 2011
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Investing Activities
Net cash used in investing activities was $429.5 million, $154.8 million and $343.9 million in
2010, 2009 and 2008, respectively. This increase is primarily due to the $147.6 million acquisition of
Dytech, the $9.6 million acquisition of the Company’s 50/50 BERU-Eichenauer joint venture, and the
final $7.5 million payment for the June 2009 purchase of Etatech, Inc. Capital expenditures,
including tooling outlays (“capital spending”) of $276.6 million in 2010, or 4.9% of sales, increased
$104.6 million over the 2009 level of $172.0 million, or 4.3% of sales. Selective capital spending
remains an area of focus for us, both in order to support our book of new business and for cost
reduction and other purposes. Heading into 2011, we plan to continue to spend capital to support
the launch of our new applications and for cost reductions and productivity improvement projects.
Financing Activities and Liquidity
Liquidity: The Company had $449.9 million of cash on hand at December 31, 2010. On
March 31, 2010, the Company replaced its $250 million multi-currency revolving credit facility with a
new $550 million multi-currency revolving credit facility, which includes a feature that allows the
Company to increase its borrowings to $600 million. The new facility provides for borrowings
through March 31, 2013, and is guaranteed by the Company’s domestic subsidiaries. The Company
has three key financial covenants as part of the credit agreement. These covenants are a net worth
test, a debt compared to EBITDA (“Earnings Before Interest, Taxes, Depreciation and
Amortization”) test, and an interest coverage test. The Company was in compliance with all
covenants at December 31, 2010 and expects to remain compliant in future periods. At
December 31, 2010 and December 31, 2009 there were no outstanding borrowings under these
facilities. In addition to the credit facility, as of December 31, 2010, the Company had approximately
$126 million available under a universal shelf registration statement on file with the Securities and
Exchange Commission (“SEC”) under which a variety of debt and equity instruments could be
issued. The Company’s Board of Directors has authorized the filing of a new universal shelf
registration with the SEC.
From a credit quality perspective, the Company has a credit rating of BBB from both Standard &
Poor’s and Fitch Ratings and Baa3 from Moody’s (on September 2, 2010 the Company received its
first credit rating from Fitch Ratings). On October 27, 2010, Moody’s upgraded the Company’s
credit rating from Ba1 to Baa3. The current outlook from Standard & Poor’s, Moody’s and Fitch
Ratings is stable. None of the Company’s debt agreements require accelerated repayment in the
event of a downgrade in credit ratings.
On April 24, 2009 the Company’s $50 million accounts receivable securitization facility matured
and was repaid. On December 21, 2009 the Company entered into a new $50 million accounts
receivable securitization facility.
On September 8, 2010 the Company amended the December 21, 2009 Receivable Purchase
Agreement, which increased the accounts receivable securitization facility from $50 million to
$80 million. This facility matures on December 21, 2012.
32
Source: BORGWARNER INC, 10-K, February 10, 2011
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The Company’s significant contractual obligation payments at December 31, 2010 are as
follows:
(millions of dollars)
Total
2011
2012-2013
2014-2015
After 2015
Other post employment
benefits excluding
pensions(a)
Defined benefit pension
plans(b)
Notes payable and
long-term debt
Projected interest
payments(c)
Non-cancelable operating
leases
Capital spending
obligations
Inventory purchase
obligations
Income tax payments(d)
Environmental(e)
$
401.0 $
27.1 $
52.1 $
48.5 $
273.3
129.9
23.2
43.8
1,210.2
128.5
389.1
85.3
14.3
—
436.9
74.9
43.0
9.3
28.9
28.9
76.9
134.2
29.2
40.1
134.2
21.0
15.8
10.2
72.8
11.4
—
47.1
682.4
203.9
8.0
—
25.3
—
2.6
612.5 $
11.5
—
0.8
171.0 $
—
—
4.8
1,219.5
Total
$ 2,490.2 $ 487.2 $
(a) Other post employment benefits excluding pensions include anticipated future payments to
cover retiree medical and life insurance benefits. See Note 11 to the Consolidated Financial
Statements for disclosures related to the Company’s pension and other post employment
benefits.
(b) Since the timing and amount of payments for funded defined benefit pension plans are usually
not certain for future years such potential payments are not shown in this table, except for the
Company’s proposed settlement agreement with the Pension Benefit Guaranty Corporation to
make payments of $15 million per year in 2011, 2012 and 2013. Amount contained in “After
2015” column are for unfunded plans and includes estimated payments through 2020. See
Note 11 to the Consolidated Financial Statements for disclosures related to the Company’s
pension and other post employment benefits.
(c) Projection is based upon actual fixed rates where appropriate, and a projected floating rate for
the variable rate portion of the total debt portfolio. The floating rate projection is based upon
current market conditions and rounded to the nearest 50th basis point (0.50%), which is 4.5%
for this purpose. Projection is also based upon debt being redeemed upon maturity.
(d) See Note 4 to the Consolidated Financial Statements for disclosures related to the Company’s
income taxes.
(e) See Note 14 to the Consolidated Financial Statements for disclosures related to the
Company’s environmental liability.
We believe that the combination of cash from operations, cash balances, available credit
facilities and our shelf registration capacity will be sufficient to satisfy our cash needs for our current
level of operations and our planned operations for the foreseeable future. We will continue to
balance our needs for internal growth, external growth, debt reduction and cash conservation.
Financing Activities: Net debt increases, excluding the impact of currency translation, were
$256.3 million, $102.4 million and $107.5 million in 2010, 2009 and 2008, respectively. The change
is mostly due to the Company’s September 16, 2010 issuance of $250 million in 4.625% senior
notes, offset by the repurchasing of approximately 7.1 million shares of its common stock in 2010.
Proceeds from stock options exercised, net of tax benefit were $67.1 million, $8.7 million and
$17.1 million in 2010, 2009 and 2008, respectively. The Company paid dividends to BorgWarner
stockholders of $13.8 million and $51.1 million in 2009 and 2008, respectively. The Company had
treasury stock purchases of $331.2 million in 2010, of which $325.7 million has been paid for as of
December 31, 2010. The Company had treasury stock purchases of $55.9 million in 2008.
The Company purchased approximately 0.4 million and 1.34 million BERU shares in 2009 and
2008, respectively. The cost for these shares was $46.6 million and $136.8 million for 2009 and
2008, respectively and has been reflected as “payments for noncontrolling interest acquired” in the
Financing section of the Consolidated Statements of Cash Flows. See Note 18, “Recent
Transactions” for further information.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Source: BORGWARNER INC, 10-K, February 10, 2011
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Off Balance Sheet Arrangements
The Company securitizes certain receivables through third party financial institutions without
recourse. The amount can vary each month based on the amount of underlying receivables. The
Company continues to administer the collection of these receivables on behalf of the third party.
On April 24, 2009 the Company’s $50 million accounts receivable securitization facility matured
and was repaid. On December 21, 2009 the Company entered into a new $50 million accounts
receivable securitization facility.
The Company was required to adopt amended ASC Topic 860, “Accounting for Transfer of
Financial Assets”, on January 1, 2010. This adoption required the Company to reflect its receivable
securitization facility in its financial statements in the current year of change. Accounting rules prior
to January 1, 2010 allowed qualifying special-purpose entities off-balance sheet treatment. The
impact of this adoption was an increase in receivables, net of $80 million and an increase in notes
payable and other short-term debt of $80 million in the Company’s December 31, 2010
Consolidated Balance Sheet.
On September 8, 2010 the Company amended the December 21, 2009 Receivable Purchase
Agreement, which increased the accounts receivable securitization facility from $50 million to
$80 million. This facility matures on December 21, 2012. Both the maturity and repayment; as well
as the subsequent renewal of our accounts receivable securitization facility are reflected as
Financing activities in the Consolidated Statements of Cash Flows.
The Company has certain leases that are recorded as operating leases. Types of operating
leases include leases on the headquarters facility, an airplane, vehicles, and certain office
equipment. The total expected future cash outlays for all lease obligations at the end of 2010 is
$43.0 million. See Note 15 to the Consolidated Financial Statements for more information on
operating leases, including future minimum payments.
Pension and Other Post Employment Benefits
The Company’s policy is to fund its defined benefit pension plans in accordance with applicable
government regulations and to make additional contributions when appropriate. At December 31,
2010, all legal funding requirements had been met. The Company contributed $25.1 million,
$39.3 million and $13.3 million to its defined benefit pension plans in 2010, 2009 and 2008,
respectively. The Company expects to contribute a total of $30 million to $40 million in 2011.
$23.2 million of the $30 million to $40 million in 2011 contributions are contractually obligated, as
shown in the table above, while the remaining payments are discretionary.
The funded status of all pension plans was a net unfunded position of $(210.4) million and
$(229.9) million at the end of 2010 and 2009, respectively. Of these amounts, $(128.0) million and
$(131.1) at the end of 2010 and 2009, respectively, were related to plans in Germany, where there
is not a tax deduction allowed under the applicable regulations to fund the plans; hence the
common practice is that they are unfunded plans.
Other post employment benefits primarily consist of post employment health care benefits for
certain employees and retirees of the Company’s U.S. operations. The Company funds these
benefits as retiree claims are incurred. Other post employment benefits had an unfunded status of
$(261.9) million at the end of 2010 and $(278.5) million at the end of 2009.
The Company believes it will be able to fund the requirements of these plans through cash
generated from operations or other available sources of financing for the foreseeable future.
See Note 11 to the Consolidated Financial Statements for more information regarding costs and
assumptions for employee retirement benefits.
34
Source: BORGWARNER INC, 10-K, February 10, 2011
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OTHER MATTERS
Contingencies
In the normal course of business the Company and its subsidiaries are parties to various
commercial and legal claims, actions and complaints, including matters involving warranty claims,
intellectual property claims, general liability and various other risks. See Notes 7 and 14 to the
Consolidated Financial Statements. It is not possible to predict with certainty whether or not the
Company and its subsidiaries will ultimately be successful in any of these commercial and legal
matters or, if not, what the impact might be. The Company’s environmental and product liability
contingencies are discussed separately below. The Company’s management does not expect that
the results in any of these commercial and legal claims, actions and complaints will have a material
adverse effect on the Company’s results of operations, financial position or cash flows.
Litigation
In January 2006, DTP, a subsidiary of the Company, filed a declaratory judgment action in
United States District Court, Southern District of Indiana (Indianapolis Division) against the United
Automobile, Aerospace, and Agricultural Implements Workers of America (“UAW”) Local No. 287
and Gerald Poor, individually and as the representative of a defendant class. DTP sought the
Court’s affirmation that DTP did not violate the Labor-Management Relations Act or the Employee
Retirement Income Security Act (ERISA) by unilaterally amending certain medical plans effective
April 1, 2006 and October 1, 2006, prior to the expiration of the then-current collective bargaining
agreements. On September 10, 2008, the Court found that DTP’s reservation of the right to make
such amendments reducing the level of benefits provided to retirees was limited by its collectively
bargained health insurance agreement with the UAW, which did not expire until April 24, 2009.
Thus, the amendments were untimely. In 2008 the Company recorded a charge of $4.0 million as a
result of the Court’s decision.
DTP filed a declaratory judgment action in the United States District Court, Southern District of
Indiana (Indianapolis Division) against the UAW Local No. 287 and Jim Barrett and others,
individually and as representatives of a defendant class, on February 26, 2009 again seeking the
Court’s affirmation that DTP will not violate the Labor — Management Relations Act or ERISA by
modifying the level of benefits provided retirees to make them comparable to other Company retiree
benefit plans after April 24, 2009. Certain retirees, on behalf of themselves and others, filed a
mirror-image action in the United States District Court, Eastern District of Michigan (Southern
Division) on March 11, 2009, for which a class has been certified. During the last quarter of 2009
the action pending in Indiana was dismissed, while the action in Michigan is continuing and in the
discovery phase. The Company is vigorously defending against the suit. This contingency is subject
to many uncertainties, therefore based on the information available to date, the Company cannot
estimate the amount or the range of potential loss, if any.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by the United States Environmental Protection
Agency and certain state environmental agencies and private parties as potentially responsible
parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state laws
and, as such, may presently be liable for the cost of clean-up and other remedial activities at 38
such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically
shared among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or in the aggregate, will have a
material adverse effect on its results of operations, financial position, or cash flows. Generally, this
is because either the estimates of the maximum potential liability at a site are not material or the
liability will be shared with other PRPs, although no assurance can be given with respect to the
ultimate outcome of any such matter.
Based on information available to the Company (which in most cases includes: an estimate of
allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent
public companies,
35
Source: BORGWARNER INC, 10-K, February 10, 2011
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will fully pay the cost apportioned to them; currently available information from PRPs and/or federal
or state environmental agencies concerning the scope of contamination and estimated remediation
and consulting costs; remediation alternatives; and estimated legal fees), the Company has an
accrual for indicated environmental liabilities with a balance at December 31, 2010 of $28.0 million.
The Company has accrued amounts that do not exceed $3.0 million related to any individual site
except for the Crystal Springs site discussed below, and we do not believe that the costs related to
any of these sites will have a material adverse effect on the Company’s results of operations, cash
flows or financial condition. The Company expects to pay out substantially all of the amounts
accrued for environmental liability over the next three to five years.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify
the buyer and Kuhlman Electric for certain environmental liabilities, then unknown to the Company,
relating to certain operations of Kuhlman Electric that pre-date the Company’s 1999 acquisition of
Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential
environmental contamination at its Crystal Springs, Mississippi plant while undertaking an
expansion of the plant. The Company is continuing to work with the Mississippi Department of
Environmental Quality and Kuhlman Electric to investigate and remediate to the extent necessary,
historical contamination at the plant and surrounding area. Kuhlman Electric and others, including
the Company, were sued in numerous related lawsuits, in which multiple claimants alleged personal
injury and property damage relating to the alleged environmental contamination. In 2005, the
Company and other defendants entered into settlements that resolved approximately 99% of those
claims and the remainder of them have since been dismissed.
In 2007 and 2008, four additional lawsuits were filed against Kuhlman Electric and others,
including the Company, on behalf of approximately 340 plaintiffs, alleging personal injury relating to
the alleged environmental contamination. One of the lawsuits, involving a single plaintiff, was
dismissed by the trial court in April 2010 and the plaintiff’s appeal of that decision was dismissed by
the appellate court in August 2010. The Company entered into a settlement in July 2010 regarding
the personal injury claims of the plaintiffs in the other three lawsuits and those of approximately
2,700 unfiled claimants represented by those plaintiffs’ attorneys. In exchange for, among other
things, the dismissal with prejudice of these lawsuits and the release of claims by the unfiled
claimants, the Company agreed to pay up to $28 million in settlement funds, which was expensed
in the second quarter of 2010. In November 2010 the Company paid $13.9 million related to this
settlement. The remaining payment of approximately $14 million is expected to be paid in February
2011.
Conditional Asset Retirement Obligations
In March 2005, ASC Topic 410, Accounting for Conditional Asset Retirement Obligations, which
requires the Company to recognize legal obligations to perform asset retirements in which the
timing and/or method of settlement are conditional on a future event that may or may not be within
the control of the entity. Certain government regulations require the removal and disposal of
asbestos from an existing facility at the time the facility undergoes major renovations or is
demolished. The liability exists because the facility will not last forever, but it is conditional on future
renovations (even if there are no immediate plans to remove the materials, which pose no health or
safety hazard in their current condition). Similarly, government regulations require the removal or
closure of underground storage tanks and above ground storage tanks when their use ceases, the
disposal of polychlorinated biphenyl transformers and capacitors when their use ceases, and the
disposal of used furnace bricks and liners, and lead-based paint in conjunction with facility
renovations or demolition. The Company currently has 45 manufacturing locations that have been
identified as containing these items. The fair value to remove and dispose of this material has been
estimated and recorded at $1.2 million as of December 31, 2010 and $1.3 million at December 31,
2009.
Product Liability
Like many other industrial companies who have historically operated in the U.S., the Company
(or parties the Company is obligated to indemnify) continues to be named as one of many
defendants in asbestos-related personal injury actions. We believe that the Company’s involvement
is limited because, in general, these claims relate to a few types of automotive friction products that
were manufactured many years ago and contained encapsulated asbestos. The nature of the
fibers, the encapsulation and the manner of use lead the
36
Source: BORGWARNER INC, 10-K, February 10, 2011
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Company to believe that these products are highly unlikely to cause harm. As of December 31,
2010 and December 31, 2009 the Company had approximately 17,000 and 23,000 pending
asbestos-related product liability claims, respectively. Of the 17,000 outstanding claims at
December 31, 2010, approximately 8,000 were pending in just three jurisdictions, where significant
tort and judicial reform activities are underway.
The Company’s policy is to vigorously defend against these lawsuits and the Company has
been successful in obtaining dismissal of many claims without any payment. The Company expects
that the vast majority of the pending asbestos-related product liability claims where it is a defendant
(or has an obligation to indemnify a defendant) will result in no payment being made by the
Company or its insurers. In 2010, of the approximately 7,700 claims resolved, 245 (3.2%) resulted
in any payment being made to a claimant by or on behalf of the Company. In the full year of 2009,
of the approximately 5,300 claims resolved, only 223 (4.2%) resulted in any payment being made to
a claimant by or on behalf of the Company.
Prior to June 2004, the settlement and defense costs associated with all claims were covered
by the Company’s primary layer insurance coverage, and these carriers administered, defended,
settled and paid all claims under a funding arrangement. In addition to the primary insurance
available for asbestos-related claims, the Company has substantial additional layers of insurance
available for potential future asbestos-related product claims. As such, the Company continues to
believe that its coverage is sufficient to meet foreseeable liabilities.
In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion
of their policy limits. This led the Company to access the next available layer of insurance coverage.
Since June 2004, secondary layer insurers have been responsible for asbestos-related litigation
defense and settlement expenses pursuant to a funding arrangement.
A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County,
Illinois by Continental Casualty Company and related companies (“CNA”) against the Company and
certain of its other historical general liability insurers. CNA provided the Company with both primary
and additional layer insurance, and, in conjunction with other insurers, is currently defending and
indemnifying the Company in its pending asbestos-related product liability claims. The lawsuit
seeks to determine the extent of insurance coverage available to the Company including whether
the available limits exhaust on a “per occurrence” or an “aggregate” basis, and to determine how
the applicable coverage responsibilities should be apportioned. On August 15, 2005, the Court
issued an interim order regarding the apportionment matter. The interim order has the effect of
making insurers responsible for all defense and settlement costs pro rata to time-on-the-risk, with
the pro-ration method to hold the insured harmless for periods of bankrupt or unavailable coverage.
Appeals of the interim order were denied. However, the issue is reserved for appellate review at the
end of the action.
Although it is impossible to predict the outcome of pending or future claims or the impact of tort
reform legislation that may be enacted at the State or Federal levels, due to the encapsulated
nature of the products, the Company’s experiences in vigorously defending and resolving claims in
the past, and the Company’s significant insurance coverage with solvent carriers as of the date of
this filing, management does not believe that asbestos-related product liability claims are likely to
have a material adverse effect on the Company’s results of operations, cash flows or financial
condition.
To date, the Company has paid and accrued $153.1 million in defense and indemnity in
advance of insurers’ reimbursement, which includes the $40.7 million referred to below, and has
received $32.5 million in cash from insurers. The net outstanding balance of $120.6 million is
expected to be fully recovered, of which approximately $43 million is expected to be recovered
within one year. Timing of the recovery is dependent on final resolution of the declaratory judgment
action referred to above. At December 31, 2009, insurers owed $58.6 million in association with
these claims.
On April 5, 2010 the Superior Court of New Jersey Appellate Division affirmed a lower court
judgment in an asbestos-related action against the Company and others. The Company filed its
Notice of Petition to the Supreme Court of New Jersey in late April, seeking to appeal the decisions
of the lower courts. On July 8, 2010 the Supreme Court of New Jersey denied the Company’s
Notice of Petition appealing the decision of the lower courts. The total claim of $40.7 million was
paid by the Company in July 2010.
37
Source: BORGWARNER INC, 10-K, February 10, 2011
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In addition to the $120.6 million net outstanding balance relating to past settlements and
defense costs, the Company has estimated a liability of $50.6 million for claims asserted, but not
yet resolved and their related defense costs at December 31, 2010. The Company also has a
related asset of $50.6 million to recognize proceeds from the insurance carriers. Insurance carrier
reimbursement of 100% is expected based on the Company’s experience, its insurance contracts
and decisions received to date in the declaratory judgment action referred to below. At
December 31, 2009, the comparable value of the insurance asset and accrued liability was
$49.9 million.
The amounts recorded in the Consolidated Balance Sheets related to the estimated future
settlement of existing claims are as follows:
(millions of dollars)
Assets:
Prepayments and other current assets
Other non-current assets
Total insurance assets
Liabilities:
Accounts payable and accrued expenses
Other non-current liabilities
Total accrued liability
2010
2009
$ 25.8 $ 24.9
25.0
$ 50.6 $ 49.9
24.8
$ 25.8 $ 24.9
25.0
$ 50.6 $ 49.9
24.8
The Company cannot reasonably estimate possible losses, if any, in excess of those for which
it has accrued, because it cannot predict how many additional claims may be brought against the
Company (or parties the Company has an obligation to indemnify) in the future, the allegations in
such claims, the possible outcomes, or the impact of tort reform legislation that may be enacted at
the State or Federal levels.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with accounting principles
generally accepted in the United States (“GAAP”). In preparing these financial statements,
management has made its best estimates and judgments of certain amounts included in the
financial statements, giving due consideration to materiality. Critical accounting policies are those
that are most important to the portrayal of the Company’s financial condition and results of
operations. These policies require management’s most difficult, subjective or complex judgments in
the preparation of the financial statements and accompanying notes. Management makes
estimates and assumptions about the effect of matters that are inherently uncertain, relating to the
reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and
liabilities. Our most critical accounting policies are discussed below.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Depreciation
The automotive industry experienced unprecedented declines in production in the fourth quarter
of 2008 and projected continued declines for the full year of 2009. According to Accounting
Standards Codification (“ASC”) 250, future depreciation expense should be revised due to a change
in the estimated future benefits inherent in an asset, the pattern of consumption of those benefits, or
the information available to the entity about those benefits. As a result of the 2008 and 2009
unprecedented declines in production activity, the
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Source: BORGWARNER INC, 10-K, February 10, 2011
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Company determined that its usage pattern for certain assets had changed significantly and revised
the useful lives of certain equipment starting in 2009. This adjustment was considered to be a
change in an accounting estimate.
The impact to the Company in 2010 and 2009 were as follows (unaudited):
(millions of dollars)
Q1
Q2
2010
Q3
Q4
Full Year
Operating income increase
Net earnings increase attributable to
BorgWarner Inc.
Earnings per share increase — Basic
Earnings per share increase — Diluted
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
3.7
3.6
3.6
3.6
$
4.8 $
4.7 $
4.6 $
4.7 $
18.8
(millions of dollars)
Q1
Q2
2009
Q3
Q4
Full Year
Operating income increase
Net earnings increase attributable to
BorgWarner Inc.
Earnings per share increase — Basic
Earnings per share increase — Diluted
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
3.5
3.5
3.5
3.5
$
4.6 $
4.6 $
4.6 $
4.6 $
18.4
14.5
0.13
0.11
14.0
0.12
0.12
Revenue Recognition
The Company recognizes revenue when title and risk of loss pass to the customer, which is
usually upon shipment of product. Although the Company may enter into long-term supply
agreements with its major customers, each shipment of goods is treated as a separate sale and the
prices are not fixed over the life of the agreements.
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, the Company periodically reviews the carrying value of its
long-lived assets, whether held for use or disposal, including other intangible assets, when events
and circumstances warrant such a review. Such events and circumstances include, but are not
limited to, a significant decrease in market volumes, or project life, or a loss of a major customer
application (i.e., a “triggering event”). The Company’s impairment review is performed at each
manufacturing, assembly, and technical site using data that is the basis for the Company’s annual
budget (or forecast on an interim basis) and long-range plan (“LRP”). The annual budget and LRP
include a five year projection of future cash flows based on actual new products and customer
commitments. If a triggering event has occurred, the assets are identified by the operating location
and management as potentially impaired and a recoverability review is performed by management.
The review will determine if a current or future alternative use exists for additional customer
applications or if redeployment of the assets to any of the Company’s other operating sites around
the world is justified. The recoverability test compares projected undiscounted future cash flows to
the carrying value of a product line or a specific customer application or asset grouping, as
applicable.
If the undiscounted cash flow test for recoverability identifies a possible impairment,
management will perform a fair value analysis. Management determines fair value under ASC Topic
820 using the appropriate valuation technique of market, income or cost approach. Management
believes that the estimates and assumptions are reasonable however, changes in assumptions with
respect to future volumes, program project life or future asset use, in addition to future cash flows
underlying these estimates could affect the Company’s fair value evaluations.
Due to the sudden decline in the global automotive markets in 2008 and 2009, the Company
reviewed the carrying value of its long-lived assets. As a result of these reviews, the Company
recognized $36.3 million and $72.9 million in impairment of long-lived assets (i.e., plant and
equipment) as part of restructuring
39
Source: BORGWARNER INC, 10-K, February 10, 2011
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expenses in 2009 and 2008, respectively. The 2009 and 2008 impairment charges are broken out
by segment as follows:
(millions of dollars)
Drivetrain Group
Engine Group
Total
2009
2008
$ 13.7 $ 22.1
50.8
$ 36.3 $ 72.9
22.6
See Note 17, “Restructuring” and Note 9 “Fair Value Measurements”, to the Consolidated
Financial Statements for more information regarding the Company’s 2009 and 2008 impairment of
long-lived assets and a discussion of market-based measurements.
Goodwill
The Company annually reviews its goodwill for impairment in the fourth quarter of each year for
all of its reporting units, or more often when events and circumstances warrant such a review.
The Company’s goodwill impairment review, under ASC Topic 350, requires the Company to
make significant assumptions and estimates about the extent and timing of future cash flows,
discount rates and growth rates. The basis of our goodwill impairment analysis is the Company’s
annual budget and long-range plan (“LRP”). The annual budget and LRP include a five year
projection of future cash flows based on actual new products and customer commitments. As part
of the projection, we assumed the last year of the LRP data is a fair indication of the future
performance, including fundamental industry growth for the business beyond the five year period
into perpetuity. As the LRP is estimated over a significant future period of time, those estimates and
assumptions are subject to a high degree of uncertainty. We also utilize market valuation models
and other financial ratios, which require us to make certain assumptions and estimates regarding
the applicability of those models to our assets and businesses. We believe that the assumptions
and estimates used to determine the estimated fair values of each of our reporting units are
reasonable. Different assumptions could materially affect the estimated fair value. The primary
assumptions affecting the Company’s December 31, 2010 goodwill impairment review are as
follows:
• Discount Rate: The Company used a 10% weighted average cost of capital (“WACC”) as the
discount rate for future cash flows. The WACC is intended to represent a rate of return that
would be expected by a market participant.
• Operating Income Margin: The Company utilized historical and expected operating income
margins, which varied based on the projections of each reporting unit being evaluated.
In addition to the above significant assumptions, the Company notes the following risk to
volume assumptions that could have an impact on the discounted cash flow model:
• Our industry is cyclical and our results of operations will be adversely affected by industry
downturns.
• We are dependent on market segments that use our key products and would be affected by
decreasing demand in those segments.
• We are subject to risks related to our international operations.
While the Company believes that these assumptions are appropriate, significant changes in
these assumptions may materially affect the Company’s analysis related to one of its reporting units
in the Engine operating segment, whose estimated fair value is 112% of its carrying value.
Based on our sensitivity analysis, a 1% increase in the discount rate or a 1% decrease in the
operating margin assumptions would result in the carrying value exceeding the estimated fair value
of one reporting unit tested within the Engine operating segment. This would require further
evaluation of the reporting unit’s
40
Source: BORGWARNER INC, 10-K, February 10, 2011
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goodwill, under a step two impairment test. The following table illustrates the sensitivity to the
estimated fair value of that reporting unit.
millions of dollars
1 percentage point increase in discount rate
1 percentage point decrease in operating margin
2010
Impact
$
$
15.5
11.7
In 2008 the company recorded impairment charges totaling €111.5 ($156.8) million to adjust
BERU’s goodwill to its estimated fair value. The impairment charge is attributable to a decrease in
the operating unit’s estimated fair value based primarily upon the effect of the decline in European
market conditions on current and projected operating results. The impairment charge was also
impacted by the recognition of additional goodwill in the second quarter of 2008, which was based
on the court determined buy out value of €71.32 per share related to the Domination and Profit
Transfer Agreement. Any differences in future results compared to management’s estimates could
result in fair values different from estimated fair values, which could materially impact the
Company’s future results of operations and financial condition.
See Note 18, “Recent Transactions”, for further discussion on the BERU Domination and Profit
Transfer Agreement.
The impairment tests completed in the fourth quarter of 2010 and 2009 indicated no impairment
for either year, and estimated fair value to be approximately 360% and 220% for the Company’s
carrying value in 2010 and 2009, respectively.
See Note 6 to the Consolidated Financial Statements for more information regarding goodwill.
Environmental Accrual
We work with outside experts to determine a range of potential liability for environmental sites.
The ranges for each individual site are then aggregated into a loss range for the total accrued
liability. Management’s estimate of the loss range for environmental liability, including conditional
asset retirement obligations, for 2010 is between approximately $26 million and $40 million. We
record an accrual at the most probable amount within the range unless one cannot be determined;
in which case we record the accrual at the low end of the range. At the end of 2010, our total
accrued environmental liability was $29.2 million, which includes our conditional asset retirement
obligation under ASC Topic 410 of $1.2 million.
See Note 14 to the Consolidated Financial Statements for more information regarding
environmental accrual.
Product Warranty
The Company provides warranties on some of its products. The warranty terms are typically
from one to three years. Provisions for estimated expenses related to product warranty are made at
the time products are sold. These estimates are established using historical information about the
nature, frequency, and average cost of warranty claim settlements; as well as product
manufacturing and industry developments and recoveries from third parties. Management actively
studies trends of warranty claims and takes action to improve product quality and minimize warranty
claims. Management believes that the warranty accrual is appropriate; however, actual claims
incurred could differ from the original estimates, requiring adjustments to the accrual. Our warranty
provision over the last three years, and as a percentage of net sales, has trended as follows:
(millions of dollars)
2010
2009
2008
Net Sales
Warranty Provision
Warranty Provision as a Percentage of Net Sales
41
$ 5,652.8 $ 3,961.8 $ 5,263.9
66.1
$
1.3%
46.0 $
1.2%
39.3 $
0.70%
Source: BORGWARNER INC, 10-K, February 10, 2011
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The following table illustrates the sensitivity of a 25 basis point change (as a percentage of
sales) in the assumed warranty trend on the Company’s accrued warranty liability:
(millions of dollars)
25 basis point decrease
25 basis point increase
(Income)/Expense
2009
2010
2008
$ (14.1)
$ 14.1
$ (9.9)
$ 9.9
$ (13.2)
$ 13.2
At the end of 2010, our total accrued warranty liability was $66.8 million. The accrual is
represented as $37.0 million in current liabilities and $29.8 million in non-current liabilities on our
balance sheet.
See Note 7 to the Consolidated Financial Statements for more information regarding product
warranty.
Other Loss Accruals and Valuation Allowances
The Company has numerous other loss exposures, such as customer claims, workers’
compensation claims, litigation, and recoverability of assets. Establishing loss accruals or valuation
allowances for these matters requires the use of estimates and judgment in regard to the risk
exposure and ultimate realization. We estimate losses under the programs using consistent and
appropriate methods; however, changes to our assumptions could materially affect our recorded
accrued liabilities for loss or asset valuation allowances.
Pension and Other Post Employment Defined Benefits
The Company provides post employment defined benefits to a number of its current and former
employees. Costs associated with post employment defined benefits include pension and post
employment health care expenses for employees, retirees and surviving spouses and dependents.
Using appropriate actuarial methods and assumptions, the Company’s defined benefit pension
and non-pension postretirement employee benefit plans are accounted for in accordance with ASC
Topic 715. Disability, early retirement and other postretirement employee benefits are accounted for
in accordance with ASC Topic 712.
The determination of the Company’s obligation and expense for its pension and other
postretirement employee benefits, such as retiree health care, is dependent on certain assumptions
used by actuaries in calculating such amounts. Certain of the more important assumptions are
described in Note 11 “Retirement Benefit Plans” to the Company’s consolidated financial
statements included in Item 8 “Financial Statements and Supplementary Data” of this Annual
Report on Form 10-K and include the discount rate, expected long-term rate of return on plan
assets, rates of increase in compensation and health care costs, retirement rates, mortality rates
and other factors. The effects of any modification to those assumptions are either recognized
immediately or amortized over future periods in accordance with GAAP.
In accordance with GAAP, actual results that differ from assumptions used are accumulated
and generally amortized over future periods. The primary assumptions affecting the Company’s
accounting for employee benefits under ASC Topics 712 and 715 as of December 31, 2010 are as
follows:
• Expected long-term rate of return on plan assets: The expected long-term rate of return is
used in the calculation of net periodic benefit cost. The required use of the expected
long-term rate of return on plan assets may result in recognized returns that are greater or
less than the actual returns on those plan assets in any given year. Over time, however, the
expected long-term rate of return on plan assets is designed to approximate actual earned
long-term returns. The expected long-term rate of return for pension assets has been
determined based on various inputs. These inputs include historical returns for the different
asset classes held by the Company’s trusts and its asset allocation, as well as inputs from
internal and external sources regarding expected capital market return, inflation and other
variables. The Company also considers the impact of active management of the plans’
invested assets. In determining its pension expense for 2010, the Company used long-term
rates of return on plan assets ranging from 2.00% to 9.25% outside of the U.S. and 7.50% in
the U.S.
42
Source: BORGWARNER INC, 10-K, February 10, 2011
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Actual return on U.S. pension assets for 2010, 2009 and 2008 were 14.6%, 25.3% and
(25.7%), respectively, compared to the expected rate of return assumption of 7.50% in 2010
and 2009 and 8.75% for 2008.
Actual return on U.K. pension assets for 2010, 2009 and 2008 were 13.3%, 15.1% and
(18.7%), respectively, compared to the expected rate of return assumption of 7.50% in 2010
and 2009 and 7.25% for 2008.
• Discount rate: The discount rate is used to calculate pension and postretirement employee
benefit obligations (“OPEB”). The discount rate assumption is based on a constant effective
yield from matching projected plan cash flows to high quality (Aa) bond yields of
corresponding maturities as of the measurement date. The Company used discount rates
ranging from 1.75% to 7.75% to determine its pension and other benefit obligations as of
December 31, 2010, including weighted average discount rates of 5.17% for U.S. pension
plans, 5.37% for non-U.S. pension plans, and 4.75% for U.S. other post employment health
care plans. The U.S. discount rate reflects the fact that our U.S. pension plan has been
closed for new participants since 1989 (1999 for our U.S. health care plan), and with the
closing of our Muncie facility in 2009, there will be negligible service cost going forward.
• Health care cost trend: For postretirement employee health care plan accounting, the
Company reviews external data and Company specific historical trends for health care cost to
determine the health care cost trend rate assumptions. In determining the projected benefit
obligation for postretirement employee health care plans as of December 31, 2010, the
Company used health care cost trend rates of 7.40%, declining to an ultimate trend rate of
5% by the year 2019.
While the Company believes that these assumptions are appropriate, significant differences in
actual experience or significant changes in these assumptions may materially affect the Company’s
pension and other postretirement employee benefit obligations and its future expense.
The following table illustrates the sensitivity to a change in certain assumptions for Company
sponsored U.S. and non-U.S. pension plans on its 2011 pre-tax pension expense:
(millions of dollars)
1 percentage point decrease in discount rate
1 percentage point increase in discount rate
1 percentage point decrease in expected return on
assets
1 percentage point increase in expected return on
assets
Impact on
U.S. 2011
Pre-Tax Pension
(Expense)/Income
Impact on
Non-U.S. 2011
Pre-Tax Pension
(Expense)/Income
—*
—*
$ (2.2)
$ 2.2
$ (3.2)
$ 3.2
$ (1.5)
$ 1.5
*
Impact of 1 percentage point increase or decrease in the discount rate will have a negligible
impact on the Company’s 2011 pre-tax pension expense.
The following table illustrates the sensitivity to a change in the discount rate assumption related
to the Company’s U.S. OPEB interest expense:
(millions of dollars)
1 percentage point decrease in discount rate
1 percentage point increase in discount rate
Impact on 2011
Pre-Tax OPEB
Interest
(Expense)/Income
$ (1.6)
$ 1.6
The sensitivity to a change in the discount rate assumption related to the Company’s total 2011
U.S. OPEB expense is expected to be negligible, as any increase in interest expense will be offset
by net actuarial gains.
43
Source: BORGWARNER INC, 10-K, February 10, 2011
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The following table illustrates the sensitivity to a one-percentage point change in the assumed
health care cost trend related to the Company’s OPEB obligation and service and interest cost:
(millions of dollars)
Effect on other post employment benefit obligation
Effect on total service and interest cost components
One Percentage Point
Increase
$ 18.0
$ 0.9
Decrease
$ (16.0)
$ (0.8)
See Note 11 to the Consolidated Financial Statements for more information regarding the
Company’s retirement benefit plans.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740. 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. In 2008 and 2009, the Company
recorded a valuation allowance that primarily represented foreign net operating losses and
U.S. based foreign tax credits for which utilization was uncertain. In 2010, the Company recorded a
reversal of the Company’s $21.2 million valuation allowance on U.S. based foreign tax credit
carryforwards.
Management judgment is required in determining the Company’s provision for income taxes,
deferred tax assets and liabilities and the valuation allowance recorded against the Company’s net
deferred tax assets. In calculating the provision for income taxes on an interim basis, the Company
uses an estimate of the annual effective tax rate based upon the facts and circumstances known at
each interim period. In determining the need for a valuation allowance, the historical and projected
financial performance of the operation recording the net deferred tax asset is considered along with
any other pertinent information. Since future financial results may differ from previous estimates,
periodic adjustments to the Company’s valuation allowance may be necessary.
The Company is subject to income taxes in the U.S. at the federal and state level and
numerous non-U.S. jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes and recording the related assets and liabilities. In the ordinary course of
our business, there are many transactions and calculations where the ultimate tax determination is
less than certain. Accruals for income tax contingencies are provided for in accordance with the
requirements of ASC Topic 605. The Company’s U.S. federal and certain state income tax returns
and certain non-U.S. income tax returns are currently under various stages of audit by applicable
tax authorities. Although the outcome of ongoing tax audits is always uncertain, management
believes that it has appropriate support for the positions taken on its tax returns and that its annual
tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by
the taxing authorities. At December 31, 2010, the Company has recorded a liability for its best
estimate of the more likely than not loss on certain of its tax positions, which is included in other
non-current liabilities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the
issues raised by the taxing authorities may differ materially from the amounts accrued for each
year.
See Note 4 to the Consolidated Financial Statements for more information regarding income
taxes.
New Accounting Pronouncements
In September 2006, the FASB ASC amended Topic 820, Fair Value Measurements and
Disclosures. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in
GAAP and expands disclosures about fair value measurements. On January 1, 2009, the Company
fully adopted as required, ASC Topic 820. See Note 9 to the Consolidated Financial Statements for
more information regarding the implementation of ASC Topic 820.
44
Source: BORGWARNER INC, 10-K, February 10, 2011
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In February 2007, the FASB ASC amended Topic 825, Financial Instruments. ASC Topic 825
allows entities to irrevocably elect to recognize most financial assets and financial liabilities at fair
value on an instrument-by-instrument basis. The stated objective of ASC Topic 825 is to improve
financial reporting by giving entities the opportunity to elect to measure certain financial assets and
liabilities at fair value in order to mitigate earnings volatility caused when related assets and
liabilities are measured differently. ASC Topic 825 was effective for the Company beginning with its
quarter ending March 31, 2008. The Company chose to not make the election to adopt.
In December 2007, the FASB ASC amended Topic 805, Business Combinations. ASC Topic
805 establishes principles and requirements for recognizing identifiable assets acquired, liabilities
assumed, noncontrolling interest in the acquiree, goodwill acquired in the combination or the gain
from a bargain purchase, and disclosure requirements. Under this revised statement, all costs
incurred to effect an acquisition are recognized separately from the acquisition. Also, restructuring
costs that are expected but the acquirer is not obligated to incur are recognized separately from the
acquisition. On January 1, 2009, the Company adopted ASC Topic 805. In the first quarter of 2009,
the Company expensed $4.8 million related to on-going acquisition related activity.
In December 2007, the FASB ASC amended Topic 810, Consolidation. For consolidated
subsidiaries that are less than wholly owned, the third party holdings of equity interests are referred
to as noncontrolling interests. The portion of net income (loss) attributable to noncontrolling
interests for such subsidiaries is presented as net income (loss) applicable to noncontrolling interest
on the consolidated statement of operation, and the portion of stockholders’ equity of such
subsidiaries is presented as noncontrolling interest on the consolidated balance sheet. Effective
January 1, 2009, the Company adopted ASC Topic 810.
The adoption of ASC Topic 810 did not have a material impact on the Company’s financial
condition, results of operations or cash flows. However, it did impact the presentation and
disclosure of noncontrolling (minority) interests in our consolidated financial statements and notes
to the consolidated financial statements. As a result of the retrospective presentation and disclosure
requirements of ASC Topic 810, the Company was required to reflect the change in presentation
and disclosure for the period ending March 31, 2009 and all periods presented in future filings.
The principal effect on the prior year balance sheets related to the adoption of ASC Topic 810 is
summarized as follows:
(millions of dollars)
Balance Sheet
Total equity, as previously reported
Increase for Topic 810 reclass of noncontrolling interest
Total equity, as adjusted
December 31, 2008
$
$
2,006.0
31.5
2,037.5
The principal effect on the prior year statement of operations related to the adoption of ASC
Topic 810 is summarized as follows:
(millions of dollars)
Consolidated Statement of Operations
Net loss, as previously reported
Topic 810 reclass of noncontrolling interest
Net loss, as adjusted
Less: Net earnings attributable to noncontrolling interest
Net loss attributable to BorgWarner Inc.
45
Year Ended
December 31, 2008
$
$
$
(35.6)
(16.3)
(19.3)
16.3
(35.6)
Source: BORGWARNER INC, 10-K, February 10, 2011
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The principal effect on the prior year statement of cash flows related to the adoption of ASC
Topic 810 is summarized as follows:
(millions of dollars)
Statement of Cash Flows
Net loss, as previously reported
Topic 810 reclass of noncontrolling interest
Net loss, as adjusted
(millions of dollars)
Statement of Cash Flows
Equity in affiliates’ earnings, net of dividends received, minority interest
and other, as previously reported
Less: Topic 810 reclass of noncontrolling interest
Equity in affiliates’ earnings, net of dividends received and other
Year Ended
December 31, 2008
(35.6)
(16.3)
(19.3)
Year Ended
December 31, 2008
28.3
(16.3)
12.0
$
$
$
$
The principal effect on the prior year comprehensive income related to the adoption of ASC
Topic 810 is summarized as follows:
(millions of dollars)
Net foreign currency translation and hedge instruments adjustment, as
previously reported
Topic 810 reclass of noncontrolling interest
Net foreign currency translation and hedge instruments adjustment, as
adjusted
December 31, 2008
$
$
(136.9)
(10.8)
(126.1)
Due to the adoption of ASC Topic 810, the Company revised the presentation of cash
payments related to the acquisition of noncontrolling (minority) interests from the Investing to the
Financing section of the Company’s Consolidated Statement of Cash Flows. The principal effect on
the prior year cash flows related to the adoption of ASC Topic 810 is summarized as follows:
(millions of dollars)
Statement of Cash Flows
Payments for businesses acquired, net of cash acquired, as previously
reported
Less: Topic 805 reclass of noncontrolling interest
Payments for businesses acquired, net of cash acquired
(millions of dollars)
Statement of Cash Flows
Net cash used in investing activities, as previously reported
Less: Topic 805 reclass of noncontrolling interest
Net cash used in investing activities
(millions of dollars)
Statement of Cash Flows
Net cash provided by financing activities, as previously reported
Less: Topic 805 reclass of noncontrolling interest
Net cash used in financing activities
46
Year Ended
December 31, 2008
$
$
$
$
$
$
(141.2)
141.2
—
Year Ended
December 31, 2008
(485.1)
141.2
(343.9)
Year Ended
December 31, 2008
5.1
(141.2)
(136.1)
Source: BORGWARNER INC, 10-K, February 10, 2011
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In March 2008, the FASB ASC amended Topic 815, Derivatives and Hedging. ASC Topic 815
requires entities to provide enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted for under ASC
Topic 815 and its related interpretations, and how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows. On January 1, 2009, the
Company adopted ASC Topic 815. See Note 10 to the Consolidated Financial Statements for more
information regarding the implementation of ASC Topic 815.
In May 2008, the FASB ASC amended Topic 470, Debt. Under ASC Topic 470, an entity must
separately account for the liability and equity components of the convertible debt instruments that
may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s
interest cost. ASC Topic 470 is effective for fiscal years beginning after December 15, 2008, and for
interim periods within those fiscal years, with retrospective application required. As a result of our
adoption of ASC Topic 470 for fiscal 2009 and the Company’s April 9, 2009 issuance of
$373.8 million convertible senior notes due April 15, 2012, we recorded the equity and liability
components of the notes on our December 31, 2009 Consolidated Balance Sheet. Additionally,
ASC Topic 470 requires us to accrete the discounted carrying value of the convertible notes to their
face value over the term of the notes. The Company’s interest expense associated with this
amortization is based on the effective interest rate of the convertible senior notes of 9.365%. See
Note 8 to the Consolidated Financial Statements for more information.
In December 2008, the FASB ASC amended Topic 715, Compensation — Retirement Benefits.
ASC Topic 715 requires entities to provide enhanced disclosures about how investment allocation
decisions are made, the major categories of plan assets, the inputs and valuation techniques used
to measure fair value of plan assets, the effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period, and significant concentrations of risk
within plan assets. See Note 9 and Note 11 to the Consolidated Financial Statements for more
information regarding the implementation of ASC Topic 715.
In June 2009, the FASB ASC amended Topic 860, “Accounting for Transfer of Financial
Assets”. ASC Topic 860 removes the concept of a qualifying special-purpose entity and removes
the exception from applying ASC Topic 810, Consolidation of Variable Interest Entities, to qualifying
special-purpose entities. This Statement modifies the financial- components approach used in ASC
Topic 860 and limits the circumstances in which a financial asset, or portion of a financial asset,
should be derecognized. Additionally, enhanced disclosures are required to provide financial
statement users with greater transparency about transfers of financial assets and a transferor’s
continuing involvement with transferred financial assets. On January 1, 2010, the Company elected
to prospectively adopt ASC Topic 860. The impact of this adoption is an increase in receivables, net
of $80 million and an increase in notes payable and other short-term debt of $80 million in the
Company’s December 31, 2010 Consolidated Balance Sheet. See Note 1 to the Consolidated
Financial Statements for more information on the implementation of ASC Topic 860.
In June 2009, the FASB amended ASC Topic 810, “Consolidation”. ASC Topic 810 requires an
ongoing reassessment of whether an enterprise is the primary beneficiary of a variable interest
entity. Additionally, ASC Topic 810 requires enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprise’s involvement in variable interest
entities. On January 1, 2010, the Company adopted ASC Topic 810. The adoption of this guidance
did not have a material impact on the Company’s financial statements.
In June 2009, the FASB ASC amended Topic 105, “Generally Accepted Accounting Principles”.
This ASC Topic instituted a major change in the way accounting standards are organized. The
accounting standards Codification became the single official source of authoritative,
nongovernmental GAAP. As of September 30, 2009 only one level of authoritative GAAP exists,
other than guidance issued by the SEC. All other literature is non-authoritative. The Company
adopted the Codification in the third quarter of 2009. The adoption of the Codification had no impact
on the Company’s consolidated financial position, results of operations or cash flows.
47
Source: BORGWARNER INC, 10-K, February 10, 2011
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QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company’s primary market risks include fluctuations in interest rates and foreign currency
exchange rates. We are also affected by changes in the prices of commodities used or consumed
in our manufacturing operations. Some of our commodity purchase price risk is covered by supply
agreements with customers and suppliers. Other commodity purchase price risk is addressed by
hedging strategies, which include forward contracts. The Company enters into derivative
instruments only with high credit quality counterparties and diversifies its positions across such
counterparties in order to reduce its exposure to credit losses. We do not engage in any derivative
instruments for purposes other than hedging specific operating risks.
We have established policies and procedures to manage sensitivity to interest rate, foreign
currency exchange rate and commodity purchase price risk, which include monitoring the level of
exposure to each market risk. For quantitative disclosures about market risk, please refer to
Note 10, “Financial Instruments” of the Notes to the Consolidated Financial Statements in Item 8 of
this report with respect to interest rate risk and foreign currency exchange risk.
Interest Rate Risk
Interest rate risk is the risk that we will incur economic losses due to adverse changes in
interest rates. The Company manages its interest rate risk by balancing its exposure to fixed and
variable rates while attempting to minimize its interest costs. The Company selectively uses interest
rate swaps to reduce market value risk associated with changes in interest rates (fair value
hedges). At the end of 2010, the amount of debt with fixed interest rates was 69.5% of total debt,
including the impact of the interest rate swaps. Our earnings exposure related to adverse
movements in interest rates is primarily derived from outstanding floating rate debt instruments that
are indexed to floating money market rates. A 10% increase or decrease in the average cost of our
variable rate debt would result in a change in pre-tax interest expense of approximately $1.6 million
in 2010, and $1.5 million in 2009.
We also measure interest rate risk by estimating the net amount by which the fair value of all of
our interest rate sensitive assets and liabilities would be impacted by selected hypothetical changes
in market interest rates. Fair value is estimated using a discounted cash flow analysis. Assuming a
hypothetical instantaneous 10% change in interest rates as of December 31, 2010, the net fair
value of these instruments would increase by approximately $28.0 million if interest rates decreased
and would decrease by approximately $26.0 million if interest rates increased. Our interest rate
sensitivity analysis assumes a constant shift in interest rate yield curves. The model, therefore,
does not reflect the potential impact of changes in the relationship between short-term and
long-term interest rates. Interest rate sensitivity at December 31, 2009, measured in a similar
manner, was slightly more than at December 31, 2010.
Foreign Currency Exchange Rate Risk
Foreign currency risk is the risk that we will incur economic losses due to adverse changes in
foreign currency exchange rates. Currently, our most significant currency exposures relate to the
British Pound, the Euro, the Hungarian Forint, the Japanese Yen, and the South Korean Won. We
mitigate our foreign currency exchange rate risk principally by establishing local production facilities
and related supply chain participants in the markets we serve, by invoicing customers in the same
currency as the source of the products and by funding some of our investments in foreign markets
through local currency loans and cross currency swaps. Such non-U.S. Dollar debt was
$299.0 million as of December 31, 2010 and $303.1 million as of December 31, 2009. We also
monitor our foreign currency exposure in each country and implement strategies to respond to
changing economic and political environments. In addition, the Company periodically enters into
forward currency contracts in order to reduce exposure to exchange rate risk related to transactions
denominated in currencies other than the functional currency. As of December 31, 2010, the
Company was holding foreign exchange derivatives with positive and negative fair market values of
$2.7 million and
48
Source: BORGWARNER INC, 10-K, February 10, 2011
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$(6.4) million, respectively, of which $2.6 million in gains and $(3.3) million in losses mature in less
than one year. As of December 31, 2010, $(0.1) million in losses did not qualify for deferral.
Commodity Price Risk
Commodity price risk is the possibility that we will incur economic losses due to adverse
changes in the cost of raw materials used in the production of our products. Commodity forward
and option contracts are executed to offset our exposure to the potential change in prices mainly for
various non-ferrous metals and natural gas consumption used in the manufacturing of vehicle
components. As of December 31, 2010, the Company had forward and option commodity contracts
with a total notional value of $1.2 million.
Disclosure Regarding Forward-Looking Statements
The matters discussed in this Item 7 include forward-looking statements. See “Forward-Looking
Statements” at the beginning of this Annual Report on Form 10-K.
49
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REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The information in this report is the responsibility of management. BorgWarner Inc. and
Consolidated Subsidiaries (the “Company”) has in place reporting guidelines and policies designed
to ensure that the statements and other information contained in this report present a fair and
accurate financial picture of the Company. In fulfilling this management responsibility, we make
informed judgments and estimates conforming with accounting principles generally accepted in the
United States of America.
The accompanying Consolidated Financial Statements have been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm.
The management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles in the
United States of America. The internal control process includes those policies and procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company;
• Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on
the financial statements.
Any system of internal control, no matter how well designed, has inherent limitations. Therefore,
even those systems determined to be effective may not prevent or detect misstatements and can
provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2010. In making this assessment, the Company’s
management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control — Integrated Framework.
Based on management’s assessment and those criteria, we believe that, as of December 31,
2010, the Company’s internal control over financial reporting is effective.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited
the Company’s consolidated financial statements and the effectiveness of internal controls over
financial reporting as of December 31, 2010 as stated in their report.
The Company’s Audit Committee, composed entirely of directors of the Company who are not
employees, meets periodically with the Company’s management and independent registered public
accounting firm to review financial results and procedures, internal financial controls and internal
and external audit plans and recommendations. In carrying out these responsibilities, the Audit
Committee and the independent registered public accounting firm have unrestricted access to each
other with or without the presence of management representatives.
/s/ Timothy M. Manganello
Chairman and Chief Executive Officer
/s/ Robin J. Adams
Executive Vice President,
Chief Financial Officer & Chief Administrative
Officer
February 10, 2011
50
Source: BORGWARNER INC, 10-K, February 10, 2011
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For qualitative information regarding market risk, please refer to the discussion in Item 7 of this
report under the caption “Qualitative and Quantitative Disclosure about Market Risk.”
Refer to Note 10, “Financial Instruments” of the Notes to the Consolidated Financial Statements
in Item 8 of this report for information with respect to interest rate risk and foreign currency
exchange risk. Information with respect to the levels of indebtedness subject to interest rate
fluctuation is contained in Note 8, “Notes Payable and Long-Term Debt” to the Consolidated
Financial Statements in Item 8. Information with respect to the Company’s level of business outside
the United States which is subject to foreign currency exchange rate market risk is contained in
Note 19, “Reporting Segments and Related Information” of the Notes to the Consolidated Financial
Statements in Item 8.
Item 8. Financial Statements and Supplementary Data
51
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BorgWarner Inc.:
Auburn Hills, Michigan
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of BorgWarner Inc. and Consolidated
Subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2010 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express opinions on these financial statements
and on the Company’s internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
We also have audited the adjustments to the 2008 financial statements to retrospectively apply
the change in accounting related to the adoption of ASC 810 Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51 (formerly FAS 160), as described
in Note 1. In our opinion, such adjustments are appropriate and have been properly applied. We
were not engaged to audit, review, or apply any procedures to the 2008 financial statements of the
Company other than with respect to the adjustments and, accordingly, we do not express an
opinion or any other form of assurance on the 2008 financial statements taken as a whole.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Detroit, MI
February 10, 2011
52
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BorgWarner Inc.
Auburn Hills, Michigan
We have audited, before the effects of the adjustments to retrospectively apply the change in
accounting discussed in Note 1 to the consolidated financial statements of BorgWarner Inc. and
Consolidated Subsidiaries (the “Company”), the consolidated statements of operations,
stockholders’ equity and comprehensive income and cash flows for the year ended December 31,
2008 (the 2008 consolidated financial statements before the effects of the adjustments discussed in
Note 1 to the consolidated financial statements are not presented herein). These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 2008 consolidated financial statements, before the effects of the
adjustments to retrospectively apply the change in accounting discussed in Note 1 to the
consolidated financial statements, present fairly, in all material respects, the results of the
operations and cash flows of BorgWarner Inc. and Consolidated Subsidiaries for the year ended
December 31, 2008, in conformity with accounting principles generally accepted in the United
States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments to
retrospectively apply the change in accounting discussed in Note 1 to the consolidated financial
statements and, accordingly, we do not express an opinion or any other form of assurance about
whether such retrospective adjustments are appropriate and have been properly applied. Those
retrospective adjustments were audited by other auditors.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
February 12, 2009
53
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except share and per share amounts)
For the Year Ended December 31,
2010
2009
2008
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Restructuring expense
Goodwill impairment charge
Other (income) expense
Operating income
Equity in affiliates’ earnings, net of tax
Interest income
Interest expense and finance charges
Earnings before income taxes and noncontrolling
interest
Provision (benefit) for income taxes
Net earnings (loss)
Net earnings attributable to the noncontrolling
$
5,652.8 $
4,559.5
1,093.3
566.6
—
—
22.4
504.3
(39.6)
(2.8)
68.8
3,961.8 $
3,401.0
560.8
459.8
50.3
—
(0.1)
50.8
(21.8)
(2.5)
57.2
477.9
81.7
396.2
17.9
(18.5)
36.4
interest, net of tax
Net earnings (loss) attributable to BorgWarner Inc. $
18.8
377.4 $
9.4
27.0 $
5,263.9
4,425.4
838.5
542.9
127.5
156.8
4.0
7.3
(38.4)
(7.1)
38.8
14.0
33.3
(19.3)
16.3
(35.6)
Earnings (loss) per share — basic
Earnings (loss) per share — diluted
Average shares outstanding (thousands):
Basic
Diluted
$
$
3.31 $
0.23 $
(0.31)**
3.07* $
0.23 $
(0.31)**
114,155
129,575
116,522
116,939
116,007
116,007
* The Company’s diluted earnings per share for the year ended December 31, 2010 includes the
impact of the Company’s 3.50% convertible notes and associated warrants. Refer to Note 16,
“Earnings (Loss) Per Share”, for further information on our diluted earnings calculation.
** The Company had a loss for the year ended December 31, 2008. As a result, diluted loss per
share is the same as basic loss per share in the period, as any dilutive securities would reduce
the loss per share.
See Accompanying Notes to Consolidated Financial Statements.
54
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIAIRIES
CONSOLIDATED BALANCE SHEETS
(millions of dollars)
December 31,
ASSETS
Cash
Receivables, net
Inventories, net
Deferred income taxes
Prepayments and other current assets
Total current assets
Property, plant and equipment, net
Investments and advances
Goodwill
Other non-current assets
Total assets
LIABILITIES AND EQUITY
Notes payable and other short-term debt
Accounts payable and accrued expenses
Income taxes payable
Total current liabilities
Long-term debt
Other non-current liabilities:
Retirement-related liabilities
Other
Total other non-current liabilities
Capital stock:
2010
2009
$
449.9 $
1,023.9
430.6
75.8
79.7
2,059.9
1,542.6
307.9
1,113.5
531.1
357.4
732.0
314.3
60.2
87.9
1,551.8
1,490.3
257.4
1,061.4
450.5
$ 5,555.0 $ 4,811.4
$
128.5 $
1,224.1
39.7
1,392.3
1,051.9
69.1
977.1
—
1,046.2
773.2
438.1
362.9
801.0
473.7
295.6
769.3
$
Preferred stock, $0.01 par value; authorized shares: 5,000,000;
none issued
Common stock, $0.01 par value; authorized shares: 150,000,000;
issued shares: 2010, 120,086,206 and 2009, 118,336,410;
outstanding shares: 2010, 112,316,444 and 2009, 116,837,555
Non-voting common stock, $0.01 par value; authorized shares:
25,000,000; none issued and outstanding
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income (loss)
Common stock held in treasury, at cost: 7,769,762 shares in 2010 and
—
—
1.2
1.2
—
1,100.4
1,560.2
(53.7)
—
1,034.1
1,193.4
14.5
1,498,855 shares in 2009
Total BorgWarner Inc. stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
(349.5)
2,258.6
51.2
2,309.8
(57.9)
2,185.3
37.4
2,222.7
$ 5,555.0 $ 4,811.4
See Accompanying Notes to Consolidated Financial Statements.
55
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIAIRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
For the Year Ended December 31,
OPERATING
Net earnings (loss)
Adjustments to reconcile net earnings (loss) to net cash flows from operations:
Non-cash charges (credits) to operations:
Depreciation and tooling amortization
Amortization of intangible assets and other
Environmental litigation settlement, net of cash paid
Restructuring expense, net of cash paid
Goodwill impairment charge
Stock based compensation expense
Deferred income tax benefit
Bond amortization
BERU-Eichenauer equity investment gain
Equity in affiliates’ earnings, net of dividends received, and other
Net earnings (loss) adjusted for non-cash charges to operations
Changes in assets and liabilities:
Receivables
Inventories
Prepayments and other current assets
Accounts payable and accrued expenses
Income taxes payable
Other non-current assets and liabilities
Net cash provided by operating activities
INVESTING
Capital expenditures, including tooling outlays
Net proceeds from asset disposals
Payments for businesses acquired, net of cash acquired
Net proceeds from sale of business
Proceeds from sales of marketable securities
Net cash used in investing activities
FINANCING
Net increase (decrease) in notes payable
Additions to long-term debt, net of debt issuance costs
Repayments of long-term debt, including current portion
Payments for noncontrolling interest acquired
Payment for purchase of bond hedge
Proceeds from warrant issuance
Reduction in accounts receivable securitization facility
Proceeds from accounts receivable securitization facility
Payments for purchase of treasury stock
Proceeds from interest rate swap termination
Proceeds from stock options exercised, including the tax benefit
Dividends paid to BorgWarner stockholders
Dividends paid to noncontrolling stockholders
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid during the year for:
Interest
Income taxes
Non-cash investing transactions:
Domination and Profit Transfer Agreement
Non-cash financing transactions:
Stock performance plans
Restricted common stock for employees
Restricted common stock for non-employee directors
2010
2009
2008
$
396.2 $
36.4 $
(19.3)
224.5
28.4
14.0
—
—
22.8
(52.2)
18.3
(8.0)
1.7
645.7
(239.0)
(79.0)
0.6
169.4
37.3
3.9
538.9
(276.6)
6.8
(164.7)
5.0
—
(429.5)
(29.8)
372.2
(116.1)
—
—
—
—
30.0
(325.7)
—
67.1
—
(10.9)
(13.2)
(3.7)
92.5
357.4
449.9 $
234.6
26.3
—
38.4
—
22.0
(57.7)
12.7
—
21.3
334.0
(106.6)
143.0
1.2
98.9
(6.9)
(112.6)
351.0
(172.0)
23.1
(7.5)
1.6
—
(154.8)
(114.7)
381.6
(164.5)
(48.5)
(56.4)
31.2
(50.0)
50.0
—
30.0
8.7
(13.8)
(8.8)
44.8
13.0
254.0
103.4
357.4 $
259.7
27.1
—
115.9
156.8
21.2
(78.3)
—
—
12.0
495.1
163.9
(26.3)
16.0
(195.6)
(23.0)
(29.3)
400.8
(369.7)
5.7
—
5.5
14.6
(343.9)
114.8
—
(7.3)
(141.2)
—
—
—
—
(55.9)
—
17.1
(51.1)
(12.5)
(136.1)
(5.9)
(85.1)
188.5
103.4
53.4 $
83.1
68.8 $
60.3
44.4
122.0
—
—
44.0
3.8
18.1
0.8
6.0
14.1
0.7
5.0
9.0
0.7
$
$
See Accompanying Notes to Consolidated Financial Statements.
56
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIAIRIES
CONSOLIDATED STATEMENTS OF EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Balance, January 1, 2008
Dividends declared
Stock option expense
Stock incentive plans
Executive stock plan
Net issuance of
restricted stock,less
amortization
Purchases of treasury
stock
Net earnings (loss)
Net earnings
attributable to the
noncontrolling
interest, net of tax
Defined benefit post
employment plans,
net of tax
Net unrealized loss on
available-for-sale
securities
Currency translation
and hedge
instruments, net
Comprehensive loss
attributable to the
noncontrolling
interest
Purchase of subsidiary
shares from
noncontrolling
interest
Domination and Profit
Transfer
Agreement (See
Note 18)
Balance, December 31,
2008
Dividends declared
Stock option expense
Stock incentive plans
Executive stock plan
Net issuance of
restricted stock, less
amortization
Convertible bond
issuance
Convertible bond —
Hedge
Convertible bond —
Warrant
Net earnings
Net earnings
attributable to the
noncontrolling
interest, net of tax
Defined benefit post
employment plans,
net of tax
Currency translation
and hedge
instruments, net
Comprehensive income
attributable to the
noncontrolling
interest
Dalian joint venture
Balance, December 31,
2009
Dividends declared
Stock option expense
Stock incentive plans
Executive stock plan
Net issuance of
restricted stock, less
amortization
Purchases of treasury
stock
Net earnings
Net earnings
attributable to the
noncontrolling
interest, net of tax
Defined benefit post
employment plans,
net of tax
Net unrealized gain on
available-for-sale
securities
Currency translation
and hedge
instruments, net of
tax
Comprehensive loss
attributable to the
noncontrolling
interest
Dytech ENSA S.L.
acquisition
Balance, December 31,
2010
(millions of dollars)
BorgWarner Inc. Stockholders’ equity
Accumulated
Number of shares
Issued
Common
Stock
Common
Stock in
Treasury
Issued Capital in
Common Excess of
par Value
Stock
Treasury
Stock
Retained
Earnings
Equity
Attributable to
Comprehensive Noncontrolling Comprehensive
Interests
Income (Loss)
Income (Loss)
Other
117,206,709
—
—
—
197,052
(1,078,137) $
—
—
375,075
—
295,781
—
(1,464,108)
—
1.2 $
—
—
—
—
—
—
—
943.4 $
—
12.2
10.8
1.5
(46.5) $
—
—
15.0
—
1,295.9 $
(51.1)
—
(8.7)
—
9.7
—
—
—
—
(55.9)
—
—
(19.3)
127.1 $
—
—
—
—
—
—
—
117.9
(12.5)
—
—
—
—
—
16.2 $
—
—
—
—
—
—
(19.3)
—
—
—
—
(16.3)
—
—
(16.3)
—
—
—
—
—
(74.7)
—
(74.7)
—
—
—
—
—
(1.4)
—
(1.4)
—
—
—
—
—
(126.1)
(0.5)
(126.1)
—
—
—
—
—
(10.8)
—
(10.8)
—
—
—
—
—
—
(1.9)
—
—
—
—
—
—
(87.7)
117,699,542
(2,167,170) $
1.2 $
977.6 $
(87.4) $
1,200.5 $
(85.9) $
—
—
380,499
287,816
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7.2
(0.7)
6.0
14.8
34.7
(36.7)
31.2
—
—
—
16.2
13.3
—
—
—
—
—
(13.8)
—
(7.0)
(13.3)
—
—
—
—
36.4
—
—
—
—
—
—
—
—
—
—
—
—
—
(9.4)
—
—
—
—
—
—
(3.4)
—
—
(248.6)
—
—
—
—
—
—
—
—
36.4
(9.4)
(3.4)
31.5 $
(8.8)
—
—
—
—
—
—
—
9.4 $
—
—
—
—
—
—
—
99.9
1.9
99.9
—
—
—
—
—
—
—
—
—
—
3.9
—
118,336,410
(1,498,855) $
1.2 $
1,034.1 $
(57.9) $
1,193.4 $
14.5 $
—
—
—
—
—
—
525,297
269,896
1,749,796
—
(7,066,100)
—
—
—
—
—
—
—
—
—
0.1
43.5
3.8
—
—
22.6
11.5
—
—
(10.6)
—
18.9
—
—
—
—
(325.7)
—
396.2
—
—
—
—
—
—
—
—
3.4
37.4 $
(9.5)
—
—
—
—
—
18.8 $
3.9
—
127.4
—
—
—
—
—
—
396.2
—
—
—
—
(18.8)
—
—
(18.8)
—
—
—
—
—
7.8
—
—
—
—
—
1.2
—
—
7.8
1.2
—
—
—
—
—
(77.1)
2.5
(77.1)
—
—
—
—
—
—
—
—
—
—
(0.1)
—
—
2.0
(0.1)
—
120,086,206
(7,769,762) $
1.2 $
1,100.4 $
(349.5) $
1,560.2 $
(53.7) $
51.2 $
309.2
See Accompanying Notes to Consolidated Financial Statements.
57
—
—
—
—
636,868
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Source: BORGWARNER INC, 10-K, February 10, 2011
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INTRODUCTION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a leading global supplier of
highly engineered systems and components primarily for powertrain applications. These products are
manufactured and sold worldwide, primarily to original equipment manufacturers of passenger cars,
sport-utility vehicles, crossover vehicles, trucks, commercial transportation products and industrial
equipment and to certain Tier One vehicle systems suppliers. The Company’s products fall into two
reporting segments: Engine and Drivetrain.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following paragraphs briefly describe the Company’s significant accounting policies.
Basis of presentation The Company’s presentation of the Consolidated Balance Sheets,
Consolidated Statements of Operations, Consolidated Statements of Equity and Comprehensive
Income (Loss), and Reporting Segments and Related Information Note have been adjusted to
conform with the requirements of Accounting Standards Codification (“ASC”) Topic 810,
Noncontrolling Interest in Consolidated Financial Statements and ASC Topic 805, Business
Combinations. Refer to New Accounting Pronouncements for further information regarding these
reclassifications.
Use of estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) requires management to
make estimates and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentrations of risk Cash is maintained with several financial institutions. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally, these deposits
may be redeemed upon demand and are maintained with financial institutions of reputable credit and
therefore bear minimal risk.
The Company performs ongoing credit evaluations of its suppliers and customers and, with the
exception of certain financing transactions, does not require collateral from its customers. The
Company’s customers are primarily original equipment manufacturers (“OEMs”) of light-vehicles
(passenger cars, sport-utility vehicles, crossover vehicles, vans and light-trucks). The Company’s
products are also sold to other OEMs of commercial trucks, buses and agricultural and off-highway
vehicles. The Company also manufactures and sells products to certain Tier One vehicle systems
suppliers and into the aftermarket for light and commercial vehicles.
Some automotive parts suppliers continue to experience commodity cost pressures and the
effects of industry overcapacity. These factors have increased pressure on the industry’s supply
base, as suppliers cope with higher commodity costs, lower production volumes and other
challenges. The Company receives certain of its raw materials from sole suppliers or a limited
number of suppliers. The inability of a supplier to fulfill supply requirements of the Company could
materially affect future operating results.
Principles of consolidation The Consolidated Financial Statements include all majority- owned
subsidiaries with a controlling financial interest. All inter-company accounts and transactions have
been eliminated in consolidation. Investments in 20% to 50% owned affiliates are accounted for
under the equity method when the Company does not have a controlling financial interest.
Revenue recognition The Company recognizes revenue when title and risk of loss pass to the
customer, which is usually upon shipment of product. Although the Company may enter into
long-term supply agreements with its major customers, each shipment of goods is treated as a
separate sale and the prices are not fixed over the life of the agreements.
58
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash Cash is valued at fair market value. It is the Company’s policy to classify all highly liquid
investments with original maturities of three months or less as cash.
Accounts receivable The Company securitizes certain receivables through third party financial
institutions without recourse. The amount can vary each month based on the amount of underlying
receivables. The Company continues to administer the collection of these receivables on behalf of
the third party.
On April 24, 2009 the Company’s $50 million accounts receivable securitization facility matured
and was repaid. On December 21, 2009 the Company entered into a new $50 million accounts
receivable securitization facility.
On September 8, 2010 the Company amended the December 21, 2009 Receivable Purchase
Agreement, which increased the accounts receivable securitization facility from $50 million to
$80 million. This facility matures on December 21, 2012.
The Company was required to adopt amended ASC Topic 860, “Accounting for Transfer of
Financial Assets”, on January 1, 2010. This adoption required the Company to reflect its receivable
securitization facility in its financial statements in the current year of change. Accounting rules prior
to January 1, 2010 allowed qualifying special-purpose entities off-balance sheet treatment. The
impact of this adoption was an increase in receivables, net of $80 million and an increase in notes
payable and other short-term debt of $80 million in the Company’s December 31, 2010
Consolidated Balance Sheet.
During the years ended December 31, 2010 and 2009, total cash proceeds from sales of
accounts receivable were approximately $720 million and $250 million, respectively. The Company
paid servicing fees related to these receivables for the year ended December 31, 2010, 2009 and
2008 of $1.2 million, $0.4 million, and $1.9 million, respectively. These amounts are recorded in
interest expense and finance charges in the Consolidated Statements of Operations.
Inventories Inventories are valued at the lower of cost or market. Cost of U.S. inventories is
determined by the last-in, first-out (“LIFO”) method, while the foreign operations use the first-in,
first-out (“FIFO”) or average-cost methods. Inventory held by U.S. operations was $100.1 million
and $81.2 million at December 31, 2010 and 2009, respectively. Such inventories, if valued at
current cost instead of LIFO, would have been greater by $13.2 million in 2010 and $11.6 million in
2009.
See Note 5 to the Consolidated Financial Statements for more information on inventories.
Pre-production costs related to long-term supply arrangements Engineering, research and
development, and other design and development costs for products sold on long-term supply
arrangements are expensed as incurred unless the Company has a contractual guarantee for
reimbursement from the customer. Costs for molds, dies and other tools used to make products
sold on long-term supply arrangements for which the Company either has title to the assets or has
the non-cancelable right to use the assets during the term of the supply arrangement are capitalized
in property, plant and equipment. Capitalized items specifically designed for a supply arrangement
are amortized to cost of sales over the shorter of the term of the arrangement or over the estimated
useful lives of the assets, typically 3 to 5 years. Costs for molds, dies and other tools used to make
products sold on long-term supply arrangements for which the Company has a contractual
guarantee for lump sum reimbursement from the customer are capitalized in prepayments and
other current assets.
Property, plant and equipment and depreciation Property, plant and equipment are valued
at cost less accumulated depreciation. Expenditures for maintenance, repairs and renewals of
relatively minor items are generally charged to expense as incurred. Renewals of significant items
are capitalized. Depreciation is computed generally on a straight-line basis over the estimated
useful lives of the assets. Useful lives for buildings range from 15 to 40 years and useful lives for
machinery and equipment range from 3 to 12 years. For income tax purposes, accelerated methods
of depreciation are generally used. The Company’s property, plant and equipment are all held for
use at December 31, 2010 and 2009.
59
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See Note 5 to the Consolidated Financial Statements for more information on property, plant
and equipment and depreciation.
Impairment of long-lived assets The Company reviews the carrying value of its long-lived
assets, whether held for use or disposal, including other amortizing intangible assets, when events
and circumstances warrant such a review under ASC Topic 360. A recoverability review is
performed using the undiscounted cash flows if there is a triggering event. If the undiscounted cash
flow test for recoverability identifies a possible impairment, management will perform a fair value
analysis. Management determines fair value under ASC Topic 820 using the appropriate valuation
technique of market, income or cost approach. If the carrying value of a long-lived asset is
considered impaired, an impairment charge is recorded for the amount by which the carrying value
of the long-lived asset exceeds its fair value.
Management believes that the estimates of future cash flows and fair value assumptions are
reasonable; however, changes in assumptions underlying these estimates could affect the
evaluations. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair
value less cost to sell. Significant judgments and estimates used by management when evaluating
long-lived assets for impairment include: (i) an assessment as to whether an adverse event or
circumstance has triggered the need for an impairment review; and (ii) undiscounted future cash
flows generated by the asset (iii) fair valuation of the asset.
See Note 17, “Restructuring” and Note 9 “Fair Value Measurements”, to the Consolidated
Financial Statements for more information regarding the Company’s impairment of long-lived assets
and a discussion of market-based measurements.
Goodwill and other indefinite-lived intangible assets Under ASC Topic 350, goodwill and
other indefinite-lived intangibles are not amortized; however, they must be tested for impairment at
least annually or upon a triggering event. In the fourth quarter of each year, or when events and
circumstances warrant such a review, the Company reviews the goodwill of all of its reporting units
for impairment. The Company’s goodwill impairment review, under ASC Topic 350, requires the
Company to make significant assumptions and estimates about the extent and timing of future cash
flows, discount rates and growth rates. The fair value of the Company’s reporting units used in the
determination of goodwill impairment is computed using the expected present value of associated
future cash flows. The cash flows are estimated over a significant future period of time, which
makes those estimates and assumptions subject to an even higher degree of uncertainty. The
Company also utilizes market valuation models and other financial ratios, which require the
Company to make certain assumptions and estimates regarding the applicability of those models to
its assets and businesses. The Company believes that the assumptions and estimates used to
determine the estimated fair values of each of its reporting units are reasonable. The Company
recognized goodwill impairment of $156.8 million in the Engine segment in 2008.
A considerable amount of management judgment and assumptions are required in performing
the impairment tests. While no impairment existed at December 31, 2010, different assumptions
and estimates could materially change the estimated fair values and therefore, change impairment
charges.
See Note 6 to the Consolidated Financial Statements for more information on goodwill and
other indefinite-lived intangible assets.
Product warranty The Company provides warranties on some of its products. The warranty
terms are typically from one to three years. Provisions for estimated expenses related to product
warranty are made at the time products are sold. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claim settlements as well as
product manufacturing and industry developments and recoveries from third parties. Management
actively studies trends of warranty claims and takes action to improve product quality and minimize
warranty claims. Management believes that the warranty accrual is appropriate; however, actual
claims incurred could differ from the original estimates, requiring adjustments to the accrual. The
accrual is represented in both current and non-current liabilities on the balance sheet.
60
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See Note 7 to the Consolidated Financial Statements for more information on product
warranties.
Other loss accruals and valuation allowances The Company has numerous other loss
exposures, such as customer claims, workers’ compensation claims, litigation, and recoverability of
assets. Establishing loss accruals or valuation allowances for these matters requires the use of
estimates and judgment in regard to the risk exposure and ultimate realization. The Company
estimates losses under the programs using consistent and appropriate methods; however, changes
to its assumptions could materially affect its recorded accrued liabilities for loss or asset valuation
allowances.
Derivative financial instruments The Company recognizes that certain normal business
transactions generate risk. Examples of risks include exposure to exchange rate risk related to
transactions denominated in currencies other than the functional currency, changes in cost of major
raw materials and supplies, and changes in interest rates. It is the objective and responsibility of the
Company to assess the impact of these transaction risks, and offer protection from selected risks
through various methods including financial derivatives. Virtually all derivative instruments held by
the Company are designated as hedges, have high correlation with the underlying exposure and
are highly effective in offsetting underlying price movements. Accordingly, gains and losses from
changes in qualifying hedge fair values are matched with the underlying transactions. All hedge
instruments are carried at their fair value based on quoted market prices for contracts with similar
maturities. The Company does not engage in any derivative transactions for purposes other than
hedging specific risks.
See Note 10 to the Consolidated Financial Statements for more information on derivative
financial instruments.
Foreign currency The financial statements of foreign subsidiaries are translated to
U.S. Dollars using the period-end exchange rate for assets and liabilities and an average exchange
rate for each period for revenues, expenses, and capital expenditures. The local currency is the
functional currency for substantially all the Company’s foreign subsidiaries. Translation adjustments
for foreign subsidiaries are recorded as a component of accumulated other comprehensive income
(loss) in stockholders’ equity. The Company recognizes transaction gains and losses arising from
fluctuations in currency exchange rates on transactions denominated in currencies other than the
functional currency in earnings as incurred, except for those transactions which hedge purchase
commitments and for those intercompany balances which are designated as long-term investments.
See Note 13 to the Consolidated Financial Statements for more information on other
comprehensive income (loss).
Environmental Contingencies The Company accounts for environmental costs in accordance
with ASC Topic 450. Costs related to environmental assessments and remediation efforts at
operating facilities are accrued when it is probable that a liability has been incurred and the amount
of that liability can be reasonably estimated. Estimated costs are recorded at undiscounted
amounts, based on experience and assessments and are regularly evaluated. The liabilities are
recorded in other current liabilities and other long-term liabilities in the Company’s consolidated
balance sheets.
See Note 14 to the Consolidated Financial Statements for more information regarding
environmental contingencies.
Pensions and Other Postretirement Employee Defined Benefits The Company’s defined
benefit pension and other postretirement employee benefit plans are accounted for in accordance
with ASC Topic 715. Disability, early retirement and other postretirement employee benefits are
accounted for in accordance with ASC Topic 712.
Pensions and other postretirement employee benefit costs and related liabilities and assets are
dependent upon assumptions used in calculating such amounts. These assumptions include
discount rates, expected returns on plan assets, health care cost trends, compensation and other
factors. In
61
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accordance with GAAP, actual results that differ from the assumptions used are accumulated and
amortized over future periods, and accordingly, generally affect recognized expense in future
periods.
See Note 11 to the Consolidated Financial Statements for more information regarding the
Company’s retirement benefit plans.
Income Taxes The Company accounts for income tax expense based on expected income and
statutory tax rates in the various jurisdictions in which we operate. Judgment is required in
determining our income tax expense. We establish accruals under ASC Topic 740. For uncertain
tax positions, the ASC Topic 740 approach is based on a two-step benefit recognition model. In the
first step, ASC Topic 740 requires that a position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely than not, based on the technical merits
and without consideration of detection risk, that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step is to measure the
appropriate amount of the benefit to recognize. The amount of benefit to recognize is measured as
the largest amount of the tax benefit that is greater than 50 percent likely to ultimately be realized
upon settlement. The tax position must be derecognized when it is no longer more likely than not to
be sustained. The interpretation also provides guidance on recognition and classification of related
penalties and interest, classification of liabilities, and disclosures of unrecognized tax benefits.
The Company’s effective tax rate includes the impact of accrual provisions and changes to
accruals that we consider appropriate, as well as interest and penalties. A period of time may
elapse before a particular matter, for which we have or have not established an accrual is audited
and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution
of any particular tax matter, we believe that our accruals are appropriate under GAAP. Favorable or
unfavorable adjustments of an accrual for any particular issue would be recognized as an increase
or decrease to our income tax expense in the period of a change in facts and circumstances.
Tax laws require items to be included in the tax return at different times than the items are
reflected in the financial statements. As a result, the income tax expense reflected in our financial
statements is different than the liability reported in our tax return. Some of the differences are
permanent in nature, however, there are many differences that are temporary differences, such as
depreciation expense. 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 may not be realized. This assessment requires significant judgment,
and must be done on a jurisdiction-by-jurisdiction basis. In determining the need for a valuation
allowance, all available positive and negative evidence, including historical and projected financial
performance, is considered along with any other pertinent information.
See Note 4 to the Consolidated Financial Statements for more information regarding income
taxes.
New Accounting Pronouncements
In September 2006, the FASB ASC amended Topic 820, Fair Value Measurements and
Disclosures. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in
GAAP and expands disclosures about fair value measurements. On January 1, 2009, the Company
fully adopted as required, ASC Topic 820. See Note 9 to the Consolidated Financial Statements for
more information regarding the implementation of ASC Topic 820.
In February 2007, the FASB ASC amended Topic 825, Financial Instruments. ASC Topic 825
allows entities to irrevocably elect to recognize most financial assets and financial liabilities at fair
value on an instrument-by-instrument basis. The stated objective of ASC Topic 825 is to improve
financial reporting by
62
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
giving entities the opportunity to elect to measure certain financial assets and liabilities at fair value
in order to mitigate earnings volatility caused when related assets and liabilities are measured
differently. ASC Topic 825 was effective for the Company beginning with its quarter ending
March 31, 2008. The Company chose to not make the election to adopt.
In December 2007, the FASB ASC amended Topic 805, Business Combinations. ASC Topic
805 establishes principles and requirements for recognizing identifiable assets acquired, liabilities
assumed, noncontrolling interest in the acquiree, goodwill acquired in the combination or the gain
from a bargain purchase, and disclosure requirements. Under this revised statement, all costs
incurred to effect an acquisition are recognized separately from the acquisition. Also, restructuring
costs that are expected but the acquirer is not obligated to incur are recognized separately from the
acquisition. On January 1, 2009, the Company adopted ASC Topic 805. In the first quarter of 2009,
the Company expensed $4.8 million related to on-going acquisition related activity.
In December 2007, the FASB ASC amended Topic 810, Consolidation. For consolidated
subsidiaries that are less than wholly owned, the third party holdings of equity interests are referred
to as noncontrolling interests. The portion of net income (loss) attributable to noncontrolling
interests for such subsidiaries is presented as net income (loss) applicable to noncontrolling interest
on the consolidated statement of operation, and the portion of stockholders’ equity of such
subsidiaries is presented as noncontrolling interest on the consolidated balance sheet. Effective
January 1, 2009, the Company adopted ASC Topic 810.
The adoption of ASC Topic 810 did not have a material impact on the Company’s financial
condition, results of operations or cash flows. However, it did impact the presentation and
disclosure of noncontrolling (minority) interests in our consolidated financial statements and notes
to the consolidated financial statements. As a result of the retrospective presentation and disclosure
requirements of ASC Topic 810, the Company was required to reflect the change in presentation
and disclosure for the period ending March 31, 2009 and all periods presented in future filings.
The principal effect on the prior year balance sheets related to the adoption of ASC Topic 810 is
summarized as follows:
(millions of dollars)
Balance Sheet
Total equity, as previously reported
Increase for Topic 810 reclass of noncontrolling interest
Total equity, as adjusted
December 31,
2008
$
$
2,006.0
31.5
2,037.5
The principal effect on the prior year statement of operations related to the adoption of ASC
Topic 810 is summarized as follows:
(millions of dollars)
Consolidated Statement of Operations
Net loss, as previously reported
Topic 810 reclass of noncontrolling interest
Net loss, as adjusted
Less: Net earnings attributable to noncontrolling interest
Net loss attributable to BorgWarner Inc.
63
Year Ended
December 31,
2008
$
$
$
(35.6)
(16.3)
(19.3)
16.3
(35.6)
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The principal effect on the prior year statement of cash flows related to the adoption of ASC
Topic 810 is summarized as follows:
(millions of dollars)
Statement of Cash Flows
Net loss, as previously reported
Topic 810 reclass of noncontrolling interest
Net loss, as adjusted
(millions of dollars)
Statement of Cash Flows
Equity in affiliates’ earnings, net of dividends received, minority interest and
other, as previously reported
Less: Topic 810 reclass of noncontrolling interest
Equity in affiliates’ earnings, net of dividends received and other
Year Ended
December 31,
2008
(35.6)
(16.3)
(19.3)
Year Ended
December 31,
2008
28.3
(16.3)
12.0
$
$
$
$
The principal effect on the prior year comprehensive income related to the adoption of ASC
Topic 810 is summarized as follows:
(millions of dollars)
Net foreign currency translation and hedge instruments adjustment, as previously
reported
Topic 810 reclass of noncontrolling interest
Net foreign currency translation and hedge instruments adjustment, as
adjusted
December 31,
2008
$
(136.9)
(10.8)
$
(126.1)
Due to the adoption of ASC Topic 810, the Company revised the presentation of cash
payments related to the acquisition of noncontrolling (minority) interests from the Investing to the
Financing section of the Company’s Consolidated Statement of Cash Flows. The principal effect on
the prior year cash flows related to the adoption of ASC Topic 810 is summarized as follows:
(millions of dollars)
Statement of Cash Flows
Payments for businesses acquired, net of cash acquired, as previously reported $
Less: Topic 805 reclass of noncontrolling interest
Payments for businesses acquired, net of cash acquired
(millions of dollars)
Statement of Cash Flows
Net cash used in investing activities, as previously reported
Less: Topic 805 reclass of noncontrolling interest
Net cash used in investing activities
$
$
$
Year Ended
December 31,
2008
(141.2)
141.2
—
Year Ended
December 31,
2008
(485.1)
141.2
(343.9)
64
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(millions of dollars)
Statement of Cash Flows
Net cash provided by financing activities, as previously reported
Less: Topic 805 reclass of noncontrolling interest
Net cash used in financing activities
Year Ended
December 31,
2008
$
$
5.1
(141.2)
(136.1)
In March 2008, the FASB ASC amended Topic 815, Derivatives and Hedging. ASC Topic 815
requires entities to provide enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted for under ASC
Topic 815 and its related interpretations, and how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows. On January 1, 2009, the
Company adopted ASC Topic 815. See Note 10 to the Consolidated Financial Statements for more
information regarding the implementation of ASC Topic 815.
In May 2008, the FASB ASC amended Topic 470, Debt. Under ASC Topic 470, an entity must
separately account for the liability and equity components of the convertible debt instruments that
may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s
interest cost. ASC Topic 470 is effective for fiscal years beginning after December 15, 2008, and for
interim periods within those fiscal years, with retrospective application required. As a result of our
adoption of ASC Topic 470 for fiscal 2009 and the Company’s April 9, 2009 issuance of
$373.8 million convertible senior notes due April 15, 2012, we recorded the equity and liability
components of the notes on our December 31, 2009 Consolidated Balance Sheet. Additionally,
ASC Topic 470 requires us to accrete the discounted carrying value of the convertible notes to their
face value over the term of the notes. The Company’s interest expense associated with this
amortization is based on the effective interest rate of the convertible senior notes of 9.365%. See
Note 8 to the Consolidated Financial Statements for more information regarding the implementation
of ASC Topic 470.
In December 2008, the FASB ASC amended Topic 715, Compensation — Retirement Benefits.
ASC Topic 715 requires entities to provide enhanced disclosures about how investment allocation
decisions are made, the major categories of plan assets, the inputs and valuation techniques used
to measure fair value of plan assets, the effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period, and significant concentrations of risk
within plan assets. See Note 9 and Note 11 to the Consolidated Financial Statements for more
information regarding the implementation of ASC Topic 715.
In June 2009, the FASB ASC amended Topic 860, “Accounting for Transfer of Financial
Assets”. ASC Topic 860 removes the concept of a qualifying special-purpose entity and removes
the exception from applying ASC Topic 810, Consolidation of Variable Interest Entities, to qualifying
special-purpose entities. This Statement modifies the financial-components approach used in ASC
Topic 860 and limits the circumstances in which a financial asset, or portion of a financial asset,
should be derecognized. Additionally, enhanced disclosures are required to provide financial
statement users with greater transparency about transfers of financial assets and a transferor’s
continuing involvement with transferred financial assets. On January 1, 2010, the Company elected
to prospectively adopt ASC Topic 860. The impact of this adoption is an increase in receivables, net
of $80 million and an increase in notes payable and other short-term debt of $80 million in the
Company’s December 31, 2010 Consolidated Balance Sheet. See Note 1 to the Consolidated
Financial Statements for more information on the implementation of ASC Topic 860.
In June 2009, the FASB amended ASC Topic 810, “Consolidation”. ASC Topic 810 requires an
ongoing reassessment of whether an enterprise is the primary beneficiary of a variable interest
entity. Additionally, ASC Topic 810 requires enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprise’s involvement in variable interest
entities. On January 1, 2010, the Company adopted ASC Topic 810. The adoption of this guidance
did not have a material impact on the Company’s financial statements.
65
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2009, the FASB ASC amended Topic 105, “Generally Accepted Accounting Principles”.
This ASC Topic instituted a major change in the way accounting standards are organized. The
accounting standards Codification became the single official source of authoritative,
nongovernmental GAAP. As of September 30, 2009 only one level of authoritative GAAP exists,
other than guidance issued by the SEC. All other literature is non-authoritative. The Company
adopted the Codification in the third quarter of 2009. The adoption of the Codification had no impact
on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 2 RESEARCH AND DEVELOPMENT COSTS
The following table presents the Company’s gross and net expenditures on research and
development (“R&D”) activities:
(millions of dollars)
Year Ended December 31,
Gross R&D expenditures
Customer reimbursements
Net R&D expenditures
2010
2009
2008
$ 233.2 $ 219.0 $ 273.4
(67.7)
$ 185.0 $ 155.2 $ 205.7
(63.8)
(48.2)
The Company’s net R&D expenditures are included in the selling, general, and administrative
expenses of the Consolidated Statements of Operations. Net R&D expenditures as a percentage of
net sales were 3.3% in 2010 and 3.9% in 2009 and 2008. Customer reimbursements are netted
against gross R&D expenditures upon billing of services performed. The Company has contracts
with several customers at the Company’s various R&D locations. No such contract exceeded
$6.0 million in any of the years presented.
NOTE 3 OTHER EXPENSE (INCOME)
Items included in other expense (income) consist of:
(millions of dollars)
Year Ended December 31,
Environmental litigation settlement
BERU-Eichenauer equity investment gain
Loss on the sale of a product line
Net loss (gain) on asset disposals
Other
Total other expense (income)
2010
2009
2008
$ 28.0 $ — $ —
—
2.2
2.0
(0.2)
4.0
—
—
(0.1)
—
$ 22.4 $ (0.1) $
(8.0)
1.5
1.8
(0.9)
See Notes 14 and 18 to the Consolidated Financial Statements for more information regarding
the Company’s second quarter 2010 environmental litigation settlement and BERU-Eichenauer
equity investment gain.
66
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 4 INCOME TAXES
Earnings before income taxes and the provision for income taxes are presented in the following
table.
(millions of dollars)
Year Ended December 31,
U.S.
2010
Non-U.S.
Total
U.S.
Non-U.S.
Total
U.S.
2009
2008
Non-U.S.
Total
Earnings (loss) before taxes $
(26.7)
$
504.6
$
477.9
$
(138.5)
$
156.4
$
17.9
$
(123.8)
$
137.8
$
14.0
Provision for income taxes:
Current:
Federal/foreign
State
Total current
Deferred
Total provision for income
14.0
2.2
16.2
(48.9)
117.7
—
117.7
(3.3)
131.7
2.2
133.9
(52.2)
(2.7)
1.5
(1.2)
(51.6)
42.7
—
42.7
(8.4)
40.0
1.5
41.5
(60.0)
7.7
1.0
8.7
(44.7)
99.5
—
99.5
(30.2)
107.2
1.0
108.2
(74.9)
taxes
$
(32.7)
$
114.4
$
81.7
$
(52.8)
$
34.3
$
(18.5)
$
(36.0)
$
69.3
$
33.3
Effective tax rate
(122.5)%
22.7%
17.1%
(38.1)%
21.9%
(103.4)%
(29.1)%
50.3%
237.9%
The provision for income taxes resulted in an effective tax rate for 2010 of 17.1% compared with
rates of (103.4)% in 2009 and 237.9% in 2008.
In the first quarter of 2010, the Patient Protection and Affordable Care Act (PPACA) was signed
into law. In addition, the Health Care and Education Reconciliation Act of 2010 (“the Reconciliation
Act”) was also passed, amending certain portions of the PPACA. The PPACA contains a provision
eliminating tax deductibility of retiree health care costs to the extent of federal subsidies received by
plan sponsors who provide retiree prescription drug benefits equivalent to Medicare Part D
coverage. However, based upon the changes made in the Reconciliation Act, the tax benefit related
to the Medicare Part D subsidies will be extended until December 31, 2012. For all tax years ending
after December 31, 2012 there will no longer be a tax benefit for the Medicare Part D subsidies.
Therefore, the impact to the Company for the loss of this future tax benefit (after December 31,
2012) was an additional tax expense of approximately $2.9 million in 2010.
The provision for income taxes for the year ended December 31, 2010 included a favorable
impact of $21.2 million from the reversal of the Company’s valuation allowance on U.S. based
foreign tax credit carryforwards. The improving financial performance of the Company’s
U.S. operations has resulted in greater certainty that the Company will be able to fully utilize
existing foreign tax credit carryforwards.
The Company’s annual effective tax rate for 2010 is 17.1% which includes the impact of the
reversal of the Company’s valuation allowance on U.S. based foreign tax credit carryforwards, the
change in tax legislation related to Medicare Part D subsidies, the additional tax expense
associated with the BERU-Eichenauer equity investment gain and the tax benefit associated with
the Company’s environmental litigation settlement. This rate differs from the U.S. statutory rate
primarily due to foreign rates, which differ from those in the U.S., the realization of certain business
tax credits including foreign tax credits and favorable permanent differences between book and tax
treatment for items, including equity in affiliates’ earnings.
67
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following is a rollforward of the Company’s total gross unrecognized tax benefits for the
year-to-date periods ended December 31, 2010 and 2009, respectively. Of the total $27.6 million of
unrecognized tax benefits as of December 31, 2010, approximately $22.8 million of this total
represents the amount that, if recognized, would affect the Company’s effective income tax rate in
future periods. This amount differs from the gross unrecognized tax benefits presented in the table
due to the decrease in the U.S. federal income taxes which would occur upon recognition of the state
tax benefits included therein.
millions of dollars
2010
2009
Balance, January 1
Additions based on tax positions related to current year
Additions (Reductions) for tax positions of prior years
Reductions for lapse in statute of limitations
Settlements
Translation adjustment
Balance, December 31
$ 34.8 $
1.1
0.3
(1.3)
(6.6)
(0.7)
$ 27.6 $
61.1
16.4
(16.5)
(17.0)
(9.9)
0.7
34.8
In 2010 the Company closed / settled certain open years for foreign jurisdictions that resulted in
cash payments of $6.6 million. Possible changes related to other examinations cannot be reasonably
estimated at this time.
The Company recognizes interest and penalties related to unrecognized tax benefits in income
tax expense. The Company had accrued approximately $11.4 million for the payment of interest and
penalties at December 31, 2010. The Company had approximately $11.6 million for the payment of
interest and penalties accrued at December 31, 2009.
The Company and/or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to income
tax examinations by tax authorities in its major tax jurisdictions as follows:
Tax Jurisdiction
U.S. Federal
Brazil
France
Germany
Hungary
Italy
Japan
South Korea
United Kingdom
Years No Longer
Subject to Audit
2006 and prior
2003 and prior
2006 and prior
2003 and prior
2007 and prior
2005 and prior
2008 and prior
2005 and prior
2008 and prior
In certain tax jurisdictions the Company may have more than one taxpayer. The table above
reflects the status of the significant taxpayers in each major tax jurisdiction. In Germany the open tax
years for the Company’s BERU subsidiary are from 2002 and forward.
68
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The analysis of the variance of income taxes as reported from income taxes computed at the
U.S. statutory rate for consolidated operations is as follows:
(millions of dollars)
Income taxes at U.S. statutory rate of 35%
Increases (decreases) resulting from:
2010
2009
2008
$ 167.3 $
6.2 $
4.9
Income from non-U.S. sources including withholding taxes
State taxes, net of federal benefit
Business tax credits
Affiliates’ earnings
Accrual adjustment and settlement of prior year tax
matters
Medicare prescription drug benefit
Goodwill impairment
Restructuring
Valuation allowance
Non-temporary differences and other
Provision for income taxes as reported
(55.8)
1.4
0.2
(13.8)
0.4
2.9
—
—
(21.2)
0.3
(17.1)
4.7
(1.9)
(7.5)
(6.3)
1.7
—
—
7.7
(6.0)
(26.5)
0.9
(9.8)
(13.2)
6.0
1.1
54.9
0.6
13.1
1.3
33.3
$
81.7 $ (18.5) $
During 2010, certain countries enacted changes to their respective statutory income tax rate
which are effective starting in 2011. In the UK, the statutory income tax rate was reduced 1% from
28% to 27%. In Hungary, the statutory income tax rate was reduced 9% from 19% to 10%
beginning in tax year 2013.
69
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following are the gross components of deferred tax assets and liabilities as of December 31,
2010 and 2009:
(millions of dollars)
Current deferred tax assets:
Employee related
Net operating loss carryforwards
Inventory
Warranties
Litigation & environmental
Customer claims
Derivatives
Other
Total current deferred tax assets
Current deferred tax liabilities:
Derivatives
Other
Total current deferred tax liabilities
Non-current deferred tax assets:
Foreign tax credits
Other comprehensive income
Research and Development Capitalization
Pension and other post employment benefits
Employee related
Net operating loss carryforwards
Research and development credits
Warranties
Litigation and environmental
Capital loss carryforwards
Other
Total non-current deferred tax assets
Non-current deferred tax liabilities:
Goodwill & intangibles
Fixed assets
Dividends accrued
Other comprehensive income
Lease obligation — production equipment
Other
Total non-current deferred tax liabilities
Total deferred tax items
Valuation allowances
Net deferred tax asset
70
2010
2009
$
$
$
$
$
$
26.2 $
9.8
8.6
6.3
5.8
2.0
1.2
6.8
66.7 $
— $
(7.6)
(7.6) $
183.4 $
98.0
49.3
44.6
20.0
15.0
6.3
4.4
2.6
—
8.1
431.7 $
23.9
4.7
9.3
4.5
6.9
2.9
1.9
6.4
60.5
(1.0)
(3.8)
(4.8)
138.3
103.7
—
52.5
13.4
87.5
5.9
4.5
2.5
3.5
4.1
415.9
(84.8)
(2.8)
(3.0)
—
(7.7)
$ (130.3) $ (103.5)
(101.7)
—
(3.5)
(1.9)
(4.5)
$ (228.6) $ (215.1)
256.5
$
(43.8)
212.7
262.2 $
(13.0)
249.2 $
$
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign tax credit and net operating loss carryforwards are shown gross with the corresponding
valuation allowances located at the end of the table.
The deferred tax assets and liabilities recognized in the Company’s Consolidated Balance
Sheets are as follows:
(millions of dollars)
Deferred income taxes — current assets
Deferred income taxes — current liabilities
Other non-current assets
Other non-current liabilities
Net deferred tax asset (current and non-current)
2010
2009
$
$
60.2
75.8 $
(4.8)
(18.4)
247.1
305.5
(113.7)
(89.8)
249.2 $ 212.7
The other non-current assets and liabilities have been netted within their respective taxing
jurisdictions due to consolidation (primarily U.S. and Germany).
The deferred income taxes — current assets are primarily comprised of amounts from the U.S.,
France, Italy, Japan, Spain and the U.K. The deferred income taxes — current liabilities are
primarily comprised of amounts from Germany. The other non-current assets are primarily
comprised of amounts from the U.S.. The other non-current liabilities are primarily comprised of
amounts from France, Germany, Italy, Spain and the U.K.
At December 31, 2010, the Company has a U.S. net operating loss carryforward of $1.6 million
that is available to offset future taxable income. This loss carryforward expires in 2030. Certain
non-U.S. subsidiaries have net operating loss carryforwards totaling $69.5 million that are available
to offset future taxable income. Carryforwards of $29.7 million expire at various dates from 2011
through 2019 and the balance has no expiration date. A valuation allowance of $6.5 million has
been recorded for the tax effect on $26.3 million of the loss carryforwards. Certain U.S. subsidiaries
have state net operating loss carryforwards totaling $510.3 million which are completely offset by a
valuation allowance due to risk of realization. Certain non-U.S. subsidiaries located in China, Korea
and Poland have tax exemptions or tax holidays. The cumulative impact of these tax exemptions or
tax holidays was a reduction of tax expense of approximately $17.0 million in 2010.
No deferred income taxes have been provided on the excess of the amount for financial
reporting over the tax basis of investments in foreign subsidiaries or foreign equity affiliates totaling
$1,574.6 million in 2010, as these amounts are essentially permanent in nature. The excess
amount will become taxable upon repatriation of assets, sale, or liquidation of the investment. It is
not practicable to determine the unrecognized deferred tax liability on the excess amount because
the actual tax liability on the excess amount, if any, is dependent on circumstances existing when
remittance occurs.
71
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 5 BALANCE SHEET INFORMATION
Detailed balance sheet data are as follows:
(millions of dollars)
December 31,
Receivables:
Customers
Other
Gross receivables
Bad debt allowance(a)
Net receivables
Inventories:
Raw material and supplies
Work in progress
Finished goods
FIFO inventories
LIFO reserve
Net inventories
Other current assets:
Prepaid tooling
Product liability insurance asset
Derivatives
Prepaid tax
Other
Total other current assets
Property, plant and equipment:
Land
Buildings
Machinery and equipment
Capital leases
Construction in progress
Total property, plant and equipment
Accumulated depreciation
Tooling, net of amortization
Property, plant & equipment, net
Investments and advances:
Investment in equity affiliates
Other investments and advances
Total investments and advances
Other non-current assets:
Product liability insurance asset
Deferred income taxes
Other intangible assets
Other
Total other non-current assets
72
2010
2009
859.5 $
168.4
1,027.9
(4.0)
1,023.9 $
244.0 $
88.1
111.7
443.8
(13.2)
430.6 $
21.8 $
25.8
2.7
5.8
23.6
79.7 $
634.5
101.8
736.3
(4.3)
732.0
187.3
69.8
68.8
325.9
(11.6)
314.3
25.6
24.9
12.0
2.2
23.2
87.9
67.9 $
601.4
1,961.2
2.3
128.2
2,761.0
(1,308.0)
1,453.0
89.6
1,542.6 $
56.3
570.0
1,866.5
2.4
126.4
2,621.6
(1,211.6)
1,410.0
80.3
1,490.3
205.2 $
102.7
307.9 $
24.8 $
305.5
168.8
32.0
531.1 $
194.8
62.6
257.4
25.0
247.1
148.6
29.8
450.5
$
$
$
$
$
$
$
$
$
$
$
$
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(millions of dollars)
December 31,
Accounts payable and accrued expenses:
Trade payables
Trade payables for capital expenditures
Payroll and employee related
Retirement related
Product warranties
Customer related
Product liability
Severance
Insurance
Derivatives
Environmental
Interest
Legal and professional fees
Dividends payable to non-controlling shareholders
Current deferred income taxes
Other
Total accounts payable and accrued expenses
Other non-current liabilities:
Deferred income taxes
Cross currency swaps and derivatives
Product warranties
Product liability accrual
Deferred revenue
Environmental
Other
Total other non-current liabilities
(a) Bad debt allowance:
Beginning balance
Provision
Write-offs
Translation adjustment and other
Ending balance
2010
2009
$
737.7 $ 539.2
28.6
136.7
34.8
32.5
31.4
24.9
17.5
16.2
14.6
12.2
11.2
9.1
5.4
4.8
58.0
$ 1,224.1 $ 977.1
28.9
190.2
34.7
37.0
32.5
25.8
4.6
11.9
3.3
21.0
14.3
8.6
4.2
18.4
51.0
$
$
113.7 $
78.8
29.8
24.8
23.4
8.2
84.2
89.8
54.2
29.2
25.0
22.7
10.1
64.6
362.9 $ 295.6
2010
2009
2008
$ (4.3) $ (5.7) $ (5.2)
(2.4)
1.6
0.3
$ (4.0) $ (4.3) $ (5.7)
0.1
1.4
(0.1)
(1.1)
2.5
(1.1)
Interest costs capitalized during 2010 and 2009 were $11.2 million, respectively. As of
December 31, 2010 and December 31, 2009, accounts payable of $28.9 million and $28.6 million,
respectively, were related to property, plant and equipment purchases. As of December 31, 2010
and December 31, 2009, specific assets of $3.4 million and $3.7 million, respectively, were pledged
as collateral under certain of the Company’s long-term debt agreements.
As a result of the impairment charges recorded in the third and fourth quarters of 2008,
depreciation expense for the year ended December 31, 2010 and 2009 was reduced by
approximately $9 million and $11 million, respectively.
73
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The automotive industry experienced unprecedented declines in production in the fourth quarter
of 2008 and projected continued declines for the full year of 2009. According to Accounting
Standards Codification (“ASC”) 250, future depreciation expense should be revised due to a change
in the estimated future benefits inherent in an asset, the pattern of consumption of those benefits, or
the information available to the entity about those benefits. As a result of the 2008 and 2009
unprecedented declines in production activity, the Company determined that its usage pattern for
certain assets had changed significantly and revised the useful lives of certain equipment starting in
2009. This adjustment was considered to be a change in an accounting estimate.
The impact to the Company in 2010 and 2009 were as follows (unaudited):
(millions of dollars)
Q1
Q2
2010
Q3
Q4
Full Year
Operating income increase
Net earnings increase attributable to
BorgWarner Inc.
Earnings per share increase — Basic
Earnings per share increase — Diluted
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
3.7
3.6
3.6
3.6
$
4.8 $
4.7 $
4.6 $
4.7 $
18.8
(millions of dollars)
Q1
Q2
2009
Q3
Q4
Full Year
Operating income increase
Net earnings increase attributable to
BorgWarner Inc.
Earnings per share increase — Basic
Earnings per share increase — Diluted
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
3.5
3.5
3.5
3.5
$
4.6 $
4.6 $
4.6 $
4.6 $
18.4
14.5
0.13
0.11
14.0
0.12
0.12
NSK-Warner
The Company has a 50% interest in NSK-Warner, a joint venture based in Japan that
manufactures automatic transmission components. The Company’s share of the earnings or losses
reported by NSK-Warner is accounted for using the equity method of accounting. NSK-Warner has
a fiscal year-end of March 31. The Company’s equity in the earnings of NSK-Warner consists of the
12 months ended November 30 so as to reflect earnings on as current a basis as is reasonably
feasible. NSK-Warner is the joint venture partner with a 40% interest in the Drivetrain Group’s
South Korean subsidiary, BorgWarner Transmission Systems Korea Inc. Dividends received from
NSK-Warner were $35.5 million, $48.0 million and $40.8 million in calendar year 2010, 2009 and
2008, respectively.
Following are summarized financial data for NSK-Warner, translated using the ending or
periodic rates as of and for the years ended November 30, 2010, 2009 and 2008 (unaudited):
(millions of dollars)
Balance sheets:
Cash and securities
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total equity
2010
2009
$ 109.1 $
310.2
174.9
151.4
41.9
291.8
83.0
279.1
182.6
137.9
45.0
278.8
74
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2010
2009
2008
Statements of operations:
Net sales
Gross profit
Net income
$ 634.7 $ 494.5 $ 637.9
140.0
67.6
131.9
68.3
89.2
35.8
There was no debt outstanding as of November 30, 2010 and 2009. Purchases from
NSK-Warner for the years ended December 31, 2010, 2009 and 2008 were $14.6 million,
$16.5 million and $25.4 million, respectively.
NOTE 6 GOODWILL AND OTHER INTANGIBLES
The Company annually reviews its goodwill for impairment in the fourth quarter of each year for
all of its reporting units, or more often when events and circumstances warrant such a review.
The Company’s goodwill impairment review, under ASC Topic 350, requires the Company to
make significant assumptions and estimates about the extent and timing of future cash flows,
discount rates and growth rates. The basis of our goodwill impairment analysis is the Company’s
annual budget and long-range plan (“LRP”). The annual budget and LRP include a five year
projection of future cash flows based on actual new products and customer commitments. As part
of the projection, we assumed the last year of the LRP data is a fair indication of the future
performance, including fundamental industry growth for the business beyond the five year period
into perpetuity. As the LRP is estimated over a significant future period of time, those estimates and
assumptions are subject to a high degree of uncertainty. We also utilize market valuation models
and other financial ratios, which require us to make certain assumptions and estimates regarding
the applicability of those models to our assets and businesses. We believe that the assumptions
and estimates used to determine the estimated fair values of each of our reporting units are
reasonable. Different assumptions could materially affect the estimated fair value. The primary
assumptions affecting the Company’s December 31, 2010 goodwill impairment review are as
follows:
• Discount Rate: The Company used a 10% weighted average cost of capital (“WACC”) as the
discount rate for future cash flows. The WACC is intended to represent a rate of return that
would be expected by a market participant.
• Operating Income Margin: The Company utilized historical and expected operating income
margins, which varied based on the projections of each reporting unit being evaluated.
In addition to the above significant assumptions, the Company notes the following risk to
volume assumptions that could have an impact on the discounted cash flow model:
• Our industry is cyclical and our results of operations will be adversely affected by industry
downturns.
• We are dependent on market segments that use our key products and would be affected by
decreasing demand in those segments.
• We are subject to risks related to our international operations.
Using the assumptions outlined above, the impairment testing conducted in the fourth quarter of
2010 indicated that goodwill was not impaired in any reporting unit tested.
The estimated fair value of one reporting unit tested within the Engine operating segment was
112% of its carrying value. Based on our sensitivity analysis, a 1% increase in the discount rate or a
1% decrease in the operating margin assumptions would result in the carrying value exceeding the
estimated fair value, which would require further evaluation of the reporting unit’s goodwill. This
reporting unit had approximately $165 million of goodwill at December 31, 2010.
75
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2008 the Company recorded impairment charges totaling €111.5 ($156.8) million to adjust
BERU’s goodwill to its estimated fair value. The impairment charge is attributable to a decrease in
the operating unit’s estimated fair value based primarily upon the effect of the decline in European
market conditions on current and projected operating results. The impairment charge was also
impacted by the recognition of additional goodwill in the second quarter of 2008, which was based
on the court determined buy out value of €71.32 per share related to the Domination and Profit
Transfer Agreement. Any differences in future results compared to management’s estimates could
result in fair values different from estimated fair values, which could materially impact the
Company’s future results of operations and financial condition.
See Note 18, “Recent Transactions”, for further discussion on the BERU Domination and Profit
Transfer Agreement.
The changes in the carrying amount of goodwill for the year ended December 31, 2010 and
2009 are as follows:
(millions of dollars)
Engine
Drivetrain
Engine
Drivetrain
2010
2009
Gross goodwill balance as of January
1
$
Accumulated impairment losses
Net goodwill balance as of January 1 $
1,297.8 $
(501.8)
796.0 $
265.6 $
(0.2)
265.4 $
1,289.6 $
(501.8)
787.8 $
264.8
(0.2)
264.6
Goodwill during the year:
Acquired
Divested
Translation adjustment
Balance as of December 31
74.1
(1.4)
(18.6)
850.1 $
—
—
(2.0)
263.4 $
(1.1)
9.3
796.0 $
—
—
0.8
265.4
$
The Company’s other intangible assets, primarily from acquisitions consist of the following:
(millions of dollars)
Amortized intangible
assets
Patented
technology
Unpatented
technology
Customer
relationships
Distribution
network
Miscellaneous
December 31, 2010
December 31, 2009
Gross
Carrying
Amount
Accumulated
Amortization
Carrying
Amount
Net
Gross
Carrying
Amount
Accumulated
Amortization
Carrying
Amount
Net
$
47.0 $
13.8 $
33.2 $
32.8 $
11.6 $
21.2
22.4
4.2
18.2
6.7
3.2
127.3
57.5
69.8
119.1
46.2
50.8
14.7
50.8
11.9
—
2.8
54.4
14.7
43.6
11.9
3.5
72.9
10.8
2.8
Total amortized
intangible assets
In-process R&D
Unamortized
trade names
262.2
13.1
138.2
—
124.0
13.1
227.7
13.1
116.5
—
111.2
13.1
31.7
—
31.7
24.3
—
24.3
Total intangible
assets
$
307.0 $
138.2 $
168.8 $
265.1 $
116.5 $
148.6
Amortization of other intangible assets was $28.4 million, $26.3 million and $27.1 million in
2010, 2009 and 2008, respectively. The amortization totals include non-recurring charges directly
attributable to acquisitions, as described in Note 18, “Recent Transactions”. The estimated useful
lives of the Company’s amortized intangible assets range from 3 to 15 years. The Company utilizes
the straight line method of amortization, recognized over the estimated useful lives of the assets.
The estimated future annual
76
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amortization expense, primarily for acquired intangible assets, is as follows: $20.5 million in 2011,
$20.5 million in 2012, $20.5 million in 2013, $15.2 million in 2014 and $10.0 million in 2015.
A roll-forward of the gross carrying amounts for the years ended December 31, 2010 and 2009 is
presented below:
(millions of dollars)
Beginning balance
Acquisitions
Translation adjustment
Ending balance
2010
2009
$ 265.1 $ 231.2
27.7
6.2
$ 307.0 $ 265.1
55.0
(13.1)
A roll-forward of accumulated amortization for the years ended December 31, 2010 and 2009 is
presented below:
(millions of dollars)
Beginning balance
Provisions
Non-recurring charges (write-offs)
Translation adjustment
Ending balance
2010
2009
$ 116.5 $
82.8
26.3
4.6
2.8
$ 138.2 $ 116.5
28.4
—
(6.7)
On June 2, 2009, the Company announced the purchase of advanced gasoline ignition
technology and related intellectual property from Florida-based Etatech, Inc. In connection with ASC
amended Topic 805, Business Combinations, the Company capitalized $13.1 million of in-process
R&D. The Company intends to commercialize a high-frequency ignition system based on Etatech
technology in the next five years. Amortization of the $13.1 million of in-process R&D will coincide
with the commercial application of the technology.
On April 10, 2010, the Company acquired 100% of Dytech ENSA S.L. (“Dytech”), headquartered
in Vigo, Spain. In connection with this acquisition, the Company capitalized $15.6 million for
customer relationships, $15.7 million for unpatented technology, $9.0 million for trade names and
$0.3 million in other miscellaneous intangible assets. Customer relationships, unpatented
technology and miscellaneous intangible assets will be amortized over 8, 15 and 3 year useful life,
respectively. Trade names will not be amortized.
On May 1 2010, the Company completed the acquisition of BERU-Eichenauer GmbH by
acquiring the shares of its former joint venture partner, Eichenauer Heizelemente GmbH & Co. KG.
In connection with this acquisition, the Company capitalized $14.4 million in intangible assets related
to adjusting the Company’s fifty percent investment to fair value under ASC Topic 805.
77
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 7 PRODUCT WARRANTY
The changes in the carrying amount of the Company’s total product warranty liability for the
years ended December 31, 2010 and 2009 were as follows:
(millions of dollars)
Beginning balance
Acquisition
Provisions
Payments
Translation adjustment
Ending balance
2010
2009
$
$
61.7 $
3.0
39.3
(35.5)
(1.7)
66.8 $
82.1
—
46.0
(68.3)
1.9
61.7
The product warranty liability is classified in the consolidated balance sheets as follows:
(millions of dollars)
Accounts payable and accrued expenses
Other non-current liabilities
Total product warranty liability
2010
2009
$ 37.0 $ 32.5
29.2
$ 66.8 $ 61.7
29.8
NOTE 8 NOTES PAYABLE AND LONG-TERM DEBT
Following is a summary of notes payable and long-term debt, including the current portion. The
weighted average interest rate on all borrowings outstanding as of December 31, 2010 and 2009
was 6.4% and 6.9%, respectively.
As of December 31, 2010 and 2009 the Company had notes payable and long-term debt
outstanding as follows:
(millions of dollars)
Short-term debt
Short-term borrowings
Receivables securitization(a)
Total short-term debt
Long-term debt
3.5% Convertible notes due 4/15/12
5.75% Senior notes due 11/01/16 ($150 million par value)(b)
8.00% Senior notes due 10/01/19 ($134 million par value)(b)
4.625% Senior notes due 09/15/20 ($250 million par value)
7.125% Senior notes due 02/15/29 ($121 million par value)
Term loan facilities & other
Impact of derivates on debt(b)
Total long-term debt
Less: current portion
Long-term debt, net of current portion
2010
2009
$
$
42.4 $
80.0
122.4 $
64.0
—
64.0
$
348.5 $ 330.2
149.3
149.4
133.9
133.9
—
247.5
119.3
119.3
14.2
31.6
31.4
27.8
$ 1,058.0 $ 778.3
5.1
6.1
$ 1,051.9 $ 773.2
(a) On January 1, 2010, the Company adopted ASC Topic 860. The impact of this adoption is an
increase in receivables, net of $80 million and an increase in notes payable and other
short-term debt of $80 million in
78
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Company’s December 31, 2010 Consolidated Balance Sheet. See Note 1 in the
Consolidated Financial Statements for more information regarding the Company’s first quarter
2010 adoption of ASC Topic 860.
(b) In 2006, the Company entered into several interest rate swaps that had the effect of converting
$325.0 million of fixed rate notes to variable rates. In the first quarter of 2009, $100 million in
interest rate swaps related to the Company’s 2009 fixed rate debt matured, and the Company
terminated $150 million in interest rate swap agreements related to the Company’s 2016 fixed
rate debt and $75 million of interest rate swap agreements related to the Company’s 2019 fixed
rate debt. As a result of the first quarter 2009 swap terminations, a $34.5 million gain remained
in debt and is being amortized over the remaining lives of the respective 2016 and 2019 debt.
As of December 31, 2010 and 2009, the unamortized portion was $27.8 million and
$31.4 million, respectively.
Annual principal payments required as of December 31, 2010 are as follows (in millions of
dollars):
2011
2012
2013
2014
2015
After 2015
Total Payments
Less: Convertible Note Accretion
Less: Unamortized Discounts
Total
$
128.5
384.1
5.0
0.2
10.0
682.4
$ 1,210.2
(25.3)
(4.5)
$ 1,180.4
The Company’s long-term debt includes various financial covenants, none of which are
expected to restrict future operations.
On March 31, 2010, the Company replaced its $250 million multi-currency revolving credit
facility with a new $550 million multi-currency revolving credit facility, which includes a feature that
allows the Company to increase its borrowings to $600 million. The new facility provides for
borrowings through March 31, 2013, and is guaranteed by the Company’s domestic subsidiaries.
The Company has three key financial covenants as part of the credit agreement. These covenants
are a net worth test, a debt compared to EBITDA (“Earnings Before Interest, Taxes, Depreciation
and Amortization”) test, and an interest coverage test. The Company was in compliance with all
covenants at December 31, 2010 and expects to remain compliant in future periods. At
December 31, 2010 and December 31, 2009 there were no outstanding borrowings under these
facilities.
On September 16, 2010, the Company issued $250 million in 4.625% senior notes due 2020.
Interest is payable semi-annually on March 15 and September 15 of each year, beginning on
March 15, 2011. The senior notes were issued under the Company’s $750 million universal shelf
registration filed with the Securities and Exchange Commission, leaving approximately $126 million
available as of December 31, 2010.
On April 9, 2009, the Company issued $373.8 million in convertible senior notes due April 15,
2012. Under ASC Topic 470, “Accounting for Convertible Debt Instruments That May be Settled in
Cash Upon Conversion (Including Partial Cash Settlement)”, the Company must account for the
convertible senior notes by bifurcating the instruments between their liability and equity
components. The value of the debt component is based on the fair value of issuing a similar
nonconvertible debt security. The equity component of the convertible debt security is calculated by
deducting the value of the liability from the proceeds received at issuance. The Company’s
December 31, 2010 Consolidated Balance Sheet includes debt of $348.5 million and capital in
excess of par of $36.5 million. Additionally, ASC Topic 470 requires the Company to accrete the
79
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
discounted carrying value of the convertible notes to their face value over the term of the notes. The
Company’s interest expense associated with this amortization is based on the effective interest rate
of the convertible senior notes of 9.365%. The total interest expense related to the convertible notes
in the Company’s Consolidated Statement of Operations for the year ended December 31, 2010
and 2009 was as follows:
(millions of dollars)
Interest expense
Non-cash portion
2010
$ 31.3
$ 18.3
2009
$ 22.2
$ 12.7
The notes will pay interest semi-annually of $6.5 million, which is at a coupon rate of 3.50% per
year.
Holders of the notes may convert their notes at their option at any time prior to the close of
business on the second scheduled trading day immediately preceding the maturity date of the
notes, in multiples of $1,000 principal amount. The initial conversion rate for the notes is
30.4706 shares of the Company’s common stock per $1,000 principal amount of notes
(representing an initial conversion price of approximately $32.82 per share of common stock). The
conversion price represents a conversion premium of 27.50% over the last reported sale price of
the Company’s common stock on the New York Stock Exchange on April 6, 2009, of $25.74 per
share. Since the Company’s stock price was above the convertible senior notes conversion price of
$32.82 as of December 31, 2010, the if-converted value was approximately $450.2 million and
$4.6 million higher than the face value of the convertible senior notes at December 31, 2010 and
December 31, 2009, respectively. In conjunction with the note offering, the Company entered into a
bond hedge overlay at a net pre-tax cost of $25.2 million, effectively raising the conversion premium
to 50.0%, or approximately $38.61 per share. Upon conversion, the Company will pay or deliver
cash, shares of our common stock or a combination thereof at our election. The convertible senior
notes were issued under the Company’s $750 million universal shelf registration filed with the
Securities and Exchange Commission (“SEC”).
As of December 31, 2010 and 2009, the estimated fair values of the Company’s senior
unsecured notes totaled $1,482.3 million and $776.0 million, respectively. The estimated fair values
were $483.7 million higher and $43.3 million higher at December 31, 2010 and 2009, respectively
than their carrying values. Fair market values are developed by the use of estimates obtained from
brokers and other appropriate valuation techniques based on information available as of
quarter-end and year-end. The fair value estimates do not necessarily reflect the values the
Company could realize in the current markets.
The Company had outstanding letters of credit at December 31, 2010 and 2009 of $26.5 million
and $15.2 million, respectively. The letters of credit typically act as a guarantee of payment to
certain third parties in accordance with specified terms and conditions.
NOTE 9 FAIR VALUE MEASUREMENTS
On January 1, 2009, the Company fully adopted as required, ASC Topic 820 — “Fair Value
Measurements” which expands the disclosure of fair value measurements and its impact on the
Company’s financial statements.
ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity
specific measurement. Therefore, a fair value measurement should be determined based on
assumptions that market participants would use in pricing an asset or liability. As a basis for
considering market participant assumptions in fair value measurements, ASC Topic 820 establishes
a fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly
or indirectly; and
80
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Level 3: Unobservable inputs in which there is little or no market data, which require the
reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of the following three
valuation techniques noted in ASC Topic 820:
A. Market approach: Prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities.
B. Cost approach: Amount that would be required to replace the service capacity of an
asset (replacement cost).
C. Income approach: Techniques to convert future amounts to a single present amount
based upon market expectations (including present value techniques, option-pricing
and excess earnings models).
The following table classifies the assets and liabilities measured at fair value on a recurring
basis as of December 31, 2010:
(millions of dollars)
Assets:
Foreign exchange
contracts
Liabilities:
Foreign exchange
contracts
Net investment hedge
contracts
Basis of Fair Value Measurements
Quoted
Prices in
Active
Significant
Other
Significant
Balance at
December 31,
2010
Markets for Observable Unobservable
Identical
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Valuation
Technique
$
$
$
$
2.7 $
2.7 $
— $
— $
2.7 $
2.7 $
6.4 $
— $
6.4 $
75.7
82.1 $
—
— $
75.7
82.1 $
A
A
A
—
—
—
—
—
The following table classifies the assets and liabilities measured at fair value on a recurring and
non-recurring basis as of December 31, 2009:
(millions of dollars)
Assets:
Engine segment fixed
assets
Commodity contracts
Foreign exchange
contracts
Liabilities:
Commodity contracts
Foreign exchange
contracts
Net investment hedge
contracts
Basis of Fair Value Measurements
Quoted
Prices in
Active
Significant
Other
Significant
Balance at
December 31,
2009
Markets for Observable Unobservable
Identical
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Valuation
Technique
$
$
$
$
— $
8.4
3.8
12.2 $
— $
—
—
— $
— $
8.4
3.8
12.2 $
0.1 $
— $
0.1 $
17.5
—
17.5
51.2
68.8 $
—
— $
51.2
68.8 $
81
B
A
A
A
A
A
—
—
—
—
—
—
—
—
Source: BORGWARNER INC, 10-K, February 10, 2011
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Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The change in the fair value of the Company’s net fixed assets impaired in the second quarter
of 2009 was as follows:
(millions of dollars)
Net book value prior to impairment
Fixed asset impairment charge
Net book value after impairment charge
Fair Value
Measurements
Using Significant
Unobservable Inputs
(Level 3)
$
$
22.3
(22.3)
—
Refer to Note 17, “Restructuring” of the Notes to the Consolidated Financial Statements for
further discussion of this impairment charge.
Refer to Note 1, “Summary of Significant Accounting Policies” and Note 10, “Financial
Instruments”, for more detail surrounding the Company’s valuation methodology, inputs used, and
fair value adjustment recorded.
The following tables classify the Company’s defined benefit plan assets measured at fair value
on a recurring and non-recurring basis as of December 31, 2010:
Basis of Fair Value Measurements
Quoted
Prices in
Active
Significant
Other
Significant
(millions of dollars)
Balance at
December 31,
2010
Markets for Observable Unobservable
Identical
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Valuation
Technique
U.S. Plans:
Fixed income securities $
Equity securities
Cash, real estate and
other
$
Non-U.S. Plans:
Fixed income securities $
Equity securities
Cash, real estate and
other
$
113.7 $
140.5
33.0
287.2 $
59.6 $
88.4
6.6
154.6 $
— $
48.5
—
48.5 $
— $
—
—
— $
82
113.7 $
92.0
33.0
238.7 $
59.6 $
88.4
6.6
154.6 $
—
—
—
—
—
—
—
—
A
A
A
A
A
A
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables classify the Company’s defined benefit plan assets measured at fair value
on a recurring and non-recurring basis as of December 31, 2009:
Basis of Fair Value Measurements
Quoted
Prices in
Active
Significant
Other
Significant
(millions of dollars)
Balance at
December 31,
2009
Markets for Observable Unobservable
Identical
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Valuation
Technique
U.S. Plans:
Fixed income securities $
Equity securities
Cash, real estate and
other
$
Non-U.S. Plans:
Fixed income securities $
Equity securities
Cash, real estate and
other
$
122.0 $
124.3
22.8
269.1 $
42.1 $
72.7
29.2
144.0 $
— $
43.3
—
43.3 $
— $
—
—
— $
122.0 $
81.0
22.8
225.8 $
42.1 $
72.7
29.2
144.0 $
—
—
—
—
—
—
—
—
A
A
A
A
A
A
Refer to Note 11, “Retirement Benefit Plans”, for more detail surrounding the plan’s asset
investment policies and strategies, target allocation percentages, and expected return on plan asset
assumptions.
NOTE 10 FINANCIAL INSTRUMENTS
On January 1, 2009, the Company adopted as required, ASC Topic 815, “Disclosures about
Derivative Instruments and Hedging Activities” which expands the disclosure of financial
instruments.
The Company’s financial instruments include cash and marketable securities. Due to the
short-term nature of these instruments, their book value approximates their fair value. The
Company’s financial instruments also include long-term debt, interest rate and currency swaps,
commodity forward contracts, and foreign currency forward contracts. All derivative contracts are
placed with counterparties that have an S&P, or equivalent, investment grade credit rating at the
time of the contracts’ placement. At December 31, 2010 and 2009 the Company had no derivative
contracts that contained credit risk related contingent features.
The Company selectively uses cross-currency swaps to hedge the foreign currency exposure
associated with our net investment in certain foreign operations (net investment hedges). Fair
values of cross currency swaps are based on observable inputs, such as interest rate, yield curves,
credit risks, currency exchange rates and other external valuation methodology (Level 2 inputs
under ASC Topic 820).
At December 31, 2010 and 2009 the following cross-currency swaps were outstanding:
(millions of dollars)
Floating $ to Floating €
Floating $ to Floating ¥
Notional
in USD
$ 75.0
$ 150.0
Cross-Currency Swaps
Notional
in Local Currency
€
58.5
¥ 17,581.5
Duration
Oct - 19
Nov - 16
The Company uses certain commodity derivative instruments to protect against commodity
price changes related to forecasted raw material and supplies purchases. The Company primarily
utilizes forward and option contracts, which are designated as cash flow hedges.
83
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2010 and 2009 the following commodity derivative contracts were
outstanding:
Commodity
Nickel
Copper
Aluminum
Natural Gas
Commodity Hedges
Volume
Hedged
December 31,
2010
Volume
Hedged
December 31, 2009
Units of
Measure
—
—
—
258,900
780
759
330
392,396
Metric Tons
Metric Tons
Metric Tons
MMBtu
Duration
Dec - 10
Dec - 10
Dec - 10
Dec - 11
The Company uses foreign exchange forward and option contracts to protect against exchange
rate movements for forecasted cash flows for purchases, operating expenses or sales transactions
designated in currencies other than the functional currency of the operating unit. Foreign currency
contracts require the Company, at a future date, to either buy or sell foreign currency in exchange
for the operating units’ local currency.
At December 31, 2010 and 2009 the following foreign exchange derivative contracts were
outstanding:
Functional
Currency
British Pound
Euro
Euro
Euro
Euro
Indian Rupee
Korean Won
Mexican Peso
US Dollar
US Dollar
Currency Hedges (millions)
Traded
Currency
Notional in
Traded Currency
December 31, 2010
Notional in
Traded Currency
December 31, 2009
Duration
Euro
Hungarian Forint
British Pound
US Dollar
Japanese Yen
US Dollar
Euro
Euro
Indian Rupee
Euro
107.3
—
—
20.2
—
1.9
45.7
13.5
141.5
1.7
84.3
2,562.6
10.5
0.4
16.7
7.4
62.3
—
372.9
—
Dec - 13
Dec - 10
Jan - 10
Dec - 11
Mar - 10
Dec - 11
Dec - 12
Mar - 11
Dec - 11
Mar - 11
In 2006, the Company entered into a series of interest rate swaps designated as fair value
hedges of a portion of its senior notes. In the first quarter of 2009 the company terminated interest
rate swaps designated as fair value hedges of debt. Therefore, the basis adjustments of
$34.5 million present at the termination of the hedging relationship are being amortized over the
remaining life of the respective debt maturing in 2016 and 2019. The $30.0 million cash received
related to the termination of these interest rate swaps is included in the Financing section of the
Statement of Cash Flows. The Company recognized $5.7 million in interest expense in the first
quarter of 2009 as a result of the early termination. As of December 31, 2010 and 2009, there were
no outstanding fixed to floating interest rate swap agreements.
84
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2010 and 2009 the following amounts were recorded in the Company’s
balance sheet as being payable to or receivable from counterparties. The fair value of foreign
exchange and commodity forward option contracts are based on Level 2 inputs under ASC Topic
820, as observed on recognized exchanges.
(millions of dollars)
Derivatives designated as
hedging instruments
under Topic 815
Foreign Exchange Contracts
Commodity Contracts
Net Investment Hedges
Location
Prepayments and
Other Current Assets
Other Non-Current
Assets
Prepayments and
Other Current Assets
Other Non-Current
Assets
Assets
December 31,
2010
December 31,
2009
$
2.7 $
3.6
Location
Accounts Payable
and Accrued
Expenses
—
—
—
Other Non-Current
Liabilities
0.2
Accounts Payable
and Accrued
Expenses
8.4
Other Non-Current
Liabilities
—
Liabilities
December 31,
2010
December 31,
2009
$
3.3 $
3.1
—
75.7
14.5
3.0
0.1
51.2
Effectiveness for cash flow, fair value and net investment hedges is assessed at the inception
of the hedging relationship and quarterly, thereafter. To the extent that derivative instruments are
deemed to be effective as defined by ASC Topic 815, gains and losses arising from these contracts
are deferred in other comprehensive income or loss (OCI). Such gains and losses will be
reclassified into income as the underlying operating transactions are realized. Gains and losses not
qualifying for deferral treatment have been credited/charged to income as they are recognized.
The table below shows deferred gains and losses at the end of the period reported in OCI and
amounts expected to be reclassified to income or loss within the next twelve months. The OCI gain
or loss expected to be reclassified to income or loss in one year or less assumes no change in the
current relationship of the hedged item at December 31, 2010 market rates.
(millions of dollars)
Contract Type
December 31, 2010
December 31, 2009
Balance in OCI at
Foreign Exchange
Commodity
Net Investment Hedges
$
Total
$
(3.7) $
1.6
(69.3)
(71.4) $
(11.4) $
7.3
(47.2)
(51.3) $
Gain (Loss) Expected to
be Reclassified to Income
in One Year or Less
(0.6)
1.6
—
1.0
Net investment hedges are derivative contracts entered into to hedge against changes in
exchange rates that affect the overall value of net investments in foreign entities. Gains and losses
on net investment hedges are recorded in other comprehensive income or loss and are used to
offset equivalent gains or losses in the value of net investments that are recorded in translation
gains and losses which is also a component of other comprehensive income or loss.
Derivatives Designated as Net Investment Hedges under Topic 815
(millions of dollars)
Contract Type
Gain (Loss) Reclassified
from OCI to Income
(Effective Portion)
Year Ended
Gain (Loss)
Recognized in Income
(Ineffective Portion)
Year Ended
Location
December 31, 2010
December 31, 2009
Location
December 31, 2010
December 31, 2009
Cross-Currency Swap
Interest Expense
$ —
$ —
Interest Expense
$ (2.5)
$
1.1
Cash Flow hedges held during the period resulted in the following gains and losses recorded in
income. The effective portion of gains or losses exactly offset gains or losses in the underlying
transaction that they were designated to hedge, and are recorded on the same line in the income
statement. Ineffectiveness resulting from imperfect matches between changes in value of hedge
contracts and changes in value of the underlying transaction are immediately recognized in income.
85
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivatives Designated as Cash Flow Hedging Instruments under Topic 815
Gain (Loss) Reclassified
from OCI to Income
(Effective Portion)
Year Ended
Gain (Loss)
Recognized in Income
(Ineffective Portion)
Year Ended
(millions of dollars)
Contract Type
Location
December 31,
2010
December 31,
2009
Location
December 31,
2010
December 31,
2009
Foreign Exchange
Sales
$
Foreign Exchange
Foreign Exchange
Commodity
Cost of Goods
Sold
SG&A Expense
Cost of Goods
Sold
(0.2)
(1.2)
(0.6)
8.2
$
(14.4) SG&A Expense $
5.2 SG&A Expense
(0.7) SG&A Expense
Cost of Goods
Sold
(7.2)
0.9
—
—
(0.2)
$
(4.5)
0.6
—
0.3
At December 31, 2010 derivative instruments that are designated as fair value hedging
instruments as defined by ASC Topic 815 were immaterial.
NOTE 11 RETIREMENT BENEFIT PLANS
The Company sponsors various defined contribution savings plans primarily in the U.S. that
allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with
plan specified guidelines. Under specified conditions, the Company will make contributions to the
plans and/or match a percentage of the employee contributions up to certain limits. Total expense
related to the defined contribution plans was $19.2 million, $16.6 million and $22.1 million in 2010,
2009 and 2008, respectively.
The Company has a number of defined benefit pension plans and other post employment benefit
plans covering eligible salaried and hourly employees and their dependents. The defined pension
benefits provided are primarily based on (i) years of service and (ii) average compensation or a
monthly retirement benefit amount. The Company provides defined benefit pension plans in the U.S.,
U.K., Germany, Japan, South Korea, Italy, France, Ireland, Monaco and Mexico. The other post
employment benefit plans, which provide medical and life insurance benefits, are unfunded plans. All
pension and other post employment benefit plans in the U.S. have been closed to new employees
since 1999. The measurement date for all plans is December 31.
In September 2008 and 2007, the Company made changes to its U.S. retiree medical program
that impact certain union and non-union active employees with a future retiree benefit and current
retirees participating in a health care plan. The effect of the changes to both groups is that most
members will pay a higher percentage of the annual premium for Company-sponsored retiree
medical coverage between retirement and age 65, and neither group will receive
Company-sponsored Medicare health plan coverage once entitled to Medicare. Instead, certain
active employees received a lump sum credit into a non-contributory cash balance pension plan
earning interest each year. Current retirees receive an annual per member allowance toward the
purchase of individual Medicare health plan coverage and for reimbursement of healthcare
out-of-pocket expenses.
On February 26, 2009, the Company’s subsidiary, BorgWarner Diversified Transmission
Products Inc. (“DTP”), entered into a Plant Shutdown Agreement with the United Auto Workers
(“UAW”) for its Muncie, Indiana automotive component plant (the “Muncie Plant”). Management
subsequently wound-down production activity at the plant, with operations effectively ceased as of
March 31, 2009. As a result of the closure of the Muncie Plant, the Company recorded a curtailment
gain of $41.9 million in the other post employment benefit plan in the first quarter of 2009.
The Plant Shutdown Agreement with the UAW for the Muncie Plant also included a settlement of
a portion of the UAW retiree health care obligation, resulting in the remeasurement of the retiree
medical plan. The financial impact of this settlement resulted in expense recognition of $14.0 million,
a $47.2 million reduction to retirement-related liabilities, a $27.2 million increase in accumulated
other comprehensive income and a $34.0 million increase in accounts payable and accrued
expenses in the first quarter of 2009. The $34.0 million in accounts payable and accrued expenses
was paid in monthly installments, which began in May 2009 and concluded in April 2010.
86
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The combined pre-tax impact of these actions was a net gain of $27.9 million, comprised of a
$41.9 million curtailment gain and $14.0 million settlement loss in the first quarter of 2009.
In April 2009, the Company made changes to certain Muncie retirees medical program. The
effect of the changes to this group is that members will pay a higher percentage of the annual
premium for Company-sponsored retiree medical coverage from retirement to age 65, and the
group will not receive Company-sponsored Medicare Supplemental coverage once entitled to
Medicare. Consistent with the majority of other U.S. BorgWarner retiree medical plans, retirees will
receive an annual per member allowance toward the purchase of individual Medicare health plan
coverage and for reimbursement of healthcare out-of-pocket expenses. The financial impact of this
change was a $22.2 million reduction to retirement-related liabilities and a $22.2 million increase in
accumulated other comprehensive income.
In June 2009, the Company announced its plan to freeze its defined benefit plan at its Bradford
plant in the United Kingdom in consultation with affected employees and their representatives. The
effect of this change was that participants in the Bradford defined benefit plan ceased to accrue
defined benefits after October 31, 2009. Future pension benefits will be earned within an existing
defined contribution plan going forward. The financial impact of this change was a $3.7 million
reduction to retirement-related liabilities, a $3.5 million increase in accumulated other
comprehensive income and $0.2 million in income recognition in the second quarter of 2009.
On March 24, 2010, the Company finalized its settlement agreement regarding the closure of
the Muncie Plant with the Pension Benefit Guaranty Corporation in which the Company will make
certain payments directly to the Muncie Plant’s defined benefit pension plan (the “Plan”). On
December 23, 2009 the Company made an initial cash contribution of $23 million for the 2009 Plan
year, consistent with the settlement agreement. Also under the settlement agreement for each of
the Plan years beginning in 2011, 2012, and 2013, the Company will make a cash contribution to
the Plan in the amount of $15 million, unless this contribution exceeds the maximum amounts
deductible under the applicable U.S. tax regulations. The Company provided $35 million in the form
of a surety bond and will waive a credit balance valued at $8 million in 2014.
The following table summarizes the expenses for the Company’s defined contribution and
defined benefit pension plans and the other post employment defined benefit plans.
millions of dollars
Defined contribution expense
Defined benefit pension expense
Other post employment benefit expense
Total
2010
2009
2008
$ 19.2 $
19.8
17.5
$ 56.5 $
16.6 $ 22.1
19.2
33.1
1.3
(48.4)
1.3 $ 42.6
87
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following provides a rollforward of the plans’ benefit obligations, plan assets, funded status
and recognition in the Consolidated Balance Sheets.
millions of dollars
US
Non-US
US
Non-US
2010
2009
Pension Benefits
2010
2009
Other Post
Employment Benefits
Change in projected
benefit obligation:
Projected benefit
obligation at beginning
of year
Service cost
Interest cost
Plan participants’
contributions
Plan amendments
Curtailment/settlement
gain
Actuarial (gain) loss
Currency translation
Other
Benefits paid
Projected benefit
$ 316.5 $
—
17.5
326.5 $ 317.9 $
0.3
20.7
7.4
17.6
280.4 $
9.9
16.5
—
—
0.6
1.2
—
(13.5)
—
19.2
—
1.1
(28.1)
—
(0.4)
(12.2)
—
(14.7)
—
24.9
—
—
(33.8)
0.1
—
(4.3)
19.2
17.2
3.4
(15.9)
278.5
0.8
14.5
—
—
—
(7.2)
—
—
(24.7)
$
328.5
0.8
18.6
—
(22.2)
(30.9)
11.7
—
—
(28.0)
obligation at end of year $ 326.2 $
326.0 $ 316.5 $
326.5 $
261.9
$
278.5
Change in plan assets:
Fair value of plan assets at
beginning of year
Actual return on plan
assets
Employer contribution
Plan participants’
contribution
Currency translation
Other
Benefits paid
Fair value of plan assets at
$ 269.1 $
144.0 $ 230.8 $
114.0
35.6
10.6
—
—
—
(28.1)
14.2
14.5
49.1
23.0
0.5
(3.9)
—
(14.7)
—
—
—
(33.8)
18.0
16.3
0.1
11.6
(0.1)
(15.9)
end of year
$ 287.2 $
154.6 $ 269.1 $
144.0
Funded status
$
(39.0) $
(171.4) $
(47.4) $
(182.5) $
(261.9)
$
(278.5)
Amounts recognized in
the Consolidated
Balance Sheets
consist of:
Non-current assets
Current liabilities
Non-current liabilities
Net amount recognized
Amounts recognized in
accumulated other
comprehensive loss
consist of:
Net actuarial loss
Net prior service cost
(credit)
Net amount recognized*
Total accumulated
benefit obligation for
all plans
$
$
— $
(0.1)
(38.9)
(39.0) $
0.5 $
(8.1)
(163.8)
(171.4) $
— $
—
(47.4)
(47.4) $
0.1 $
(6.2)
(176.4)
(182.5) $
—
(26.5)
(235.4)
(261.9)
$ 145.7 $
37.4 $ 147.9 $
44.2 $
120.0
(12.1)
$ 133.6 $
1.4
(12.8)
38.8 $ 135.1 $
0.2
44.4 $
(59.5)
60.5
$ 326.2 $
316.8 $ 316.5 $
317.1
$
$
$
$
—
(28.6)
(249.9)
(278.5)
136.3
(66.4)
69.9
* Accumulated other comprehensive loss (“OCI”) shown above does not include our equity
investee, NSK-Warner. NSK-Warner had an OCI loss of $6.1 million in 2010 and $9.4 million in
2009.
88
Source: BORGWARNER INC, 10-K, February 10, 2011
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Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The funded status of pension plans included above with accumulated benefit obligations in
excess of plan assets at December 31 is as follows:
(millions of dollars)
Accumulated benefit obligation
Plan assets
Deficiency
Pension deficiency by country:
United States
United Kingdom
Germany
Other
Total pension deficiency
2010
2009
$ (634.9) $ (630.5)
409.1
$ (202.7) $ (221.4)
432.2
$
(39.0) $
(7.5)
(128.0)
(28.2)
(47.4)
(19.1)
(131.1)
(23.8)
$ (202.7) $ (221.4)
The weighted average asset allocations of the Company’s funded pension plans at
December 31, 2010 and 2009, and target allocations by asset category are as follows:
U.S. Plans:
Cash, real estate and other
Fixed income securities
Equity securities
Non-U.S. Plans:
Cash, real estate and other
Fixed income securities
Equity securities
2010
2009
Allocation
Target
11%
40%
49%
100%
9%
36%
55%
100%
9%
45%
46%
100%
10%
31%
59%
100%
5-15%
35-55%
35-55%
7-11%
31-37%
54-60%
The Company’s investment strategy is to maintain actual asset weightings within a preset range
of target allocations. The Company believes these ranges represent an appropriate risk profile for
the planned benefit payments of the plans based on the timing of the estimated benefit payments.
Within each asset category, separate portfolios are maintained for additional diversification.
Investment managers are retained within each asset category to manage each portfolio against its
benchmark. Each investment manager has appropriate investment guidelines. In addition, the entire
portfolio is evaluated against a relevant peer group. The defined benefit pension plans did not hold
any Company securities as investments as of December 31, 2010 and 2009. A portion of pension
assets are invested in common and comingled trusts.
The Company expects to contribute a total of $30 million to $40 million into its defined benefit
pension plans during 2011, including $15 million related to the Company’s settlement agreement
with the PBGC discussed above. $23.2 million of the $30 million to $40 million in 2011 contributions
are contractually obligated, while the remaining payments are discretionary.
Refer to Note 9, “Fair Value Measurements”, for more detail surrounding the fair value of each
major category of plan assets as well as the inputs and valuation techniques used to develop the
fair value measurements of the plan’s assets at December 31, 2010 and 2009.
89
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See the table below for a breakout between U.S. and non-U.S. pension plans:
(millions of dollars)
For the Year Ended December 31,
Components of net
periodic benefit cost:
Service cost
Interest cost
Expected return on plan
assets
Settlements, curtailments
and other
Amortization of
unrecognized prior
service benefit
Amortization of
unrecognized loss
Net periodic benefit cost
2010
Pension Benefits
2009
2008
Other Post
Employment Benefits
US
Non-US
US
Non-US
US
Non-US
2010
2009
2008
$
— $
17.5
7.4 $
17.6
0.3 $
20.7
9.9 $
16.5
2.0 $
20.9
10.4 $
17.3
0.8 $
14.5
0.8
18.6
$
2.2
22.7
(19.7)
(9.7)
(16.2)
(9.6)
(28.2)
(13.1)
—
—
—
—
—
3.3
0.6
7.5
—
—
(61.9)*
(8.7)
(0.7)
—
(0.5)
—
—
—
(6.9)
(13.2)
(25.0)
6.6
0.8
7.3
0.8
2.3
0.1
9.1
7.3
10.1
(benefit)
$
3.7 $
16.1 $
14.9 $
18.2 $
4.5 $
14.7 $ 17.5 $ (48.4)
$
1.3
* Note: In the year ended December 31, 2009, the other post employment benefits
settlement/curtailment of $61.9 million, in the table above, was offset by a $34.0 million cost to
settle, resulting in a net pre-tax gain of $27.9 million. Excluding the $61.9 million
settlement/curtailment gain, the Company’s 2009 other post employment benefit expense was
$13.5 million.
The estimated net loss for the defined benefit pension plans that will be amortized from
accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal
year is $7.2 million. The estimated net loss and prior service credit for the other post employment
plans that will be amortized from accumulated other comprehensive income (loss) into net periodic
benefit cost over the next fiscal year are $8.0 million and $(6.9) million, respectively.
The Company’s weighted-average assumptions used to determine the benefit obligations for its
defined benefit pension and other post employment plans as of December 31, 2010 and 2009 were
as follows:
percent
U.S. pension plans:
Discount rate
Rate of compensation increase
U.S. other post employment plans:
Discount rate
Rate of compensation increase
Non-U.S. pension plans:
Discount rate
Rate of compensation increase
90
2010
2009
5.17
3.50
5.75
3.50
4.75
N/A
5.50
N/A
5.37
2.80
5.43
2.57
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s weighted-average assumptions used to determine the net periodic benefit cost
(benefit) for its defined benefit pension and other post employment benefit plans for the three years
ended December 31, 2010 were as follows:
percent
U.S. pension plans
Discount rate
Rate of compensation increase
Expected return on plan assets
U.S. other post employment plans
Discount rate
Rate of compensation increase
Expected return on plan assets
Non-U.S. pension plans
Discount rate
Rate of compensation increase
Expected return on plan assets
2010
2009
2008
5.75
3.50
7.50
7.09
3.50
7.50
6.50
3.50
8.75
5.50
N/A
N/A
7.00
N/A
N/A
6.50
N/A
N/A
5.47
2.75
7.12
5.72
2.77
7.10
5.42
3.10
7.05
The Company’s approach to establishing the discount rate is based upon the market yields of
high-quality corporate bonds, with appropriate consideration of each plan’s defined benefit payment
terms and duration of the liabilities. The discount rate assumption is typically rounded up or down to
the nearest 25 basis points for each plan.
The Company determines its expected return on plan asset assumptions by evaluating
estimates of future market returns and the plans’ asset allocation. The Company also considers the
impact of active management of the plans’ invested assets. The Company’s expected return on
assets assumption reflects the asset allocation of each plan. The Company’s assumed long-term
rate of return on assets for its U.S. pension plans was 7.50% for 2010 and 2009 and 8.75% for
2008. The Company’s assumed long-term rate of return on assets for its U.K. pension plan was
7.50% for 2010 and 2009 and 7.25% for 2008.
The estimated future benefit payments for the pension and other post employment benefits are
as follows:
millions of dollars
Year
2011
2012
2013
2014
2015
2016-2020
Pension Benefits
Other Post Employment Benefits
U.S.
Non-U.S.
Reimbursements
W/o Medicare
Part D
With Medicare
Part D
Reimbursements
$
27.1 $
26.5
26.2
25.2
24.4
114.1
15.4 $
14.3
15.3
16.9
17.1
96.5
$
28.0
27.4
26.4
25.5
24.6
109.7
27.1
26.6
25.5
24.7
23.8
106.4
The weighted-average rate of increase in the per capita cost of covered health care benefits is
projected to be 7.40% in 2011 for pre-65 and post-65 participants, decreasing to 5% by the year
2019. A one-percentage point change in the assumed health care cost trend would have the
following effects:
millions of dollars
Effect on other post employment benefit obligation
Effect on total service and interest cost components
91
One Percentage Point
Increase
$ 18.0
$ 0.9
Decrease
$ (16.0)
$ (0.8)
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 12 STOCK INCENTIVE PLANS
Under the Company’s 1993 Stock Incentive Plan (“1993 Plan”), the Company granted options
to purchase shares of the Company’s common stock at the fair market value on the date of grant.
The options vest over periods up to three years and have a term of ten years from date of grant. As
of December 31, 2003, there were no options available for future grants under the 1993 Plan. The
1993 Plan expired at the end of 2003 and was replaced by the Company’s 2004 Stock Incentive
Plan, which was amended at the Company’s 2009 Annual Stockholders Meeting, among other
things, to increase the number of shares available for issuance under the Plan. Under the
BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan (“2004 Stock Incentive Plan”),
the number of shares authorized for grant was 12,500,000, of which approximately
2,200,000 shares are available for future issuance. As of December 31, 2010, there were a total of
3,253,181 outstanding options under the 1993 and 2004 Stock Incentive Plans.
Stock Options Stock option compensation expense reduced earnings before income taxes and
noncontrolling interest and net earnings for the years ended December 31, 2010, 2009 and 2008
by:
(millions), except per share data
Earnings before income taxes and noncontrolling interest
Net earnings
Per share — basic
Per share — diluted
Year Ended
December 31,
2009
2008
2010
6.6 $ 12.2
$ 0.1 $
$ — $
9.1
5.1 $
$ — $ 0.04 $ 0.08
$ — $ 0.04 $ 0.08
A summary of the plans’ shares under option at December 31, 2010, 2009 and 2008 is as
follows:
Outstanding at January 1, 2008
Exercised
Forfeited
Outstanding at December 31,
2008
Exercised
Forfeited
Outstanding at December 31,
2009
Exercised
Forfeited
Outstanding at December 31,
2010
Options exercisable at
December 31, 2010
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic
Value
(In millions)
Shares
(thousands)
6,331 $
(366)
(167)
27.75
23.82
32.58
5,798 $
27.86
(381) $
(240) $
23.89
32.16
5,177 $
27.98
(1,888) $
(36) $
26.73
33.95
7.7 $
$
130.8
8.3
6.7 $
$
5.8 $
$
6.0
3.4
29.7
50.3
3,253 $
28.64
4.9 $
142.2
3,253 $
28.64
4.9 $
142.2
92
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes information about stock options outstanding at December 31,
2010:
Options Outstanding
Range of Exercise Prices
(Thousands)
Number
Outstanding
Weighted-Average
Remaining
Contractual
Life (Years)
Options Exercisable
Number
Weighted-Average
Exercise Price
Exercisable
(Thousands)
Weighted-Average
Exercise Price
$12.07 - 16.52
$22.15 - 34.95
319
2,934
3,253
0.2 $
4.7 $
4.9 $
14.27
30.21
28.64
319
2,934
3,253
$
$
$
14.27
30.21
28.64
Proceeds from stock option exercises for 2010, 2009 and 2008 were as follows:
(millions of dollars)
Proceeds from stock options — gross
Tax benefit (loss)
Proceeds from stock options — net
Year Ended
December 31,
2009
2010
2008
$ 55.4 $
11.7
$ 67.1 $
9.4 $ 14.1
(0.7)
3.0
8.7 $ 17.1
Restricted Stock At its November 2007 meeting, our Compensation Committee decided that
restricted common stock and stock units would be awarded in place of stock options for long-term
incentive award grants to employees. These restricted shares and units for employees vest fifty
percent after two years and the remainder after three years from the date of grant. The Company
also grants restricted common stock to its non-employee directors. For non-employee directors
restricted shares generally vest ratably on the anniversary of the date of the grant over a period of
three years. The market value of the Company’s restricted common stock and stock units at the
date of grant determines the value of the restricted common stock. In February 2010, 570,954
restricted shares and units were granted to employees under the 2004 Stock Incentive Plan. In April
2010, 19,440 restricted shares were granted to non-employee directors under the 2004 Stock
Incentive Plan. The value of the awards is recorded as unearned compensation within capital in
excess of par value in stockholders’ equity, and is amortized as compensation expense over the
restriction periods.
Restricted stock compensation expense reduced earnings before income taxes and
noncontrolling interest and net earnings for the years ended December 31, 2010, 2009 and 2008
by:
(millions), except per share data
Year Ended
December 31,
2009
2008
2010
Earnings before income taxes and noncontrolling interest
Net earnings
Per share — basic
Per share — diluted
9.6
$ 18.9 $ 14.8 $
7.2
$ 14.7 $ 11.4 $
$ 0.13 $ 0.10 $ 0.06
$ 0.11 $ 0.10 $ 0.06
93
Source: BORGWARNER INC, 10-K, February 10, 2011
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company’s nonvested restricted stock for employees and
non-employee directors at December 31, 2010, 2009 and 2008 follows:
Nonvested at January 1, 2008
Granted
Vested
Forfeited
Nonvested at December 31, 2008
Granted
Vested
Forfeited
Nonvested at December 31, 2009
Granted
Vested
Forfeited
Nonvested at December 31, 2010
Shares
Subject to
Restriction
(Thousands)
Weighted
Average
Price
280.9 $
412.4
(14.6)
(17.2)
661.5 $
1,044.0
(23.5)
(134.9)
1,547.1 $
603.0
(188.4)
(91.1)
1,870.6 $
42.90
46.43
30.14
46.41
45.29
20.61
51.03
29.79
29.90
36.16
44.80
27.10
30.55
Performance Share Plans The 2004 Stock Incentive Plan provides for awarding of
performance shares to members of senior management at the end of successive three-year periods
based on the Company’s performance in terms of total shareholder return relative to a peer group
of automotive companies. Awards earned are generally payable 40% in cash and 60% in the
Company’s common stock.
The Company recognizes compensation expense for the 40% cash component and 60% stock
component ratably over the performance period. Compensation expense for the 60% stock
component is based on the performance shares fair value at the date of grant. This fair value is
calculated using a lattice model (Monte Carlo simulation). The compensation expense for the 40%
cash component is based on quarterly marking to market the cash liability. The amounts expensed
under the plan and the share issuances for the three-year measurement periods ended
December 31, 2010, 2009 and 2008 were as follows:
Expense (millions of dollars)
Number of shares*
2010
2009
2008
23.9
$
104,205
10.7
$
269,896
4.3
$
287,816
* Shares are issued in February of the following year.
94
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 13 OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of tax, in the
Consolidated Balance Sheets are as follows:
(millions of dollars)
Foreign currency translation adjustments
Market value of hedge instruments
Defined benefit post employment plans
Unrealized gain on available-for-sale securities
Comprehensive loss attributable to the noncontrolling interest
Accumulated other comprehensive income (loss)
2010
2009
147.1 $
(44.8)
(158.1)
1.2
0.9
(53.7) $
210.6
(31.2)
(165.9)
—
1.0
14.5
$
$
The amounts presented as changes in accumulated other comprehensive income (loss), net of
related taxes, are added to (deducted from) net earnings (loss) resulting in comprehensive income
(loss). The following table summarizes the components of comprehensive income (loss) on an
after-tax basis for the year ended December 31, 2010, 2009 and 2008.
(millions of dollars)
2010
2009
2008
Foreign currency translation adjustments
Market value change of hedge instruments
Income taxes
Net foreign currency translation and hedge instruments
adjustment
Unrealized gain (loss) on available-for-sale securities
Defined benefit post employment plans
Income taxes
Net defined benefit post employment plans
Change in accumulated other comprehensive income (loss)
Net earnings (loss) attributable to BorgWarner Inc.
Comprehensive income (loss)
Comprehensive income (loss) attributable to noncontrolling
interest*
Comprehensive income (loss) attributable to BorgWarner
$ (63.5) $
(20.5)
6.9
(77.1)
1.2
23.9
(16.1)
7.8
(68.1)
377.4
309.3
54.8 $
63.3
(18.2)
(88.6)
(56.8)
19.3
99.9
—
(13.1)
9.7
(3.4)
96.5
27.0
123.5
(126.1)
(1.4)
(104.5)
29.8
(74.7)
(202.2)
(35.6)
(237.8)
(0.1)
3.9
(10.8)
Inc.
$ 309.2 $ 127.4 $ (248.6)
* Refer to Note 1, “Summary of Significant Accounting Policies” for implementation of ASC Topic
810.
NOTE 14 CONTINGENCIES
In the normal course of business the Company and its subsidiaries are parties to various
commercial and legal claims, actions and complaints, including matters involving warranty claims,
intellectual property claims, general liability and various other risks. It is not possible to predict with
certainty whether or not the Company and its subsidiaries will ultimately be successful in any of
these commercial and legal matters or, if not, what the impact might be. The Company’s
environmental and product liability contingencies are discussed separately below. The Company’s
management does not expect that the results in any of these commercial and legal claims, actions
and complaints will have a material adverse effect on the Company’s results of operations, financial
position or cash flows.
95
Source: BORGWARNER INC, 10-K, February 10, 2011
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Litigation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In January 2006, DTP, a subsidiary of the Company, filed a declaratory judgment action in
United States District Court, Southern District of Indiana (Indianapolis Division) against the United
Automobile, Aerospace, and Agricultural Implements Workers of America (“UAW”) Local No. 287
and Gerald Poor, individually and as the representative of a defendant class. DTP sought the
Court’s affirmation that DTP did not violate the Labor-Management Relations Act or the Employee
Retirement Income Security Act (ERISA) by unilaterally amending certain medical plans effective
April 1, 2006 and October 1, 2006, prior to the expiration of the then-current collective bargaining
agreements. On September 10, 2008, the Court found that DTP’s reservation of the right to make
such amendments reducing the level of benefits provided to retirees was limited by its collectively
bargained health insurance agreement with the UAW, which did not expire until April 24, 2009.
Thus, the amendments were untimely. In 2008 the Company recorded a charge of $4.0 million as a
result of the Court’s decision.
DTP filed a declaratory judgment action in the United States District Court, Southern District of
Indiana (Indianapolis Division) against the UAW Local No. 287 and Jim Barrett and others,
individually and as representatives of a defendant class, on February 26, 2009 again seeking the
Court’s affirmation that DTP will not violate the Labor — Management Relations Act or ERISA by
modifying the level of benefits provided retirees to make them comparable to other Company retiree
benefit plans after April 24, 2009. Certain retirees, on behalf of themselves and others, filed a
mirror-image action in the United States District Court, Eastern District of Michigan (Southern
Division) on March 11, 2009, for which a class has been certified. During the last quarter of 2009
the action pending in Indiana was dismissed, while the action in Michigan is continuing and in the
discovery phase. The Company is vigorously defending against the suit. This contingency is subject
to many uncertainties, therefore based on the information available to date, the Company cannot
estimate the amount or the range of potential loss, if any.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by the United States Environmental Protection
Agency and certain state environmental agencies and private parties as potentially responsible
parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state laws
and, as such, may presently be liable for the cost of clean-up and other remedial activities at 38
such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically
shared among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or in the aggregate, will have a
material adverse effect on its results of operations, financial position, or cash flows. Generally, this
is because either the estimates of the maximum potential liability at a site are not material or the
liability will be shared with other PRPs, although no assurance can be given with respect to the
ultimate outcome of any such matter.
Based on information available to the Company (which in most cases includes: an estimate of
allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent
public companies, will fully pay the cost apportioned to them; currently available information from
PRPs and/or federal or state environmental agencies concerning the scope of contamination and
estimated remediation and consulting costs; remediation alternatives; and estimated legal fees), the
Company has an accrual for indicated environmental liabilities with a balance at December 31,
2010 of $28.0 million. The Company has accrued amounts that do not exceed $3.0 million related
to any individual site except for the Crystal Springs site discussed below, and we do not believe that
the costs related to any of these sites will have a material adverse effect on the Company’s results
of operations, cash flows or financial condition. The Company expects to pay out substantially all of
the amounts accrued for environmental liability over the next three to five years.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify
the buyer and Kuhlman Electric for certain environmental liabilities, then unknown to the Company,
relating to certain
96
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
operations of Kuhlman Electric that pre-date the Company’s 1999 acquisition of Kuhlman Electric.
During 2000, Kuhlman Electric notified the Company that it discovered potential environmental
contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant.
The Company is continuing to work with the Mississippi Department of Environmental Quality and
Kuhlman Electric to investigate and remediate to the extent necessary, historical contamination at
the plant and surrounding area. Kuhlman Electric and others, including the Company, were sued in
numerous related lawsuits, in which multiple claimants alleged personal injury and property damage
relating to the alleged environmental contamination. In 2005, the Company and other defendants
entered into settlements that resolved approximately 99% of those claims and the remainder of
them have since been dismissed.
In 2007 and 2008, four additional lawsuits were filed against Kuhlman Electric and others,
including the Company, on behalf of approximately 340 plaintiffs, alleging personal injury relating to
the alleged environmental contamination. One of the lawsuits, involving a single plaintiff, was
dismissed by the trial court in April 2010 and the plaintiff’s appeal of that decision was dismissed by
the appellate court in August 2010. The Company entered into a settlement in July 2010 regarding
the personal injury claims of the plaintiffs in the other three lawsuits and those of approximately
2,700 unfiled claimants represented by those plaintiffs’ attorneys. In exchange for, among other
things, the dismissal with prejudice of these lawsuits and the release of claims by the unfiled
claimants, the Company agreed to pay up to $28 million in settlement funds, which was expensed
in the second quarter of 2010. In November 2010 the Company paid $13.9 million related to this
settlement. The remaining payment of approximately $14 million is expected to be paid in February
2011.
Conditional Asset Retirement Obligations
In March 2005, ASC Topic 410, Accounting for Conditional Asset Retirement Obligations, which
requires the Company to recognize legal obligations to perform asset retirements in which the
timing and/or method of settlement are conditional on a future event that may or may not be within
the control of the entity. Certain government regulations require the removal and disposal of
asbestos from an existing facility at the time the facility undergoes major renovations or is
demolished. The liability exists because the facility will not last forever, but it is conditional on future
renovations (even if there are no immediate plans to remove the materials, which pose no health or
safety hazard in their current condition). Similarly, government regulations require the removal or
closure of underground storage tanks and above ground storage tanks when their use ceases, the
disposal of polychlorinated biphenyl transformers and capacitors when their use ceases, and the
disposal of used furnace bricks and liners, and lead-based paint in conjunction with facility
renovations or demolition. The Company currently has 45 manufacturing locations that have been
identified as containing these items. The fair value to remove and dispose of this material has been
estimated and recorded at $1.2 million as of December 31, 2010 and $1.3 million at December 31,
2009.
Product Liability
Like many other industrial companies who have historically operated in the U.S., the Company
(or parties the Company is obligated to indemnify) continues to be named as one of many
defendants in asbestos-related personal injury actions. We believe that the Company’s involvement
is limited because, in general, these claims relate to a few types of automotive friction products that
were manufactured many years ago and contained encapsulated asbestos. The nature of the
fibers, the encapsulation and the manner of use lead the Company to believe that these products
are highly unlikely to cause harm. As of December 31, 2010 and December 31, 2009 the Company
had approximately 17,000 and 23,000 pending asbestos-related product liability claims,
respectively. Of the 17,000 outstanding claims at December 31, 2010, approximately 8,000 were
pending in just three jurisdictions, where significant tort and judicial reform activities are underway.
The Company’s policy is to vigorously defend against these lawsuits and the Company has
been successful in obtaining dismissal of many claims without any payment. The Company expects
that the vast majority of the pending asbestos-related product liability claims where it is a defendant
(or has an obligation to indemnify a defendant) will result in no payment being made by the
Company or its insurers. In 2010, of the
97
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
approximately 7,700 claims resolved, 245 (3.2%) resulted in any payment being made to a claimant
by or on behalf of the Company. In the full year of 2009, of the approximately 5,300 claims
resolved, only 223 (4.2%) resulted in any payment being made to a claimant by or on behalf of the
Company.
Prior to June 2004, the settlement and defense costs associated with all claims were covered
by the Company’s primary layer insurance coverage, and these carriers administered, defended,
settled and paid all claims under a funding arrangement. In addition to the primary insurance
available for asbestos-related claims, the Company has substantial additional layers of insurance
available for potential future asbestos-related product claims. As such, the Company continues to
believe that its coverage is sufficient to meet foreseeable liabilities.
In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion
of their policy limits. This led the Company to access the next available layer of insurance coverage.
Since June 2004, secondary layer insurers have been responsible for asbestos-related litigation
defense and settlement expenses pursuant to a funding arrangement.
A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County,
Illinois by Continental Casualty Company and related companies (“CNA”) against the Company and
certain of its other historical general liability insurers. CNA provided the Company with both primary
and additional layer insurance, and, in conjunction with other insurers, is currently defending and
indemnifying the Company in its pending asbestos-related product liability claims. The lawsuit
seeks to determine the extent of insurance coverage available to the Company including whether
the available limits exhaust on a “per occurrence” or an “aggregate” basis, and to determine how
the applicable coverage responsibilities should be apportioned. On August 15, 2005, the Court
issued an interim order regarding the apportionment matter. The interim order has the effect of
making insurers responsible for all defense and settlement costs pro rata to time-on-the-risk, with
the pro-ration method to hold the insured harmless for periods of bankrupt or unavailable coverage.
Appeals of the interim order were denied. However, the issue is reserved for appellate review at the
end of the action.
Although it is impossible to predict the outcome of pending or future claims or the impact of tort
reform legislation that may be enacted at the State or Federal levels, due to the encapsulated
nature of the products, the Company’s experiences in vigorously defending and resolving claims in
the past, and the Company’s significant insurance coverage with solvent carriers as of the date of
this filing, management does not believe that asbestos-related product liability claims are likely to
have a material adverse effect on the Company’s results of operations, cash flows or financial
condition.
To date, the Company has paid and accrued $153.1 million in defense and indemnity in
advance of insurers’ reimbursement, which includes the $40.7 million referred to below, and has
received $32.5 million in cash from insurers. The net outstanding balance of $120.6 million is
expected to be fully recovered, of which approximately $43 million is expected to be recovered
within one year. Timing of the recovery is dependent on final resolution of the declaratory judgment
action referred to above. At December 31, 2009, insurers owed $58.6 million in association with
these claims.
On April 5, 2010 the Superior Court of New Jersey Appellate Division affirmed a lower court
judgment in an asbestos-related action against the Company and others. The Company filed its
Notice of Petition to the Supreme Court of New Jersey in late April, seeking to appeal the decisions
of the lower courts. On July 8, 2010 the Supreme Court of New Jersey denied the Company’s
Notice of Petition appealing the decision of the lower courts. The total claim of $40.7 million was
paid by the Company in July 2010.
In addition to the $120.6 million net outstanding balance relating to past settlements and
defense costs, the Company has estimated a liability of $50.6 million for claims asserted, but not
yet resolved and their related defense costs at December 31, 2010. The Company also has a
related asset of $50.6 million to recognize proceeds from the insurance carriers. Insurance carrier
reimbursement of 100% is expected based on the Company’s experience, its insurance contracts
and decisions received to date in the declaratory
98
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
judgment action referred to below. At December 31, 2009, the comparable value of the insurance
asset and accrued liability was $49.9 million.
The amounts recorded in the Consolidated Balance Sheets related to the estimated future
settlement of existing claims are as follows:
(millions of dollars)
Assets:
Prepayments and other current assets
Other non-current assets
Total insurance assets
Liabilities:
Accounts payable and accrued expenses
Other non-current liabilities
Total accrued liability
2010
2009
$ 25.8 $ 24.9
25.0
49.9
24.8
50.6 $
$
$
$
25.8 $
24.8
50.6 $
24.9
25.0
49.9
The Company cannot reasonably estimate possible losses, if any, in excess of those for which
it has accrued, because it cannot predict how many additional claims may be brought against the
Company (or parties the Company has an obligation to indemnify) in the future, the allegations in
such claims, the possible outcomes, or the impact of tort reform legislation that may be enacted at
the State or Federal levels.
NOTE 15 LEASES AND COMMITMENTS
Certain assets are leased under long-term operating leases. These include rent for the
corporate headquarters and one airplane. Most leases contain renewal options for various periods.
Leases generally require the Company to pay for insurance, taxes and maintenance of the leased
property. The Company leases other equipment such as vehicles and certain office equipment
under short-term leases. Total rent expense was $25.6 million in 2010, $28.5 million in 2009, and
$31.5 million in 2008. The Company does not have any material capital leases.
On September 30, 2010 the Company paid $6.0 million for certain machinery and equipment it
had previously leased. The Company’s $6.0 million payment has been recorded as a capital
expenditure in the investing activity section of the Company’s Consolidated Statement of Cash
Flows for the year ended December 31, 2010.
Future minimum operating lease payments at December 31, 2010 were as follows:
(millions of dollars)
2011
2012
2013
2014
2015
After 2015
Total minimum lease payments
NOTE 16 EARNINGS (LOSS) PER SHARE
$ 9.3
7.6
6.7
5.9
5.5
8.0
$ 43.0
The Company presents both basic and diluted earnings per share of common stock (“EPS”)
amounts. Basic EPS is calculated by dividing net earnings (loss) attributable to BorgWarner Inc. by
the weighted average shares of common stock outstanding during the reporting period. Diluted EPS
is calculated by
99
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
dividing net earnings (loss) attributable to BorgWarner Inc. by the weighted average shares of
common stock and common equivalent stock outstanding during the reporting period. The dilutive
impact of stock based compensation is calculated using the treasury stock method. The treasury
stock method assumes that the Company uses the proceeds from the exercise of awards to
repurchase common stock at the average market pricing during the period. The assumed proceeds
under the treasury stock method include the purchase price that the grantee will pay in the future,
compensation cost for future service that the Company has not yet recognized and any windfall tax
benefits that would be credited to capital in excess of par value when the award generates a tax
deduction. If there would be a shortfall resulting in a charge to capital in excess of par value, such
an amount would be a reduction in proceeds.
Options are only dilutive when the average market price of the underlying common stock
exceeds the exercise price of the options because it is unlikely they would be exercised if the
exercise price were higher than the market price.
For the year ended December 31, 2008, the impact of the approximately 1.578 million options
and restricted stock in the table below were excluded from the calculation of fully diluted earnings
as this would have reduced the Company’s loss per share. For the year-ended December 31, 2009,
there were approximately 2.711 million options where the exercise price exceeded the market price.
For the year-ended December 31, 2010, the market price exceeded the exercise price for all
outstanding options.
The potential common shares associated with the Company’s 3.50% convertible notes due
April 15, 2012 are reflected in diluted earnings per share in 2010 using the “if-converted” method.
Under this method, if dilutive, the common stock is assumed issued as of the beginning of the
reporting period and included in calculating diluted earnings per share of common stock. In addition,
if dilutive, interest expense, net of tax, related to the convertible notes is added back to the
numerator in calculating diluted earnings per share of common stock.
Separately and concurrently with the issuance of the Company’s 3.50% convertible notes, the
Company entered into a bond hedge overlay, including warrants and options. If the Company’s
weighted-average share price exceeds $38.61 per share for any period presented, the warrants will
be dilutive to the Company’s earnings. If the Company’s weighted average share price exceeds
$32.82 for any period presented the offsetting bond hedge will be anti-dilutive.
For the year ended December 31, 2009, the 11.389 million share impact of the Company’s
convertible bond was not included in the calculation of fully diluted earnings because using the
if-converted method would increase earnings per share. At December 31, 2009, the common stock
share price was less than the warrant exercise price of $38.62. Therefore, no value was assigned
as anti-dilutive in the table below.
100
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reconciles the numerators and denominators used to calculate basic and
diluted earnings (loss) per share of common stock
(millions of dollars, except per share amounts)
2010
2009
2008*
Basic earnings (loss) per share:
Net earnings (loss) attributable to BorgWarner Inc. $
377.4 $
27.0 $
(35.6)
Weighted average shares of common stock
outstanding
114.155
116.522
116.007
Basic earnings (loss) per share of common stock
$
3.31 $
0.23 $
(0.31)
Diluted earnings (loss) per share:
Net earnings (loss) attributable to BorgWarner Inc. $
Adjustment for net interest expense on convertible
notes
Diluted net earnings (loss) attributable to
BorgWarner Inc.
Weighted average shares of common stock
outstanding
Effect of 3.50% convertible notes
Effect of warrant
Effect of stock-based compensation
Total dilutive effect on weighted average shares of
common stock outstanding
Weighted average shares of common stock
outstanding including dilutive shares
377.4 $
27.0 $
(35.6)
20.4
—
—
$
397.8 $
27.0 $
(35.6)
114.155
11.389
1.464
2.567
116.522
—
—
0.417
116.007
—
—
—
15.420
0.417
—
129.575
116.939
116.007
Diluted earnings (loss) per share of common stock $
3.07 $
0.23 $
(0.31)
Total anti-dilutive shares
3.50% convertible notes
Bond hedge
Stock-based compensation
Total anti-dilutive shares
—
2.836
—
2.836
11.389
0.034
2.711
14.134
—
—
1.578
1.578
* The Company had a loss for the year ended December 31, 2008. As a result, diluted loss per
share is the same as basic loss per share in the period, as any dilutive securities would reduce
the loss per share.
NOTE 17 RESTRUCTURING
On July 31, 2008, the Company announced a restructuring of its operations to align ongoing
operations with a continuing, fundamental market shift in the auto industry. As a continuation of the
Company’s third quarter restructuring, on December 11, 2008, the Company announced plans for
additional restructuring actions. As a result of these third and fourth quarter 2008 restructuring
actions, the Company had reduced its North American workforce by approximately 2,400 people, or
33%; its European workforce by approximately 1,600 people, or 18%; and its Asian workforce by
approximately 400 people, or 17%. The restructuring expense recognized for employee termination
benefits was $54.6 million. In addition to employee termination costs, the Company recorded
$72.9 million of asset impairment charges related to the North American and European
restructuring. The combined restructuring expenses of $127.5 million are broken out by segment
101
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
as follows: Engine $85.3 million, Drivetrain $40.9 million and Corporate $1.3 million for the year
ended December 31, 2008.
In the second quarter of 2009, the Company took additional restructuring actions. The
Company reduced its North American workforce by approximately 550 people, or 12%; its
European workforce by approximately 150 people, or 2%; and its Asian workforce by approximately
60 people, or 3% in the second quarter. The net restructuring expense recognized in the second
quarter was $9.0 million for employee termination benefits. In addition to employee termination
costs, the Company recorded $36.3 million of asset impairment and $5.0 million of other charges in
the second quarter of 2009 related to the North American and European restructuring. The
combined 2009 restructuring expenses of $50.3 million are broken out by segment as follows:
Engine $27.2 million, Drivetrain $19.7 million and Corporate $3.4 million for the year ended
December 31, 2009.
Included in the second quarter of 2009 asset impairment charge is $22.3 million related to one
of the Company’s European locations. During the second quarter of 2009 circumstances caused
the Company to evaluate the long range outlook of the facility using an undiscounted and
discounted cash flow model, both of which indicated that assets were impaired. The Company then
used a replacement cost technique to determine the fair value of the assets at the facility. This
reduction of asset value was included in the Engine segment.
Estimates of restructuring expense are based on information available at the time such charges
are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual
amounts paid for such activities may differ from amounts initially recorded. Accordingly, the
Company may record revisions of previous estimates by adjusting previously established reserves.
The following table displays a roll forward of the employee related restructuring and other
accruals recorded within the Company’s Consolidated Balance Sheet and the related cash flow
activity:
(millions of dollars)
Balance at January 1, 2008
Provision
Cash Payments
Translation Adjustment
Balance at December 31, 2008
Provision
Cash Payments
Translation Adjustment
Balance at December 31, 2009
Cash Payments
Translation Adjustment
Balance at December 31, 2010
Drivetrain
Employee Related and Other Costs
Corporate
Engine
$
$
$
$
9.1
18.8
(6.0)
(0.9)
21.0 $
6.0
(22.8)
0.3
4.5 $
(3.6)
(0.1)
0.8 $
—
34.5
(4.5)
(0.7)
29.3 $
4.6
(23.4)
0.4
10.9 $
(6.4)
(0.7)
3.8 $
— $
1.3
(0.6)
—
0.7 $
3.4
(2.0)
—
2.1 $
(2.1)
—
— $
Total
9.1
54.6
(11.1)
(1.6)
51.0
14.0
(48.2)
0.7
17.5
(12.1)
(0.8)
4.6
NOTE 18 RECENT TRANSACTIONS
Traction Systems division of Haldex Group
On January 31, 2011, the Company acquired the Traction Systems division of Haldex Group, a
leading provider of innovative all-wheel drive (AWD) products for the global vehicle industry
headquartered in Stockholm, Sweden. The purchase price was approximately $205 million
(1.425 billion Swedish Krona).
102
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The operating results will be reported within the Company’s Drivetrain reporting segment from the
date of acquisition.
This acquisition is expected to accelerate BorgWarner’s growth in the global AWD market as it
continues to shift toward front-wheel drive (FWD) based vehicles. The acquisition will add industry
leading FWD/AWD technologies, with a strong European customer base, to BorgWarner’s existing
portfolio of front and rear-wheel drive based products. This enables BorgWarner to provide global
customers a broader range of all-wheel drive solutions to meet their vehicle needs.
BERU-Eichenauer GmbH
In anticipation of market growth expected for its electric cabin heaters, the Company completed
the acquisition of BERU-Eichenauer GmbH by acquiring the shares of its former joint venture
partner, Eichenauer Heizelemente GmbH & Co. KG. The former 50/50 joint venture was formed in
2000 to develop and manufacture electric cabin heaters. The acquisition formally took effect on
May 1, 2010.
The pre-tax impact of this acquisition was an increase in intangible and other assets of
$17.6 million related to adjusting the Company’s fifty percent investment to fair value under ASC
Topic 805, a gain of $8.0 million and a decrease in cash of $9.6 million. The Company’s $9.6 million
payment has been recorded as an investing activity in the Company’s December 31, 2010
Consolidated Statement of Cash Flows.
Dytech ENSA S.L.
On April 10, 2010, the Company acquired 100% of Dytech ENSA S.L. (“Dytech”),
headquartered in Vigo, Spain. The gross cost of this acquisition is $147.7 million, or $147.6 million,
net of cash and cash equivalents. Dytech is a leading producer of exhaust gas recirculation (EGR)
coolers, EGR tubes, and integrated EGR modules including valves for automotive and commercial
vehicle applications, both on- and off-road. This acquisition enhances the Company’s emissions
products offering and system/module expertise, further differentiating BorgWarner as a leader in
highly engineered automotive systems. In addition, Dytech’s geographic footprint and customer
base complements and strengthens the Company’s market presence with global automakers. The
operating results of Dytech are reported within the Company’s Engine reporting segment from the
date of acquisition. The Company’s $147.6 million payment has been recorded as an investing
activity in the Company’s December 31, 2010 Consolidated Statement of Cash Flows.
The following table summarizes the aggregate estimated fair values of the assets acquired and
liabilities assumed on April 10, 2010, the date of acquisition.
(millions of dollars)
Receivables, net
Inventories, net
Property, plant and equipment, net
Goodwill
Other intangible assets, net of tax
Accounts payable and accrued expenses
Other assets and liabilities, net
Assumed debt
Net cash consideration
Etatech, Inc. Technology
$
54.3
44.7
45.0
74.1
31.1
(81.5)
(9.3)
(10.8)
$ 147.6
On June 2, 2009, the Company announced the purchase of advanced gasoline ignition
technology and related intellectual property from Florida-based Etatech, Inc. The high-frequency
ignition technology enables
103
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
high-performing, lean burning engines to significantly improve fuel economy and reduce emissions
compared with conventional combustion technologies. Amortization expense for the year ended
December 31, 2009 was approximately $1.3 million. For the year ended December 31, 2009, a
$7.5 million payment for Etatech, Inc. has been reflected as an investing activity in the Consolidated
Statement of Cash Flows.
In May 2010, the Company made the final payment regarding the June 2009 purchase of
Etatech, Inc. The $7.5 million payment has been reflected as an investing activity in the Company’s
December 31, 2010 Consolidated Statement of Cash Flows.
BERU
The Company acquired approximately 82.2% of the outstanding shares of BERU
Aktiengesellschaft (“BERU”), headquartered in Ludwigsburg, Germany prior to 2008.
In the second quarter of 2008, the Company and BERU completed a Domination and Profit
Transfer Agreement (“DPTA”), giving BorgWarner full control of BERU. Under this agreement
BERU is obligated to transfer 100% of its annual profits or losses to the Company. Upon request of
BERU noncontrolling shareholders, the Company is obligated to purchase their shares for a cash
payment of €71.32 per share. Those BERU noncontrolling shareholders who did not sell their
shares are entitled to receive an annual compensatory payment (perpetual dividend) of €4.23 (net)
per share. The DPTA is a binding agreement. However, certain noncontrolling shareholders of
BERU initiated an appraisal proceeding in the German court system that challenged the valuation of
the €71.32 purchase price and €4.23 annual compensatory payment (perpetual dividend).
On January 7, 2009 the Company informed BERU of its intention to purchase the remaining
outstanding shares at that time of approximately 4%, using the required German legal process
referred to as a “squeeze-out” to gain 100% ownership. This process included an affirmative vote of
BERU shareholders at its May 20, 2009 annual shareholder meeting. The registration of the
“squeeze-out” was challenged by certain noncontrolling shareholders of BERU with the commercial
register in June 2009. The “squeeze-out” share price passed by the BERU shareholders in May
2009 was €73.39. The increase in price per share of €2.07 resulting from the “squeeze out” was
reflected as an increase to the Company’s total DPTA obligation.
On September 18, 2009 the noncontrolling shareholders of BERU who had challenged the
“squeeze-out” resolution dropped their complaint. The elimination of all actions against the
resolution allowed BERU to register the “squeeze-out” with the commercial register. The
“squeeze-out” became effective on, September 30, 2009, making the Company the only
shareholder of BERU. On October 2, 2009, BERU was delisted as a public company in Germany. In
October 2009, the Company paid €22.9 ($33.5) million for the approximately 311,000 outstanding
shares of BERU. Certain noncontrolling shareholders have challenged the “squeeze out” share
price of €73.39. A hearing date for this action has been scheduled for April 2011.
As a result of the tendering of shares, the Company owned 100% of all BERU’s outstanding
shares at December 31, 2009. The tendering of approximately 4.4% of BERU shares, at a cost of
$46.6 million, has been reflected as a Financing activity in the Consolidated Statements of Cash
Flows for the year ended December 31, 2009. Additionally, on May 22, 2009, the Company paid the
annual perpetual dividend of $1.9 million, which is also reflected as a Financing activity in the
Consolidated Statement of Cash Flows for the year ended December 31, 2009.
104
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below summarizes activity related to the Company’s DPTA obligation as of
December 31, 2009 as follows:
(millions of dollars)
Domination and Profit Transfer Agreement Obligation at December 31, 2008
Shares Purchased During the Year Ended December 31, 2009
Share Resolution to €73.39 per Share
Translation Adjustment
Domination and Profit Transfer Agreement Obligation at December 31, 2009
$ 44.0
(46.6)
0.9
1.7
—
$
The table below summarizes the net cash paid related to the Company’s step acquisition of
BERU as follows (in millions of dollars):
Year
2005
2007
2008
2009
Total
Percentage
Acquired
Amount
Paid
69.4% $ 477.2(a)
138.8(b)
12.8%
136.8(b)
13.4%
46.6(b)
4.4%
100.0% $ 799.4
(a) The Company’s payment of $477.2 million has been reflected as an Investing activity in the
Consolidated Statements of Cash Flows for the year ended December 31, 2005.
(b) The Company’s payments of $46.6 million, $136.8 million and $138.8 million have been
reflected as a Financing activity in the Consolidated Statements of Cash Flows for the year
ended December 31, 2009, 2008 and 2007, respectively.
See Note 6, “Goodwill and Other Intangible Assets”, for further discussion on BERU’s goodwill
impairment charge recorded in 2008.
Other
In the third quarter of 2008, the Company purchased the remaining 26% interest in its joint
venture located in India, BorgWarner Morse TEC Murugappa Pvt. Ltd, for $4.4 million.
In the third quarter of 2008, BERU divested its 50% interest in Impco BERU Technologies B.V.
(located in the Netherlands) for $5.5 million, which approximated its carrying value.
On November 18, 2008, the Company entered into a joint venture agreement with China
Automobile Development United Investment Company, a company owned by leading Chinese
automakers, to produce various dual clutch transmission modules. The joint venture’s operations
will be located in Dalian, China and production is scheduled to begin in 2011. BorgWarner owns
66% of the joint venture.
NOTE 19 REPORTING SEGMENTS AND RELATED INFORMATION
The Company’s business is comprised of two reporting segments: Engine and Drivetrain.
These segments are strategic business groups, which are managed separately as each represents
a specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return
on invested capital (“ROIC”) of its business initiatives. The ROIC is comprised of projected earnings
before interest, income taxes and noncontrolling interest (“EBIT”) adjusted for restructuring,
goodwill impairment
105
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
charges, affiliates’ earnings and other items not reflective of on-going operating profit or loss
(“Adjusted EBIT”) compared to the projected average capital investment required.
Adjusted EBIT is the measure of segment profit or loss used by the Company. The Company
believes Adjusted EBIT is most reflective of the operational profitability or loss of our reporting
segments.
The following tables show segment information and Adjusted EBIT for the Company’s reporting
segments.
(millions of dollars)
Customers
Segment
Net
Net Sales
Inter-
Year-End
Assets
Depr./
Amort.
Long-lived
Asset
Expenditures (b)
$
4,041.4 $
1,611.4
19.4 $ 4,060.8 $
1,611.4
—
3,277.7
1,230.5
$
184.4 $
63.6
—
5,652.8
—
5,652.8 $
(19.4)
(19.4)
5,652.8
—
—
—
— $ 5,652.8 $
—
4,508.2
1,046.8
5,555.0(a) $
—
248.0
4.9
252.9 $
(millions of dollars)
Customers
Segment
Net
Net Sales
Inter-
Year-End
Assets
Depr./
Amort.
Long-lived
Asset
Expenditures (b)
$
2,868.3 $
1,093.5
14.9 $ 2,883.2 $
1,093.5
—
2,812.8
1,104.1
$
188.7 $
65.9
—
3,961.8
—
3,961.8 $
(14.9)
(14.9)
3,961.8
—
—
—
— $ 3,961.8 $
—
3,916.9
894.5
4,811.4(a) $
—
254.6
6.3
260.9 $
(millions of dollars)
Customers
Segment
Net
Net Sales
Inter-
Year-End
Assets
Depr./
Amort.
Long-lived
Asset
Expenditures (b)
2010 Segment
Information
Engine
Drivetrain
Inter-segment
eliminations
Total
Corporate(a)
Consolidated
$
2009 Segment
Information
Engine
Drivetrain
Inter-segment
eliminations
Total
Corporate(a)
Consolidated
$
2008 Segment
Information
Engine
Drivetrain
Inter-segment
eliminations
Total
Corporate(a)
Consolidated
$
$
3,837.5 $
1,426.4
24.0 $ 3,861.5 $
1,426.4
—
3,065.3
1,211.8
$
199.4 $
78.6
—
5,263.9
—
5,263.9 $
(24.0)
(24.0)
5,263.9
—
—
—
— $ 5,263.9 $
—
4,277.1
366.9
4,644.0(a) $
—
278.0
8.8
286.8 $
181.3
83.5
—
264.8
11.8
276.6
115.6
44.6
—
160.2
11.8
172.0
231.0
112.2
—
343.2
26.5
369.7
(a) Corporate assets include cash, equity in affiliates’, investments and advances and deferred
income taxes. The December 31, 2009 and 2008 assets are net of trade receivables
securitized and sold to third parties.
(b) Long-lived asset expenditures include capital expenditures and tooling outlays.
106
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Adjusted Earnings (Loss) Before Interest, Income Taxes and Noncontrolling Interest
(Adjusted “EBIT”)
(millions of dollars)
Engine
Drivetrain
Adjusted EBIT
Muncie closure retiree obligation net gain
Environmental litigation settlement
BERU-Eichenauer equity investment gain
Corporate, including equity in affiliates’ earnings and
stock-based compensation
Restructuring expense
Goodwill impairment charge
Interest income
Interest expense and finance charges
Earnings before income taxes and noncontrolling interest
Provision (benefit) for income taxes
Net earnings (loss)
Net earnings attributable to the noncontrolling interest, net
of tax
Net earnings (loss) attributable to BorgWarner Inc.
Geographic Information
2010
2009
2008
$ 537.9 $ 219.8 $ 394.9
(4.9)
390.0
—
—
—
137.0
674.9
—
28.0
(8.0)
(13.5)
206.3
(27.9)
—
—
111.0
—
—
(2.8)
68.8
477.9
81.7
396.2
18.8
111.3
50.3
—
(2.5)
57.2
17.9
(18.5)
36.4
60.0
127.5
156.8
(7.1)
38.8
14.0
33.3
(19.3)
9.4
16.3
27.0 $ (35.6)
$ 377.4 $
Outside the U.S., only China, Germany, France, Hungary and South Korea, exceeded 5% of
consolidated net sales in 2010, attributing sales to the sources of the product rather than the
location of the customer. Also, the Company’s 50% equity investment in NSK-Warner (see
Note 5) amounting to $180.3 million, $174.0 million and $192.5 million at December 31, 2010, 2009
and 2008, respectively, are excluded from the definition of long-lived assets, as are goodwill and
certain other non-current assets.
(millions of dollars)
2010
Net sales
2009
2008
2010
Long-Lived Assets
2009
2008
$
1,451.1 $
1,090.4 $
1,499.6 $
466.6 $
469.4 $
529.3
United States
Europe:
Germany
Hungary
France
Other Europe
Total Europe
South Korea
China
Other foreign
Total
$
1,839.9
418.3
318.7
546.1
3,123.0
358.0
330.6
390.1
5,652.8 $
1,419.9
292.4
229.5
282.9
2,224.7
212.4
184.1
250.2
3,961.8 $
1,948.4
398.2
244.3
431.8
3,022.7
251.8
131.1
358.7
5,263.9 $
447.5
53.0
63.0
173.7
737.2
94.8
104.9
139.1
1,542.6 $
500.0
58.4
72.9
138.1
769.4
69.1
66.1
116.3
1,490.3 $
546.7
55.7
84.2
142.9
829.5
63.1
55.1
109.2
1,586.2
107
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sales to Major Customers
Consolidated net sales to a single customer (including their subsidiaries), which exceeded 10%
of our total sales, were to Volkswagen of approximately 19%, 22%, and 19%; and to Ford of
approximately 11%, 12%, and 9% for the years ended December 31, 2010, 2009 and 2008,
respectively. Both of the Company’s reporting segments had significant sales to Volkswagen and
Ford in 2010, 2009 and 2008. Accounts receivable from these customers at December 31, 2010
comprised approximately 17% ($178.0 million) of total accounts receivable. Such sales consisted of
a variety of products to a variety of customer locations and regions. No other single customer
accounted for more than 10% of consolidated sales in any year of the periods presented.
Sales by Product Line
Sales of turbochargers for light-vehicles represented approximately 26%, 27%, and 24% of the
Company’s total revenues for 2010, 2009 and 2008, respectively. The Company currently supplies
light-vehicle turbochargers to many OEMs including Volkswagen, Renault, PSA, Daimler, Hyundai,
Fiat, BMW, Ford and General Motors.
No other single product line accounted for more than 10% of consolidated sales in any year of
the periods presented.
Interim Financial Information (Unaudited)
(millions of dollars, except per share amounts)
Quarter Ended
Mar-31
Jun-30
2010
Sep-30
Dec-31
Year
Mar-31
Jun-30
2009
Sep-30
Dec-31
Year
Net sales
$
1,286.8
$
1,421.7
$
1,410.9
$
1,533.4
$
5,652.8
$
819.5
$
916.2
$
1,027.8 $
1,198.3
$
3,961.8
Cost of sales
1,048.3
1,146.3
1,137.6
1,227.3
4,559.5
Gross profit
238.5
275.4
273.3
306.1
1,093.3
739.9
79.6
800.0
116.2
876.0
985.1
3,401.0
151.8
213.2
560.8
130.3
137.8
150.2
148.3
566.6
74.1
115.4
125.9
144.4
459.8
—
1.6
—
20.3
—
0.1
—
0.4
—
22.4
—
—
50.3
—
—
(1.6)
—
1.5
106.6
117.3
123.0
157.4
504.3
5.5
(49.5)
27.5
67.3
(9.3)
(0.6)
14.2
(10.0)
(0.6)
14.2
(10.5)
(0.6)
18.4
(9.8)
(1.0)
22.0
(39.6)
(2.8)
(0.2)
(0.5)
68.8
19.1
102.3
113.7
115.7
146.2
477.9
(12.9)
26.0
87.7
4.2
30.6
81.7
111.5
115.6
396.2
(6.6)
(6.3)
81.4
(4.8)
(0.7)
9.0
(53.0)
(19.1)
(33.9)
(6.5)
(0.5)
(10.3)
(0.8)
13.0
16.1
21.5
62.3
1.5
5.7
20.0
56.6
36.4
Provision (benefit)
for income taxes
20.9
50.3
(0.1)
50.8
(21.8)
(2.5)
57.2
17.9
(18.5)
5.2
4.9
4.8
3.9
18.8
0.7
2.0
2.8
3.9
9.4
76.2(1)
82.8(2)
106.7(3) $
111.7
$
377.4
$
(7.0)(4) $
(35.9)(5) $
17.2 $
52.7(6) $
27.0
0.65
$
0.72
$
0.95
$
1.00
$
3.31
$
(0.06)*
$
(0.31)*
$
0.15 $
0.45
$
0.23
0.63**
$
0.68**
$
0.87**
$
0.89** $
3.07** $
(0.06)*
$
(0.31)*
$
0.15 $
0.45
$
0.23
108
Selling, general and
administrative
expenses
Restructuring
expense
Other (income)
expense
Operating income
(loss)
Equity in affiliates’
earnings, net of
tax
Interest income
Interest expense and
finance charges
Earnings (loss)
before income
taxes and
noncontrolling
interest
Net earnings
(loss)
Net earnings
attributable to the
noncontrolling
interest, net of tax
Net earnings
(loss)
attributable of
BorgWarner
Inc.
Earnings (loss) per
share — basic
Earnings (loss) per
share — diluted
$
$
Source: BORGWARNER INC, 10-K, February 10, 2011
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
* The Company had a loss for the quarters ended March 31, 2009 and June 30, 2009. As a result,
diluted loss per share is the same as basic loss per share in each period, as any dilutive
securities would reduce the loss per share.
** The Company’s diluted earnings per share for each quarter in 2010 and the year ended
December 31, 2010 includes the impact of the Company’s 3.50% convertible notes and
associated warrants. Refer to Note 16, “Earnings (Loss) Per Share”, for further information on
our diluted earnings calculation.
(1) The Company’s first quarter 2010 results were impacted by the following:
• $2.5 million Medicare Part D tax adjustment
(2) The Company’s second quarter 2010 results were impacted by the following:
• $8.0 million BERU-Eichenauer Equity investment gain.
• $28.0 million Environmental litigation settlement.
(3) The Company’s third quarter 2010 results were impacted by the following:
• $21.2 million foreign tax credit valuation allowance reversal.
(4) The Company’s first quarter 2009 results were impacted by the following:
• $4.8 million charge related to the adoption of Topic 805.
• $27.9 million net gain related to retiree obligations resulting from the closure of the Muncie,
Indiana, Drivetrain facility.
• $11.4 million net loss from interest rate derivative agreements.
(5) The Company’s second quarter 2009 results were impacted by the following:
• $50.3 million of restructuring expenses, including $9.0 million for employee termination
benefits, $36.3 million of asset impairment and $5.0 million of other charges.
• $6.6 million net gain from interest rate derivative agreement.
(6) The Company’s fourth quarter 2009 results were impacted by the following:
• $3.1 million tax benefit related to an ASC Topic 740 adjustment.
109
Source: BORGWARNER INC, 10-K, February 10, 2011
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Item 9A. Controls and Procedures
Disclosure Controls and Procedures
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints and the benefits of controls
must be considered relative to costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, within the company have been detected. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.
However, our disclosure controls and procedures are designed to provide reasonable assurance of
achieving their objectives.
The Company has adopted and maintains disclosure controls and procedures that are designed
to provide reasonable assurance that information required to be disclosed in the reports filed or
submitted under the Exchange Act, such as this Form 10-K, is collected, recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the Securities
and Exchange Commission. The Company’s disclosure controls and procedures are also designed
to ensure that such information is accumulated and communicated to management to allow timely
decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the
Company’s management, including the Chief Executive Officer and Chief Financial Officer, has
conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are effective.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted
an assessment of the Company’s internal control over financial reporting based on the framework
and criteria established by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control — Integrated Framework. Based on the assessment, management
concluded that, as of December 31, 2010, the Company’s internal control over financial reporting is
effective based on those criteria.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited
the Company’s consolidated financial statements and the effectiveness of internal controls over
financial reporting as of December 31, 2010 as stated in their report included herein.
Changes in Internal Control
There have been no changes in internal controls over the financial reporting that occurred
during the most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect our internal controls over financial reporting.
110
Source: BORGWARNER INC, 10-K, February 10, 2011
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Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information with respect to directors, executive officers and corporate governance that appears
in the Company’s proxy statement for its 2011 Annual Meeting of Stockholders under the captions
“Election of Directors,” “Information on Nominees for Directors and Continuing Directors,” “Board of
Directors and Its Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code
of Ethics,” and “Compensation Committee Report” is incorporated herein by this reference and
made a part of this report.
Item 11. Executive Compensation
Information with respect to director and executive compensation that appears in the Company’s
proxy statement for its 2011 Annual Meeting of Stockholders under the captions “Director
Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Executive
Compensation,” “Compensation Discussion and Analysis,” “Restricted Stock,” “Long Term
Incentives,” and “Change of Control Employment Agreements” is incorporated herein by this
reference and made a part of this report.
Item 12. Security Ownership and Certain Beneficial Owners and Management and Related
Stockholders Matters
Information with respect to security ownership and certain beneficial owners and management
and related stockholders matters that appears in the Company’s proxy statement for its 2011
Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial
Owners and Management” is incorporated herein by this reference and made a part of this report.
For information regarding the Company’s equity compensation plans that have been approved by
its stockholders and its equity compensation plans that have not been approved by its stockholders,
see Item 5 “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities” in this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information with respect to certain relationships and related transactions and director
independence that appears in the Company’s proxy statement for its 2011 Annual Meeting of
Stockholders under the caption “Board of Directors and Its Committees” is incorporated herein by
this reference and made a part of this report.
Item 14. Principal Accountant Fees and Services
Information with respect to principal accountant fees and services that appears in the
Company’s proxy statement for its 2011 Annual Meeting of Stockholders under the caption
“Independent Registered Public Accounting Firm Fees and Services” is incorporated herein by this
reference and made a part of this report.
PART IV
Item 15. Exhibits and Financial Statement Schedules
111
Source: BORGWARNER INC, 10-K, February 10, 2011
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BORGWARNER INC.
By:
/s/ TIMOTHY M. MANGANELLO
Timothy M. Manganello
Chairman and Chief Executive Officer
Date: February 10, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated on
the 10 th day of February, 2011.
Signature
Title
/s/ TIMOTHY M. MANGANELLO
Chairman and Chief Executive Officer
(Principal Executive Officer) and Director
Timothy M. Manganello
/s/ ROBIN J. ADAMS
Robin J. Adams
/s/ RONALD T. HUNDZINSKI
Ronald T. Hundzinski
Executive Vice President, Chief Financial
Officer and Chief Administrative Officer
(Principal Financial Officer) and Director
Vice President and Controller
(Principal Accounting Officer)
/s/ PHYLLIS O. BONANNO
Director
Phyllis O. Bonanno
/s/ DAVID T. BROWN
Director
David T. Brown
/s/ JAN CARLSON
Jan Carlson
Director
/s/ DENNIS C. CUNEO
Director
Dennis C. Cuneo
/s/ JERE A. DRUMMOND
Director
Jere A. Drummond
/s/ JOHN R. MCKERNAN
Director
John R. McKernan
/s/ ALEXIS P. MICHAS
Director
Alexis P. Michas
/s/ ERNEST J. NOVAK, JR.
Director
Source: BORGWARNER INC, 10-K, February 10, 2011
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Ernest J. Novak, Jr.
/s/ RICHARD O. SCHAUM
Director
Richard O. Schaum
/s/ THOMAS T. STALLKAMP
Director
Thomas T. Stallkamp
Source: BORGWARNER INC, 10-K, February 10, 2011
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Table of Contents
Exhibit
Number
3.1/4.1
3.2/4.2
3.3
3.4
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
10.6
EXHIBIT INDEX
Description
Restated Certificate of Incorporation of the Company (incorporated by reference to
Exhibit No. 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008).
Amended and Restated By-Laws of registrant (incorporated by reference to
Exhibit 3.2/4.2 to the Company’s Registration Statement on Form S-3
(no. 333-163928).
Certificate of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.3 of the Company’s Annual
Report on Form 10-K for the year ended December 31, 1999).
Certificate of Ownership and Merger Merging BorgWarner Inc. into Borg-Warner
Automotive, Inc. (incorporated by reference to Exhibit 99.1 of the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
Indenture, dated as of February 15, 1999 between Borg-Warner Automotive, Inc.
and The First National Bank of Chicago (incorporated by reference to
Exhibit No. 4.1 to Amendment No. 1 to Registration Statement No. 333-66879).
Indenture, dated as of September 23, 1999 between Borg-Warner Automotive, Inc.
and Chase Manhattan Trust Company, National Association, as trustee,
(incorporated by reference to Exhibit No. 4.1 to the Company’s Current Report on
Form 8-K filed September 16, 2010).
Form of First Supplemental Indenture between the registrant and The Bank of New
York Trust Company, N.A., as the indenture trustee (incorporated by reference to
Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 30,
2006).
Second Supplemental Indenture dated April 9, 2009 between the registrant and The
Bank of New York Mellon Trust Company, N.A., as the indenture trustee
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on
Form 8-K filed April 9, 2009).
Third Supplemental Indenture dated as of September 16, 2010 between the
registrant and The Bank of New York Mellon Trust Company, N.A., as the indenture
trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report
on Form 8-K filed September 16, 2010).
Form of Convertible Note Hedge confirmation between BorgWarner Inc. and Bank
of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed April 9, 2009).
Form of Warrant confirmation between BorgWarner Inc. and Bank of America, N.A.
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed April 9, 2009).
Form of Convertible Note Hedge confirmation between BorgWarner Inc. and
Morgan Stanley & Co. International Plc (represented by Morgan Stanley & Co.
Incorporated, as its agent) (incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed April 9, 2009).
Form of Warrant confirmation between BorgWarner Inc. and Morgan Stanley & Co.
International Plc (represented by Morgan Stanley & Co. Incorporated, as its agent)
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report on
Form 8-K filed April 9, 2009).
Credit Agreement dated as of March 31, 2010, among BorgWarner Inc., as
borrower, the Administrative Agent named therein, the Co-Syndication Agents
named therein, the Documentation Agent named therein and the Lenders that are
parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed April 6, 2010).
Form of Subsidiary Guaranty (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed April 6, 2010).
A-1
Source: BORGWARNER INC, 10-K, February 10, 2011
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Exhibit
Number
10.7
10.8
10.9
†10.10
†10.11
†10.12
†10.13
†10.14
†10.15
†10.16
†10.17
†10.18
†10.19
†10.20
†10.21
Description
Receivables Sale Agreement dated as of December 21, 2009 among BorgWarner
Emissions Systems Inc., BorgWarner Morse TEC Inc., BorgWarner Powdered Metals
Inc., BorgWarner Thermal Systems Inc., BorgWarner TorqTransfer Systems Inc.,
BorgWarner Transmission Systems Inc., BorgWarner Turbo Systems Inc., and BWA
Receivables Corporation (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed December 28, 2009).
Receivables Purchase Agreement dated as of December 21, 2009 among BWA
Receivables Corporation, as seller, BorgWarner Inc., as the collection agent, the
purchasers from time to time party thereto, and Wachovia Bank, National
Association, as administrative agent (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed December 28, 2009).
Amendment No. 1 to Receivables Purchase Agreement dated as of September 8,
2010, among BWA Receivables Corporation, as seller, BorgWarner Inc., as the
collection agent, and Wells Fargo Bank, N.A. (successor by merger to Wachovia
Bank, National Association), as administrative agent (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report Form 8-K filed October 27, 2010).
BorgWarner Inc. 1993 Stock Incentive Plan, as amended (incorporated by reference
to Exhibit No. 10.22 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008).
BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2009).
First Amendment to the BorgWarner Inc. Amended and Restated 2004 Stock
Incentive Plan (as amended and restated effective April 29, 2009) (incorporated by
reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
November 13, 2009).
Form of BorgWarner Inc. 2004 Stock Incentive Plan Performance Share Award
Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed February 7, 2005).
Form of BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan
Performance Units Award Agreement (incorporated by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K filed March 31, 2009).
Form of BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan
Restricted Stock Agreement for Employees (incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K filed February 12, 2008).
Form of First Amendment to Restricted Stock Agreement (incorporated by reference
to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed November 13,
2009).
Form of BorgWarner Inc. 2004 Stock Incentive Plan Non-Qualified Stock Option
Award Agreement (incorporated by reference to Exhibit No. 99.1 to the Company’s
Current Report on Form 8-K filed July 27, 2005).
Borg-Warner Automotive, Inc. Executive Stock Performance Plan, Revised and
Re-approved February 2, 2000 (incorporated by reference to Appendix B of the
Company’s Proxy Statement dated March 22, 2000 for its 2000 Annual Meeting of
Stockholders).
BorgWarner Inc. 2005 Executive Incentive Plan (as amended and restated)
(incorporated by reference to Exhibit No. 10.19 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008).
Borg-Warner Automotive, Inc. Management Incentive Bonus Plan dated January 1,
1994 (as amended and restated) (incorporated by reference to Exhibit No. 10.11 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
2008).
Borg-Warner Automotive, Inc. Retirement Savings Excess Benefit Plan dated
January 27, 1993 (as amended and restated) (incorporated by reference to
Exhibit No. 10.12 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008).
A-2
Source: BORGWARNER INC, 10-K, February 10, 2011
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Exhibit
Number
†10.22
†10.23
†10.24
†10.25
†10.26
†10.27
10.28
10.29
10.30
10.31
10.32
Description
Borg-Warner Automotive, Inc. Retirement Savings Plan dated January 27, 1993 as
amended and restated (incorporated by reference to Exhibit 10.18 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1995).
BorgWarner Inc. Board of Directors Deferred Compensation Plan dated April 18,
1995 (as amended and restated) (incorporated by reference to Exhibit No. 10.14 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
2008).
First Amendment dated as of November 22, 2010 to BorgWarner Inc. Board of
Directors Deferred Compensation Plan as filed herewith.*
Form of Amended and Restated Change of Control Employment Agreement for
Executive Officers (incorporated by reference to Exhibit No. 10.15 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008).
Form of Amended and Restated Change of Control Employment Agreement for
Executive Officers (incorporated by reference to Exhibit No. 99.1 to the Company’s
Current Report on Form 8-K filed November 13, 2009).
BorgWarner Inc. 2004 Deferred Compensation Plan (as amended and restated)
(incorporated by reference to Exhibit No. 10.2 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008).
Distribution and Indemnity Agreement dated January 27, 1993 between Borg-Warner
Automotive, Inc. and Borg-Warner Security Corporation (incorporated by reference to
Exhibit No. 10.2 to the Company’s Registration Statement on Form S-3
(no. 33-64934)).
Tax Sharing Agreement dated January 27, 1993 between Borg-Warner Automotive,
Inc. and Borg-Warner Security Corporation (incorporated by reference to
Exhibit No. 10.3 to the Company’s Registration Statement on Form S-3
(no. 33-64934)).
Assignment of Trademarks and License Agreement (incorporated by reference to
Exhibit No. 10.0 of the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994).
Amendment to Assignment of Trademarks and License Agreement (incorporated by
reference to Exhibit No. 10.23 of the Company’s Form 10-K for the year ended
December 31, 1998).
Domination and Profit Transfer Agreement dated March 7, 2008 between
BorgWarner Germany GmbH and BERU AG (incorporated by reference to
Exhibit 10.1 to the quarterly report filed on Form 10-Q for the quarter ended June 30,
2008).
21.1 Subsidiaries of the Company.*
23.1
Independent Registered Public Accounting Firm’s Consent.*
31.1 Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.*
31.2 Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.*
32.1 Section 1350 Certifications.*
* Filed herewith.
† Indicates a management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c).
A-3
Source: BORGWARNER INC, 10-K, February 10, 2011
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Exhibit 10.24
First Amendment
To
BorgWarner Inc. Board of Directors Deferred Compensation Plan
(As Amended and Restated Effective January 1, 2009)
Effective January 1, 2011, Section 4.3 of the the BorgWarner Inc. Board of Directors Deferred Compensation Plan (As Amended and
Restated Effective January 1, 2009) is hereby amended as follows:
Section 4.3 Timing of Deferral Credits. The percentage amount of a Retainer Fee that a Participant elects to defer in the Deferral
Election shall cause an equivalent reduction in the amount of the Retainer Fee actually paid in cash to the Participant for that year.
Retainer Fee deferrals shall be credited to each Participant’s appropriate Deferred Benefit Account as of the first Business Day of the
calendar quarter immediately following the calendar quarter in which the Retainer Fee was payable to the Participant. For example, a
Retainer Fee payable to the Participant during November will be credited to the Participant’s Deferred Benefit Account as of the first
Business Day of January. The amounts credited to the Participant’s deferred Benefit Account will be allocated among the Investment
Options elected by the Participant under Section 5.1.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Exhibit 21.1
BORGWARNER INC. (Parent)*
NAME OF SUBSIDIARY
BorgWarner TorqTransfer Systems Inc.
BorgWarner Powdered Metals Inc.
BorgWarner South Asia Inc.
Divgi-Warner Private Limited
BorgWarner Automotive Asia Limited
BorgWarner Automotive Components (Ningbo) Co. Ltd.
BorgWarner Shenglong (Ningbo) Co. Ltd.
BorgWarner TorqTransfer Systems Beijing Co. Ltd.
BorgWarner United Transmission Systems Co. Ltd.
BorgWarner Diversified Transmission Products Inc.
BorgWarner Diversified Transmission Products Services Inc.
BorgWarner Drivetrain Management Services de Mexico S.A. de C.V.
BorgWarner Drivetrain de Mexico S.A. de C.V.
BorgWarner Turbo Systems Poland Sp.z.o.o
BorgWarner Drivetrain Engineering GmbH
BorgWarner TorqTransfer Systems Ochang Inc.
BorgWarner Emissions Systems Inc.
BorgWarner Emissions Systems of Michigan Inc.
BorgWarner Emissions Systems Holding Inc.
BorgWarner Thermal Systems Inc.
BorgWarner Thermal Systems of Michigan Inc.
BorgWarner Cooling Systems (India) Private Limited
BorgWarner Morse TEC Inc.
BorgWarner Canada Inc.
BorgWarner Japan Inc.
BorgWarner Morse TEC Japan K.K.
Borg-Warner Automotive — Taiwan Co., Ltd.
BorgWarner Morse TEC Mexico S.A. de C.V.
BorgWarner Morse TEC Murugappa Pvt. Ltd.
BorgWarner Morse TEC Korea Ltd.
BorgWarner Transmission Systems Inc.
BorgWarner Transmission Systems Monaco S.A.M.
BorgWarner NW Inc.
BorgWarner Transmission Systems Korea Ltd.
Transmission Systems AutoForm Ltd.
NSK-Warner K.K.
NSK-Warner (Shanghai) Co., Ltd.
NSK-Warner U.S.A., Inc.
BorgWarner Europe Inc.
BorgWarner Holding Inc.
BorgWarner Transmission Systems Tulle S.A.S.
BorgWarner Turbo & Emissions Systems France S.A.S.
BW Holding Ltd.
BorgWarner Europe GmbH
BorgWarner Holdings Limited
BorgWarner Limited
Kysor Europe Limited
Morse TEC Europe S.r.l.
BorgWarner Germany GmbH
BorgWarner BERU Systems GmbH
BERU Italia S.r.l.
Source: BORGWARNER INC, 10-K, February 10, 2011
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BERU ELECTRONICS GmbH
BERU Mexico S.A. de C.V.
BorgWarner BERU Systems Kandel GmbH
B 80 S.r.l.
BorgWarner BERU Systems Korea Co. Ltd.
BERU Microelectronica S.A.
BERU Motorsport Holdings Ltd.
BERU F1 Systems Ltd.
BorgWarner France S.A.S.
BERU Hungaria zRt.
BorgWarner Cooling Systems GmbH
BorgWarner Spain Holding, S.L.
BorgWarner Emissions Systems Spain S.L.
BorgWarner Emissions Systems Portugal Unipessoal Lda.
BorgWarner IT Services Group Europe GmbH
BorgWarner Transmission Systems Arnstadt GmbH
BorgWarner Transmission Systems GmbH
BorgWarner Vertriebs und Verwaltungs GmbH
BorgWarner Turbo Systems Worldwide Headquarters GmbH
BorgWarner Turbo Systems GmbH
BorgWarner Turbo Systems Alkatreszgyarto Kft.
BorgWarner Turbo Systems Engineering GmbH
Creon Insurance Agency Limited
BorgWarner Trustees Limited
Kuhlman Corporation
BWA Turbo Systems Holding Corporation
BorgWarner Turbo Systems Inc.
BorgWarner Cooling Systems Korea, Inc.
BorgWarner Brasil Ltda.
SeohanWarner Turbo Systems, Ltd.
Bronson Specialties Inc.
BWA Receivables Corporation
BorgWarner Comercial E Distribuidora Ltda.
BorgWarner Investment Holding Inc.
BorgWarner (China) Investment Co. Limited
BorgWarner Turbo and Emissions Systems de Mexico S.A. de C.V.
BorgWarner (Thailand) Limited
BorgWarner (China) Research and Development Co. Ltd.
* This list includes significant equity investees.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-45423, 333-117171, 333-118203, 333-118202, 333-118201, 333-118200,
333-122204, 333-124086, 333-134167, 333-136604, 333-136605, 333-136606, 333-150568,
333-150569, 333-150570, 333-150571, 333-150572, 333-159694) and Registration Statements on
Form S-3 (No. 333-31259; 333-84931; 333-106787; 333-149539; 333-163928) of BorgWarner Inc.
of our report dated February 10, 2011 relating to the financial statements and the effectiveness of
internal control over financial reporting, which appears in this Form 10-K. (which expressed
unqualified opinions on the 2010 and 2009 financial statements and included an explanatory
paragraph regarding the audit of the adjustments to the 2008 financial statements to retrospectively
apply the change in accounting related to the adoption of ASC 810 Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51 (formerly FAS 160)).
/s/ PricewaterhouseCoopers LLP
Detroit, MI
February 10, 2011
Source: BORGWARNER INC, 10-K, February 10, 2011
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-45423,
333-117171, 333-11707, 333-118203, 333-118202, 333-118201, 333-118200, 333-122204,
333-124086, 333-134167, 333-136604, 333-136605, 333-136606, 333-150568, 333-150569,
333-150570, 333-150571, 333-150572, and 333-159694 all on Form S-8; and Registration
Statement Nos. 333-31259 on Form S-3 and Form S-3/A; 333-66879 on Form S-3 and Form S-3/A;
333-84931 on Form S-3 and Form S-3/A; 333-106787 on Form S-3 and Form S-3/A; and
333-149539 and 333-163928 on Form S-3; of our report dated February 12, 2009, relating to the
2008 financial statements (before retrospective adjustments to the financial statements) of
BorgWarner Inc. and Consolidated Subsidiaries (not presented herein) for the year ended
December 31, 2010 appearing in this Annual Report on Form 10-K of BorgWarner Inc. for the year
ended December 31, 2010.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
February 10, 2011
Source: BORGWARNER INC, 10-K, February 10, 2011
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Exhibit 31.1
Certification of the Principal Executive Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Timothy M. Manganello, certify that:
1. I have reviewed this annual report on Form 10-K of BorgWarner Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
controls over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal controls over financial reporting.
/s/ Timothy M. Manganello
Timothy M. Manganello
Chairman & Chief Executive Officer
Date: February 10, 2011
Source: BORGWARNER INC, 10-K, February 10, 2011
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Exhibit 31.2
Certification of the Principal Financial Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Robin J. Adams, certify that:
1. I have reviewed this annual report on Form 10-K of BorgWarner Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
controls over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal controls over financial reporting.
/s/ Robin J. Adams
Robin J. Adams
Executive Vice President, Chief Financial Officer
and
Chief Administrative Officer
Date: February 10, 2011
Source: BORGWARNER INC, 10-K, February 10, 2011
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Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Annual Report of BorgWarner Inc. (the “Company”) on Form 10-K for the
period ended December 31, 2010 (the “Report”), each of the undersigned officers of the Company
certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that
to the best of such officer’s knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Timothy M. Manganello
Timothy M. Manganello
Chief Executive Officer
/s/ Robin J. Adams
Robin J. Adams
Executive Vice President, Chief Financial Officer &
Chief Administrative Officer
Dated: February 10, 2011
A signed original of this written statement required by Section 906 has been provided to
BorgWarner Inc. and will be retained by BorgWarner Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Document and Entity Information
(USD $)
12 Months Ended
12/31/2010
02/04/2011 06/30/2010
Document and Entity Information
Entity Registrant Name
BORGWARNER
INC.
Entity Central Index Key
0000908255
Document Type
10-K
Document Period End Date
2010-12-31
Amendment Flag
false
Document Fiscal Year Focus
2,010
Document Fiscal Period Focus
FY
Current Fiscal Year End Date
--12-31
Entity Well-known Seasoned Issuer
Entity Voluntary Filers
Entity Current Reporting Status
Entity Filer Category
Yes
No
Yes
Large Accelerated
Filer
Entity Public Float
Entity Common Stock, Shares
Outstanding
$ 4,300,000,000
111,738,557
Source: BORGWARNER INC, 10-K, February 10, 2011
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Restructuring expense
Goodwill impairment charge
Other (income) expense
Operating income
Equity in affiliates' earnings, net of tax
Interest income
Interest expense and finance charges
BorgWarner Inc. and Consolidated Subsidiaries Consolidated Statements of Operations
BorgWarner Inc. and Consolidated Subsidiaries Consolidated Statements of
Operations
(USD $) (in Millions and Share Data in Thousands) except Per Share Data
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Net sales
Cost of sales
Gross profit
$ 1,533.4
$ 1,410.9
$ 1,421.7
$ 1,286.8
$ 1,198.3
$ 1,027.8
$ 916.2
$ 819.5
$ 5,652.8
$ 3,961.8
$ 5,263.9
1,227.3
1,137.6
1,146.3
1,048.3
985.1
876
800
739.9
4,559.5
3,401
4,425.4
306.1
273.3
275.4
238.5
213.2
151.8
116.2
79.6
1,093.3
560.8
838.5
Selling, general and administrative expenses
148.3
150.2
137.8
130.3
144.4
125.9
115.4
74.1
566.6
459.8
542.9
0.4
157.4
0.1
123
20.3
1.6
117.3
106.6
1.5
67.3
(1.6)
22.4
27.5
(49.5)
5.5
504.3
(0.1)
50.8
156.8
4
7.3
50.3
50.3
127.5
Earnings before income taxes and noncontrolling interest
146.2
115.7
113.7
102.3
Provision (benefit) for income taxes
Net earnings (loss)
30.6
4.2
115.6
111.5
Net earnings attributable to the noncontrolling interest, net of tax
3.9
4.8
26
87.7
4.9
20.9
81.4
5.2
(9.8)
(10.5)
(1)
22
(0.6)
18.4
(10)
(0.6)
14.2
(0.6)
14.2
(9.3)
(10.3)
(39.6)
(21.8)
(38.4)
(0.8)
16.1
62.3
5.7
56.6
3.9
(6.5)
(0.5)
13
21.5
1.5
20
2.8
(4.8)
(0.7)
9
(0.2)
(0.5)
19.1
(2.8)
68.8
(2.5)
57.2
17.9
(7.1)
38.8
14
33.3
(53)
(12.9)
477.9
(19.1)
(33.9)
2
(6.6)
(6.3)
0.7
81.7
(18.5)
396.2
36.4
(19.3)
18.8
9.4
16.3
Net earnings (loss) attributable to BorgWarner Inc.
$ 111.7
$ 106.7[16]
$ 82.8[15]
$ 76.2[14]
$ 52.7[13]
$ 17.2
$ (35.9)[12]
$ (7)[11]
$ 377.4
$ 27
$ (35.6)
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
Average shares outstanding (thousands):
Basic
$ 1
$ 0.95
$ 0.72
$ 0.65
$ 0.45
$ 0.15
$ (0.31)[8]
$ (0.06)[8]
$ 0.89[9]
$ 0.87[9]
$ 0.68[9]
$ 0.63[9]
$ 0.45
$ 0.15
$ (0.31)[8]
$ (0.06)[8]
$ 3.31
$ 3.07[9]
$ 0.23
$ 0.23
$ (0.31)[7]
$ (0.31)[7]
114,155
116,522
116,007
Diluted
[16] - The Company's third quarter 2010 results were impact by the following: $21.2 million foreign tax credit valuation allowance reversal.
129,575
116,939
116,007
[15] - The Company's second quarter 2010 results were impact by the following: $8.0 million BERU-Eichenauer Equity investment gain. $28.0 million Environmental
litigation settlement.
[14] - The Company's first quarter 2010 results were impact by the following: $2.5 million Medicare Part D tax adjustment.
[13] - The Company's fourth quarter 2009 results were impacted by the following: $3.1 million tax benefit related to an ASC Topic 740 adjustment.
[12] - The Company's second quarter 2009 results were impacted by the following: $50.3 million of restructuring expenses, including $9.0 million for employee
termination benefits,$36.3 million of asset impairment and $5.0 million of other charges. $6.6 million net gain from interest rate derivative agreement.
[11] - The Company's first quarter 2009 results were impacted by the following: $4.8 million charge related to the adoption of Topic 805. $27.9 million net gain related
to retiree obligations resulting from the closure of the Muncie, Indiana, Drivetrain facility. $11.4 million net loss from interest rate derivative agreements.
[8] - The Company had a loss for the quarters ended March 31, 2009 and June 30, 2009. As a result, diluted loss per share is the same as basic loss per share in each
period, as any dilutive securities would reduce the loss per share.
[7] - The Company had a loss for the year ended December 31, 2008. As a result, diluted loss per share is the same as basic loss per share in the period, as any dilutive
securities would reduce the loss per share.
[9] - The Company's diluted earnings per share for each quarter during the year ended December 31, 2010 and the year ended December 31, 2010 includes the impact of
the Company's 3.50% convertible notes and associated warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings
calculation.
[10] - The Company's diluted earnings per share for the year ended December 31, 2010 includes the impact of the Company's 3.50% convertible notes and associated
warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings calculation.
Source: BORGWARNER INC, 10-K, February 10, 2011
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BorgWarner Inc. and Consolidated Subsidiaries Consolidated Balance Sheets
BorgWarner Inc. and Consolidated Subsidiaries Consolidated Balance Sheets
(USD $) (in Millions)
12/31/2010 12/31/2009
ASSETS
Cash
Receivables, net
Inventories, net
Deferred income taxes
Prepayments and other current assets
Total current assets
Property, plant and equipment, net
Investments and advances
Goodwill
Other non-current assets
Total assets
LIABILITIES AND EQUITY
Notes payable and other short-term debt
Accounts payable and accrued expenses
Income taxes payable
Total current liabilities
Long-term debt
Other non-current liabilities:
Retirement-related liabilities
Other
Total other non-current liabilities
Capital stock:
Preferred stock, $0.01 par value; authorized shares: 5,000,000; none issued
Common stock, value
Capital in excess of par value
Retained earnings
$ 449.9
$ 357.4
1,023.9
430.6
75.8
79.7
732
314.3
60.2
87.9
2,059.9
1,551.8
1,542.6
1,490.3
307.9
257.4
1,113.5
1,061.4
531.1
5,555
450.5
4,811.4
128.5
1,224.1
39.7
69.1
977.1
0
1,392.3
1,046.2
1,051.9
773.2
438.1
362.9
801
0
1.2
473.7
295.6
769.3
0
1.2
1,100.4
1,034.1
1,560.2
1,193.4
Accumulated other comprehensive income (loss)
(53.7)
Common stock held in treasury, at cost: 7,769,762 shares in 2010 and 1,498,855 shares in 2009
(349.5)
14.5
(57.9)
Total BorgWarner Inc. stockholders' equity
Noncontrolling interest
Total equity
Total liabilities and equity
2,258.6
2,185.3
51.2
37.4
2,309.8
2,222.7
$ 5,555
$ 4,811.4
Source: BORGWARNER INC, 10-K, February 10, 2011
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BorgWarner Inc. and Consolidated Subsidiaries Consolidated Balance Sheets (Parenthetical)
BorgWarner Inc. and Consolidated Subsidiaries Consolidated Balance
Sheets
(Parenthetical) (USD $)
12/31/2010 12/31/2009
Capital stock:
Preferred stock, par value
Preferred stock, authorized
Preferred stock, issued
Common stock, par value
Common stock, authorized
Common stock, issued
Common stock, outstanding
Treasury stock, shares
$ 0.01
$ 0.01
5,000,000
5,000,000
0
0
$ 0.01
$ 0.01
150,000,000150,000,000
120,086,206118,336,410
112,316,444116,837,555
7,769,762
1,498,855
Source: BORGWARNER INC, 10-K, February 10, 2011
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BorgWarner Inc. and Consolidated Subsidiaries Consolidated Statements of Cash Flows
BorgWarner Inc. and Consolidated Subsidiaries Consolidated Statements of Cash
Flows
(USD $) (in Millions)
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
OPERATING
Net earnings (loss)
Non-cash charges (credits) to operations:
Depreciation and tooling amortization
Amortization of intangible assets and other
Environmental litigation settlement, net of cash paid
Restructuring expense, net of cash paid
Goodwill impairment charge
Stock based compensation expense
Deferred income tax benefit
Bond amortization
BERU-Eichenauer equity investment gain
Equity in affiliates' earnings, net of dividends received, and other
Net earnings (loss) adjusted for non-cash charges to operations
Changes in assets and liabilities:
Receivables
Inventories
Prepayments and other current assets
Accounts payable and accrued expenses
Income taxes payable
Other non-current assets and liabilities
Net cash provided by operating activities
INVESTING
Capital expenditures, including tooling outlays
Net proceeds from asset disposals
Payments for businesses acquired, net of cash acquired
Net proceeds from sale of business
Proceeds from sales of marketable securities
Net cash used in investing activities
FINANCING
Net increase (decrease) in notes payable
Additions to long-term debt, net of debt issuance costs
Repayments of long-term debt, including current portion
Payments for noncontrolling interest acquired
Payment for purchase of bond hedge
Proceeds from warrant issuance
Reduction in accounts receivable securitization facility
Proceeds from accounts receivable securitization facility
Payment for purchase of treasury stock
Proceeds from interest rate swap termination
Proceeds from stock options exercised, including the tax benefit
Dividends paid to BorgWarner stockholders
Dividends paid to noncontrolling stockholders
Net cash provided by (used in) financing activities
$ 396.2
$ 36.4
$ (19.3)
224.5
28.4
14
22.8
(52.2)
18.3
(8)
1.7
645.7
(239)
(79)
0.6
169.4
37.3
3.9
538.9
(276.6)
6.8
(164.7)
5
234.6
26.3
38.4
22
(57.7)
12.7
21.3
334
(106.6)
143
1.2
98.9
(6.9)
(112.6)
351
(172)
23.1
(7.5)
1.6
(429.5)
(154.8)
259.7
27.1
115.9
156.8
21.2
(78.3)
12
495.1
163.9
(26.3)
16
(195.6)
(23)
(29.3)
400.8
(369.7)
5.7
0
5.5
14.6
(343.9)
(29.8)
372.2
(116.1)
30
(325.7)
67.1
(10.9)
(13.2)
(114.7)
114.8
381.6
(164.5)
(48.5)
(56.4)
31.2
(50)
50
30
8.7
(13.8)
(8.8)
44.8
(7.3)
(141.2)
(55.9)
17.1
(51.1)
(12.5)
(136.1)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Net cash paid during the year for:
Interest
Income taxes
Non-cash investing transactions:
Domination and Profit Transfer Agreement
Non-cash financing transactions:
Stock performance plans
Restricted common stock for employees
Restricted common stock for non-employee directors
(3.7)
92.5
357.4
449.9
53.4
83.1
3.8
18.1
$ 0.8
13
254
103.4
357.4
68.8
60.3
6
14.1
$ 0.7
(5.9)
(85.1)
188.5
103.4
44.4
122
44
5
9
$ 0.7
Source: BORGWARNER INC, 10-K, February 10, 2011
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BorgWarner Inc. and Consolidated Subsidiaries Consolidated Statements of Equity and Comprehensive Income (Loss)
BorgWarner Inc. and Consolidated Subsidiaries Consolidated Statements of Equity and Comprehensive Income
(Loss) (USD $) (in Millions except Share Data)
Share-based Compensation
[Member]
Accumulated Other Comprehensive Income [Member]
Additional Paid-in Capital [Member]
Common Stock
[Member]
Comprehensive Income
[Member]
Noncontrolling Interest
[Member]
Restricted Stock Compensation Expense [Member]
Retained Earnings
[Member]
Scenario, Previously Reported [Member]
Beginning Balance at 2007-12-31
Beginning Balance, shares at 2007-12-31
Dividends declared
Stock option expense
Stock incentive plans
Stock incentive plans, shares
Executive stock plan
Executive stock plan, shares
Net issuance of restricted stock, less amortization
Net issuance of restricted stock, less amortization, shares
Purchases of treasury stock
Purchases of treasury stock, shares
Net earnings (loss)
Net earnings attributable to the noncontrolling interest, net of tax
Defined benefit post employment plans, net of tax
Net unrealized gain/loss on available-for-sale securities
Currency translation and hedge instruments, net
Comprehensive Income (loss) attributable to the noncontrolling interest
Purchase of subsidiary shares from noncontrolling interest
Domination and Profit Transfer Agreement (See Note 18)
Ending Balance at 2008-12-31
Ending Balance, shares at 2008-12-31
Beginning Balance at 2008-12-31
Beginning Balance, shares at 2008-12-31
Dividends declared
Stock option expense
Stock incentive plans
Stock incentive plans, shares
Executive stock plan
Executive stock plan, shares
Net issuance of restricted stock, less amortization
Net issuance of restricted stock, less amortization, shares
Convertible bond issuance
Convertible bond - Hedge
Convertible bond - Warrant
Net earnings (loss)
Net earnings attributable to the noncontrolling interest, net of tax
Defined benefit post employment plans, net of tax
Currency translation and hedge instruments, net
Comprehensive Income (loss) attributable to the noncontrolling interest
Dalian joint venture
Ending Balance at 2009-12-31
Ending Balance, shares at 2009-12-31
Beginning Balance at 2009-12-31
Beginning Balance, shares at 2009-12-31
Dividends declared
Stock option expense
Stock incentive plans
Stock incentive plans, shares
Executive stock plan
Executive stock plan, shares
Net issuance of restricted stock, less amortization
Net issuance of restricted stock, less amortization, shares
Purchases of treasury stock
Purchases of treasury stock, shares
Net earnings (loss)
Net earnings attributable to the noncontrolling interest, net of tax
Defined benefit post employment plans, net of tax
Net unrealized gain/loss on available-for-sale securities
Currency translation and hedge instruments, net
Comprehensive Income (loss) attributable to the noncontrolling interest
Dytech ENSA,S.L Acquisition
Ending Balance at 2010-12-31
Ending Balance, shares at 2010-12-31
9.1
5.1
0
$ 1,295.9
(51.1)
(8.7)
Total
Treasury
Stock
[Member]
$ (46.5)
(1,078,137)
15
375,075
$ 127.1
$ 943.4
$ 1.2
117,206,709
$ 117.9
(12.5)
12.2
10.8
1.5
9.7
197,052
295,781
(74.7)
(1.4)
(126.1)
(10.8)
(19.3)
(16.3)
(74.7)
(1.4)
(126.1)
(10.8)
(85.9)
977.6
1.2
(248.6)
(0.5)
(1.9)
(87.7)
31.5
16.2
7.2
(19.3)
(16.3)
(55.9)
(1,464,108)
(35.6)
(19.3)
16.3
(136.9)
(126.1)
10.8[5]
44
1,200.5
2,006
2,037.5
(87.4)
(85.9)
977.6
1.2
(248.6)
31.5
1,200.5
2,006
2,037.5
(87.4)
117,699,542
(2,167,170)
117,699,542
(8.8)
7.2
(0.7)
6
14.8
34.7
(36.7)
31.2
636,868
(3.4)
99.9
3.9
36.4
(9.4)
(3.4)
99.9
3.9
14.5
1,034.1
1.2
127.4
118,336,410
9.4
11.4
1.9
3.4
37.4
14.5
1,034.1
1.2
127.4
37.4
118,336,410
(9.5)
0.1
43.5
3.8
18.9
1,749,796
7.8
1.2
(77.1)
(0.1)
396.2
(18.8)
7.8
1.2
(77.1)
(0.1)
(53.7)
1,100.4
1.2
309.2
120,086,206
18.8
14.7
2.5
2
51.2
(13.8)
(7)
(13.3)
36.4
(9.4)
1,193.4
1,193.4
(10.6)
396.2
(18.8)
1,560.2
(2,167,170)
16.2
380,499
13.3
287,816
36.4
9.4
(3.9)[5]
2,222.7
(57.9)
(1,498,855)
2,222.7
(57.9)
(1,498,855)
22.6
525,297
11.5
269,896
(325.7)
(7,066,100)
396.2
18.8
0.1[5]
2,309.8
(349.5)
(7,769,762)
[5] - Refer to Note 1, "Summary of Significant Accounting Policies" for implementation of ASC Topic 810
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
(USD $)
12 Months Ended
12/31/2010
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following paragraphs briefly describe the Company’s significant
accounting policies.
Basis of presentation The Company’s presentation of the
Consolidated Balance Sheets, Consolidated Statements of Operations,
Consolidated Statements of Equity and Comprehensive Income (Loss),
and Reporting Segments and Related Information Note have been
adjusted to conform with the requirements of Accounting Standards
Codification (“ASC”) Topic 810, Noncontrolling Interest in Consolidated
Financial Statements and ASC Topic 805, Business Combinations. Refer
to New Accounting Pronouncements for further information regarding
these reclassifications.
Use of estimates The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America (“GAAP”) requires management to make estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Concentrations of risk Cash is maintained with several financial
institutions. Deposits held with banks may exceed the amount of
insurance provided on such deposits. Generally, these deposits may be
redeemed upon demand and are maintained with financial institutions of
reputable credit and therefore bear minimal risk.
The Company performs ongoing credit evaluations of its suppliers and
customers and, with the exception of certain financing transactions, does
not require collateral from its customers. The Company’s customers are
primarily original equipment manufacturers (“OEMs”) of light-vehicles
(passenger cars, sport-utility vehicles, crossover vehicles, vans and
light-trucks). The Company’s products are also sold to other OEMs of
commercial trucks, buses and agricultural and off-highway vehicles. The
Company also manufactures and sells products to certain Tier One
vehicle systems suppliers and into the aftermarket for light and
commercial vehicles.
Some automotive parts suppliers continue to experience commodity
cost pressures and the effects of industry overcapacity. These factors
have increased pressure on the industry’s supply base, as suppliers cope
with higher commodity costs, lower production volumes and other
challenges. The Company receives certain of its raw materials from sole
suppliers or a limited number of suppliers. The inability of a supplier to
fulfill supply requirements of the Company could materially affect future
operating results.
Principles of consolidation The Consolidated Financial Statements
include all majority- owned subsidiaries with a controlling financial
interest. All inter-company accounts and transactions have been
eliminated in consolidation. Investments in 20% to 50% owned affiliates
are accounted for under the equity method when the Company does not
have a controlling financial interest.
Revenue recognition The Company recognizes revenue when title
and risk of loss pass to the customer, which is usually upon shipment of
product. Although the Company may enter into long-term supply
agreements with its major customers, each shipment of goods is treated
as a separate sale and the prices are not fixed over the life of the
Source: BORGWARNER INC, 10-K, February 10, 2011
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agreements.
Cash Cash is valued at fair market value. It is the Company’s policy to
classify all highly liquid investments with original maturities of three
months or less as cash.
Accounts receivable The Company securitizes certain receivables
through third party financial institutions without recourse. The amount can
vary each month based on the amount of underlying receivables. The
Company continues to administer the collection of these receivables on
behalf of the third party.
On April 24, 2009 the Company’s $50 million accounts receivable
securitization facility matured and was repaid. On December 21, 2009 the
Company entered into a new $50 million accounts receivable
securitization facility.
On September 8, 2010 the Company amended the December 21,
2009 Receivable Purchase Agreement, which increased the accounts
receivable securitization facility from $50 million to $80 million. This
facility matures on December 21, 2012.
The Company was required to adopt amended ASC Topic 860,
“Accounting for Transfer of Financial Assets”, on January 1, 2010. This
adoption required the Company to reflect its receivable securitization
facility in its financial statements in the current year of change.
Accounting rules prior to January 1, 2010 allowed qualifying
special-purpose entities off-balance sheet treatment. The impact of this
adoption was an increase in receivables, net of $80 million and an
increase in notes payable and other short-term debt of $80 million in the
Company’s December 31, 2010 Consolidated Balance Sheet.
During the years ended December 31, 2010 and 2009, total cash
proceeds from sales of accounts receivable were approximately
$720 million and $250 million, respectively. The Company paid servicing
fees related to these receivables for the year ended December 31, 2010,
2009 and 2008 of $1.2 million, $0.4 million, and $1.9 million, respectively.
These amounts are recorded in interest expense and finance charges in
the Consolidated Statements of Operations.
Inventories Inventories are valued at the lower of cost or market. Cost
of U.S. inventories is determined by the last-in, first-out (“LIFO”) method,
while the foreign operations use the first-in, first-out (“FIFO”) or
average-cost methods. Inventory held by U.S. operations was
$100.1 million and $81.2 million at December 31, 2010 and 2009,
respectively. Such inventories, if valued at current cost instead of LIFO,
would have been greater by $13.2 million in 2010 and $11.6 million in
2009.
See Note 5 to the Consolidated Financial Statements for more
information on inventories.
Pre-production costs related to long-term supply arrangements
Engineering, research and development, and other design and
development costs for products sold on long-term supply arrangements
are expensed as incurred unless the Company has a contractual
guarantee for reimbursement from the customer. Costs for molds, dies
and other tools used to make products sold on long-term supply
arrangements for which the Company either has title to the assets or has
the non-cancelable right to use the assets during the term of the supply
arrangement are capitalized in property, plant and equipment. Capitalized
items specifically designed for a supply arrangement are amortized to
cost of sales over the shorter of the term of the arrangement or over the
estimated useful lives of the assets, typically 3 to 5 years. Costs for
molds, dies and other tools used to make products sold on long-term
supply arrangements for which the Company has a contractual guarantee
for lump sum reimbursement from the customer are capitalized in
prepayments and other current assets.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Property, plant and equipment and depreciation Property, plant
and equipment are valued at cost less accumulated depreciation.
Expenditures for maintenance, repairs and renewals of relatively minor
items are generally charged to expense as incurred. Renewals of
significant items are capitalized. Depreciation is computed generally on a
straight-line basis over the estimated useful lives of the assets. Useful
lives for buildings range from 15 to 40 years and useful lives for
machinery and equipment range from 3 to 12 years. For income tax
purposes, accelerated methods of depreciation are generally used. The
Company’s property, plant and equipment are all held for use at
December 31, 2010 and 2009.
See Note 5 to the Consolidated Financial Statements for more
information on property, plant and equipment and depreciation.
Impairment of long-lived assets The Company reviews the carrying
value of its long-lived assets, whether held for use or disposal, including
other amortizing intangible assets, when events and circumstances
warrant such a review under ASC Topic 360. A recoverability review is
performed using the undiscounted cash flows if there is a triggering event.
If the undiscounted cash flow test for recoverability identifies a possible
impairment, management will perform a fair value analysis. Management
determines fair value under ASC Topic 820 using the appropriate
valuation technique of market, income or cost approach. If the carrying
value of a long-lived asset is considered impaired, an impairment charge
is recorded for the amount by which the carrying value of the long-lived
asset exceeds its fair value.
Management believes that the estimates of future cash flows and fair
value assumptions are reasonable; however, changes in assumptions
underlying these estimates could affect the evaluations. Long-lived assets
held for sale are recorded at the lower of their carrying amount or fair
value less cost to sell. Significant judgments and estimates used by
management when evaluating long-lived assets for impairment include:
(i) an assessment as to whether an adverse event or circumstance has
triggered the need for an impairment review; and (ii) undiscounted future
cash flows generated by the asset (iii) fair valuation of the asset.
See Note 17, “Restructuring” and Note 9 “Fair Value Measurements”,
to the Consolidated Financial Statements for more information regarding
the Company’s impairment of long-lived assets and a discussion of
market-based measurements.
Goodwill and other indefinite-lived intangible assets Under ASC
Topic 350, goodwill and other indefinite-lived intangibles are not
amortized; however, they must be tested for impairment at least annually
or upon a triggering event. In the fourth quarter of each year, or when
events and circumstances warrant such a review, the Company reviews
the goodwill of all of its reporting units for impairment. The Company’s
goodwill impairment review, under ASC Topic 350, requires the Company
to make significant assumptions and estimates about the extent and
timing of future cash flows, discount rates and growth rates. The fair value
of the Company’s reporting units used in the determination of goodwill
impairment is computed using the expected present value of associated
future cash flows. The cash flows are estimated over a significant future
period of time, which makes those estimates and assumptions subject to
an even higher degree of uncertainty. The Company also utilizes market
valuation models and other financial ratios, which require the Company to
make certain assumptions and estimates regarding the applicability of
those models to its assets and businesses. The Company believes that
the assumptions and estimates used to determine the estimated fair
values of each of its reporting units are reasonable. The Company
recognized goodwill impairment of $156.8 million in the Engine segment
in 2008.
A considerable amount of management judgment and assumptions are
required in performing the impairment tests. While no impairment existed
at December 31, 2010, different assumptions and estimates could
Source: BORGWARNER INC, 10-K, February 10, 2011
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materially change the estimated fair values and therefore, change
impairment charges.
See Note 6 to the Consolidated Financial Statements for more
information on goodwill and other indefinite-lived intangible assets.
Product warranty The Company provides warranties on some of its
products. The warranty terms are typically from one to three years.
Provisions for estimated expenses related to product warranty are made
at the time products are sold. These estimates are established using
historical information about the nature, frequency, and average cost of
warranty claim settlements as well as product manufacturing and industry
developments and recoveries from third parties. Management actively
studies trends of warranty claims and takes action to improve product
quality and minimize warranty claims. Management believes that the
warranty accrual is appropriate; however, actual claims incurred could
differ from the original estimates, requiring adjustments to the accrual.
The accrual is represented in both current and non-current liabilities on
the balance sheet.
See Note 7 to the Consolidated Financial Statements for more
information on product warranties.
Other loss accruals and valuation allowances The Company has
numerous other loss exposures, such as customer claims, workers’
compensation claims, litigation, and recoverability of assets. Establishing
loss accruals or valuation allowances for these matters requires the use
of estimates and judgment in regard to the risk exposure and ultimate
realization. The Company estimates losses under the programs using
consistent and appropriate methods; however, changes to its
assumptions could materially affect its recorded accrued liabilities for loss
or asset valuation allowances.
Derivative financial instruments The Company recognizes that
certain normal business transactions generate risk. Examples of risks
include exposure to exchange rate risk related to transactions
denominated in currencies other than the functional currency, changes in
cost of major raw materials and supplies, and changes in interest rates. It
is the objective and responsibility of the Company to assess the impact of
these transaction risks, and offer protection from selected risks through
various methods including financial derivatives. Virtually all derivative
instruments held by the Company are designated as hedges, have high
correlation with the underlying exposure and are highly effective in
offsetting underlying price movements. Accordingly, gains and losses
from changes in qualifying hedge fair values are matched with the
underlying transactions. All hedge instruments are carried at their fair
value based on quoted market prices for contracts with similar maturities.
The Company does not engage in any derivative transactions for
purposes other than hedging specific risks.
See Note 10 to the Consolidated Financial Statements for more
information on derivative financial instruments.
Foreign currency The financial statements of foreign subsidiaries are
translated to U.S. Dollars using the period-end exchange rate for assets
and liabilities and an average exchange rate for each period for revenues,
expenses, and capital expenditures. The local currency is the functional
currency for substantially all the Company’s foreign subsidiaries.
Translation adjustments for foreign subsidiaries are recorded as a
component of accumulated other comprehensive income (loss) in
stockholders’ equity. The Company recognizes transaction gains and
losses arising from fluctuations in currency exchange rates on
transactions denominated in currencies other than the functional currency
in earnings as incurred, except for those transactions which hedge
purchase commitments and for those intercompany balances which are
designated as long-term investments.
See Note 13 to the Consolidated Financial Statements for more
information on other comprehensive income (loss).
Source: BORGWARNER INC, 10-K, February 10, 2011
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Environmental Contingencies The Company accounts for
environmental costs in accordance with ASC Topic 450. Costs related to
environmental assessments and remediation efforts at operating facilities
are accrued when it is probable that a liability has been incurred and the
amount of that liability can be reasonably estimated. Estimated costs are
recorded at undiscounted amounts, based on experience and
assessments and are regularly evaluated. The liabilities are recorded in
other current liabilities and other long-term liabilities in the Company’s
consolidated balance sheets.
See Note 14 to the Consolidated Financial Statements for more
information regarding environmental contingencies.
Pensions and Other Postretirement Employee Defined Benefits
The Company’s defined benefit pension and other postretirement
employee benefit plans are accounted for in accordance with ASC Topic
715. Disability, early retirement and other postretirement employee
benefits are accounted for in accordance with ASC Topic 712.
Pensions and other postretirement employee benefit costs and related
liabilities and assets are dependent upon assumptions used in calculating
such amounts. These assumptions include discount rates, expected
returns on plan assets, health care cost trends, compensation and other
factors. In accordance with GAAP, actual results that differ from the
assumptions used are accumulated and amortized over future periods,
and accordingly, generally affect recognized expense in future periods.
See Note 11 to the Consolidated Financial Statements for more
information regarding the Company’s retirement benefit plans.
Income Taxes The Company accounts for income tax expense based
on expected income and statutory tax rates in the various jurisdictions in
which we operate. Judgment is required in determining our income tax
expense. We establish accruals under ASC Topic 740. For uncertain tax
positions, the ASC Topic 740 approach is based on a two-step benefit
recognition model. In the first step, ASC Topic 740 requires that a position
taken or expected to be taken in a tax return be recognized in the
financial statements when it is more likely than not, based on the
technical merits and without consideration of detection risk, that the
position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step is to measure the
appropriate amount of the benefit to recognize. The amount of benefit to
recognize is measured as the largest amount of the tax benefit that is
greater than 50 percent likely to ultimately be realized upon settlement.
The tax position must be derecognized when it is no longer more likely
than not to be sustained. The interpretation also provides guidance on
recognition and classification of related penalties and interest,
classification of liabilities, and disclosures of unrecognized tax benefits.
The Company’s effective tax rate includes the impact of accrual
provisions and changes to accruals that we consider appropriate, as well
as interest and penalties. A period of time may elapse before a particular
matter, for which we have or have not established an accrual is audited
and finally resolved. While it is often difficult to predict the final outcome
or the timing of resolution of any particular tax matter, we believe that our
accruals are appropriate under GAAP. Favorable or unfavorable
adjustments of an accrual for any particular issue would be recognized as
an increase or decrease to our income tax expense in the period of a
change in facts and circumstances.
Tax laws require items to be included in the tax return at different times
than the items are reflected in the financial statements. As a result, the
income tax expense reflected in our financial statements is different than
the liability reported in our tax return. Some of the differences are
permanent in nature, however, there are many differences that are
temporary differences, such as depreciation expense. 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
Source: BORGWARNER INC, 10-K, February 10, 2011
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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 may not be realized. This assessment requires significant
judgment, and must be done on a jurisdiction-by-jurisdiction basis. In
determining the need for a valuation allowance, all available positive and
negative evidence, including historical and projected financial
performance, is considered along with any other pertinent information.
See Note 4 to the Consolidated Financial Statements for more
information regarding income taxes.
New Accounting Pronouncements
In September 2006, the FASB ASC amended Topic 820, Fair Value
Measurements and Disclosures. ASC Topic 820 defines fair value,
establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. On January 1, 2009, the
Company fully adopted as required, ASC Topic 820. See Note 9 to the
Consolidated Financial Statements for more information regarding the
implementation of ASC Topic 820.
In February 2007, the FASB ASC amended Topic 825, Financial
Instruments. ASC Topic 825 allows entities to irrevocably elect to
recognize most financial assets and financial liabilities at fair value on an
instrument-by-instrument basis. The stated objective of ASC Topic 825 is
to improve financial reporting by giving entities the opportunity to elect to
measure certain financial assets and liabilities at fair value in order to
mitigate earnings volatility caused when related assets and liabilities are
measured differently. ASC Topic 825 was effective for the Company
beginning with its quarter ending March 31, 2008. The Company chose to
not make the election to adopt.
In December 2007, the FASB ASC amended Topic 805, Business
Combinations. ASC Topic 805 establishes principles and requirements for
recognizing identifiable assets acquired, liabilities assumed,
noncontrolling interest in the acquiree, goodwill acquired in the
combination or the gain from a bargain purchase, and disclosure
requirements. Under this revised statement, all costs incurred to effect an
acquisition are recognized separately from the acquisition. Also,
restructuring costs that are expected but the acquirer is not obligated to
incur are recognized separately from the acquisition. On January 1, 2009,
the Company adopted ASC Topic 805. In the first quarter of 2009, the
Company expensed $4.8 million related to on-going acquisition related
activity.
In December 2007, the FASB ASC amended Topic 810, Consolidation.
For consolidated subsidiaries that are less than wholly owned, the third
party holdings of equity interests are referred to as noncontrolling
interests. The portion of net income (loss) attributable to noncontrolling
interests for such subsidiaries is presented as net income (loss)
applicable to noncontrolling interest on the consolidated statement of
operation, and the portion of stockholders’ equity of such subsidiaries is
presented as noncontrolling interest on the consolidated balance sheet.
Effective January 1, 2009, the Company adopted ASC Topic 810.
The adoption of ASC Topic 810 did not have a material impact on the
Company’s financial condition, results of operations or cash flows.
However, it did impact the presentation and disclosure of noncontrolling
(minority) interests in our consolidated financial statements and notes to
the consolidated financial statements. As a result of the retrospective
presentation and disclosure requirements of ASC Topic 810, the
Company was required to reflect the change in presentation and
disclosure for the period ending March 31, 2009 and all periods presented
in future filings.
Source: BORGWARNER INC, 10-K, February 10, 2011
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The principal effect on the prior year balance sheets related to the
adoption of ASC Topic 810 is summarized as follows:
(millions of dollars)
Balance Sheet
December 31,
2008
Total equity, as previously reported
Increase for Topic 810 reclass of noncontrolling interest
$
Total equity, as adjusted
$
2,006.0
31.5
2,037.5
The principal effect on the prior year statement of operations related to
the adoption of ASC Topic 810 is summarized as follows:
(millions of dollars)
Consolidated Statement of Operations
Net loss, as previously reported
Topic 810 reclass of noncontrolling interest
Net loss, as adjusted
Less: Net earnings attributable to noncontrolling interest
Net loss attributable to BorgWarner Inc.
Year Ended
December 31,
2008
$
$
$
(35.6)
(16.3)
(19.3)
16.3
(35.6)
The principal effect on the prior year statement of cash flows related to
the adoption of ASC Topic 810 is summarized as follows:
(millions of dollars)
Statement of Cash Flows
Net loss, as previously reported
Topic 810 reclass of noncontrolling interest
Net loss, as adjusted
(millions of dollars)
Statement of Cash Flows
Year Ended
December 31,
2008
$
$
(35.6)
(16.3)
(19.3)
Year Ended
December 31,
2008
Equity in affiliates’ earnings, net of dividends received,
minority interest and other, as previously reported
$
Less: Topic 810 reclass of noncontrolling interest
28.3
(16.3)
Equity in affiliates’ earnings, net of dividends received
and other
$
12.0
The principal effect on the prior year comprehensive income related to
the adoption of ASC Topic 810 is summarized as follows:
(millions of dollars)
Net foreign currency translation and hedge instruments
adjustment, as previously reported
Topic 810 reclass of noncontrolling interest
Net foreign currency translation and hedge instruments
adjustment, as adjusted
December 31,
2008
$
(136.9)
(10.8)
$
(126.1)
Due to the adoption of ASC Topic 810, the Company revised the
presentation of cash payments related to the acquisition of noncontrolling
(minority) interests from the Investing to the Financing section of the
Company’s Consolidated Statement of Cash Flows. The principal effect
on the prior year cash flows related to the adoption of ASC Topic 810 is
summarized as follows:
(millions of dollars)
Statement of Cash Flows
Year Ended
December 31,
2008
Payments for businesses acquired, net of cash acquired,
as previously reported
$
(141.2)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Less: Topic 805 reclass of noncontrolling interest
Payments for businesses acquired, net of cash
acquired
(millions of dollars)
Statement of Cash Flows
Net cash used in investing activities, as previously
reported
Less: Topic 805 reclass of noncontrolling interest
Net cash used in investing activities
(millions of dollars)
Statement of Cash Flows
Net cash provided by financing activities, as previously
reported
Less: Topic 805 reclass of noncontrolling interest
Net cash used in financing activities
141.2
$
—
Year Ended
December 31,
2008
$
$
(485.1)
141.2
(343.9)
Year Ended
December 31,
2008
$
$
5.1
(141.2)
(136.1)
In March 2008, the FASB ASC amended Topic 815, Derivatives and
Hedging. ASC Topic 815 requires entities to provide enhanced
disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for
under ASC Topic 815 and its related interpretations, and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. On January 1, 2009, the Company
adopted ASC Topic 815. See Note 10 to the Consolidated Financial
Statements for more information regarding the implementation of ASC
Topic 815.
In May 2008, the FASB ASC amended Topic 470, Debt. Under ASC
Topic 470, an entity must separately account for the liability and equity
components of the convertible debt instruments that may be settled
entirely or partially in cash upon conversion in a manner that reflects the
issuer’s interest cost. ASC Topic 470 is effective for fiscal years beginning
after December 15, 2008, and for interim periods within those fiscal years,
with retrospective application required. As a result of our adoption of ASC
Topic 470 for fiscal 2009 and the Company’s April 9, 2009 issuance of
$373.8 million convertible senior notes due April 15, 2012, we recorded
the equity and liability components of the notes on our December 31,
2009 Consolidated Balance Sheet. Additionally, ASC Topic 470 requires
us to accrete the discounted carrying value of the convertible notes to
their face value over the term of the notes. The Company’s interest
expense associated with this amortization is based on the effective
interest rate of the convertible senior notes of 9.365%. See Note 8 to the
Consolidated Financial Statements for more information regarding the
implementation of ASC Topic 470.
In December 2008, the FASB ASC amended Topic 715,
Compensation — Retirement Benefits. ASC Topic 715 requires entities to
provide enhanced disclosures about how investment allocation decisions
are made, the major categories of plan assets, the inputs and valuation
techniques used to measure fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs on changes in
plan assets for the period, and significant concentrations of risk within
plan assets. See Note 9 and Note 11 to the Consolidated Financial
Statements for more information regarding the implementation of ASC
Topic 715.
In June 2009, the FASB ASC amended Topic 860, “Accounting for
Transfer of Financial Assets”. ASC Topic 860 removes the concept of a
qualifying special-purpose entity and removes the exception from
applying ASC Topic 810, Consolidation of Variable Interest Entities, to
qualifying special-purpose entities. This Statement modifies the
financial-components approach used in ASC Topic 860 and limits the
Source: BORGWARNER INC, 10-K, February 10, 2011
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circumstances in which a financial asset, or portion of a financial asset,
should be derecognized. Additionally, enhanced disclosures are required
to provide financial statement users with greater transparency about
transfers of financial assets and a transferor’s continuing involvement with
transferred financial assets. On January 1, 2010, the Company elected to
prospectively adopt ASC Topic 860. The impact of this adoption is an
increase in receivables, net of $80 million and an increase in notes
payable and other short-term debt of $80 million in the Company’s
December 31, 2010 Consolidated Balance Sheet. See Note 1 to the
Consolidated Financial Statements for more information on the
implementation of ASC Topic 860.
In June 2009, the FASB amended ASC Topic 810, “Consolidation”.
ASC Topic 810 requires an ongoing reassessment of whether an
enterprise is the primary beneficiary of a variable interest entity.
Additionally, ASC Topic 810 requires enhanced disclosures that will
provide users of financial statements with more transparent information
about an enterprise’s involvement in variable interest entities. On
January 1, 2010, the Company adopted ASC Topic 810. The adoption of
this guidance did not have a material impact on the Company’s financial
statements.
In June 2009, the FASB ASC amended Topic 105, “Generally
Accepted Accounting Principles”. This ASC Topic instituted a major
change in the way accounting standards are organized. The accounting
standards Codification became the single official source of authoritative,
nongovernmental GAAP. As of September 30, 2009 only one level of
authoritative GAAP exists, other than guidance issued by the SEC. All
other literature is non-authoritative. The Company adopted the
Codification in the third quarter of 2009. The adoption of the Codification
had no impact on the Company’s consolidated financial position, results
of operations or cash flows.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Research and Development Costs
(USD $)
12 Months Ended
12/31/2010
RESEARCH AND DEVELOPMENT COSTS
Research and Development Costs
NOTE 2 RESEARCH AND DEVELOPMENT COSTS
The following table presents the Company’s gross and net expenditures on
research and development (“R&D”) activities:
(millions of dollars)
Year Ended December 31,
Gross R&D expenditures
Customer reimbursements
Net R&D expenditures
2010
2009
2008
$ 233.2 $ 219.0 $ 273.4
(67.7)
$ 185.0 $ 155.2 $ 205.7
(63.8)
(48.2)
The Company’s net R&D expenditures are included in the selling, general, and
administrative expenses of the Consolidated Statements of Operations. Net R&D
expenditures as a percentage of net sales were 3.3% in 2010 and 3.9% in 2009 and
2008. Customer reimbursements are netted against gross R&D expenditures upon
billing of services performed. The Company has contracts with several customers at
the Company’s various R&D locations. No such contract exceeded $6.0 million in
any of the years presented.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Other Expense
(Income) (USD $)
12 Months Ended
12/31/2010
OTHER EXPENSE (INCOME)
Other Expense (Income)
NOTE 3 OTHER EXPENSE (INCOME)
Items included in other expense (income) consist of:
(millions of dollars)
Year Ended December 31,
Environmental litigation settlement
BERU-Eichenauer equity investment gain
Loss on the sale of a product line
Net loss (gain) on asset disposals
Other
Total other expense (income)
2010
2009
2008
$ 28.0 $ — $ —
—
2.2
2.0
(0.2)
4.0
—
—
(0.1)
—
$ 22.4 $ (0.1) $
(8.0)
1.5
1.8
(0.9)
See Notes 14 and 18 to the Consolidated Financial Statements for more information
regarding the Company’s second quarter 2010 environmental litigation settlement and
BERU-Eichenauer equity investment gain.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Income Taxes
(USD $)
12 Months Ended
12/31/2010
INCOME TAXES NOTE 4 INCOME TAXES
Income Taxes
Earnings before income taxes and the provision for income taxes are presented in the following table.
(millions of dollars)
Year Ended December 31,
U.S.
2010
Non-U.S.
Total
U.S.
Non-U.S.
Total
U.S.
2009
2008
Non-U.S.
Total
Earnings (loss) before taxes $
(26.7)
$
504.6
$
477.9
$
(138.5)
$
156.4
$
17.9
$
(123.8)
$
137.8
$
14.0
Provision for income taxes:
Current:
Federal/foreign
State
Total current
Deferred
Total provision for income
14.0
2.2
16.2
(48.9)
117.7
—
117.7
(3.3)
131.7
2.2
133.9
(52.2)
(2.7)
1.5
(1.2)
(51.6)
42.7
—
42.7
(8.4)
40.0
1.5
41.5
(60.0)
7.7
1.0
8.7
(44.7)
99.5
—
99.5
(30.2)
107.2
1.0
108.2
(74.9)
taxes
$
(32.7)
$
114.4
$
81.7
$
(52.8)
$
34.3
$
(18.5)
$
(36.0)
$
69.3
$
33.3
Effective tax rate
(122.5)%
22.7%
17.1%
(38.1)%
21.9%
(103.4)%
(29.1)%
50.3%
237.9%
The provision for income taxes resulted in an effective tax rate for 2010 of 17.1% compared with rates
of (103.4)% in 2009 and 237.9% in 2008.
In the first quarter of 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into
law. In addition, the Health Care and Education Reconciliation Act of 2010 (“the Reconciliation Act”) was
also passed, amending certain portions of the PPACA. The PPACA contains a provision eliminating tax
deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors who
provide retiree prescription drug benefits equivalent to Medicare Part D coverage. However, based upon
the changes made in the Reconciliation Act, the tax benefit related to the Medicare Part D subsidies will
be extended until December 31, 2012. For all tax years ending after December 31, 2012 there will no
longer be a tax benefit for the Medicare Part D subsidies. Therefore, the impact to the Company for the
loss of this future tax benefit (after December 31, 2012) was an additional tax expense of approximately
$2.9 million in 2010.
The provision for income taxes for the year ended December 31, 2010 included a favorable impact of
$21.2 million from the reversal of the Company’s valuation allowance on U.S. based foreign tax credit
carryforwards. The improving financial performance of the Company’s U.S. operations has resulted in
greater certainty that the Company will be able to fully utilize existing foreign tax credit carryforwards.
The Company’s annual effective tax rate for 2010 is 17.1% which includes the impact of the reversal of
the Company’s valuation allowance on U.S. based foreign tax credit carryforwards, the change in tax
legislation related to Medicare Part D subsidies, the additional tax expense associated with the
BERU-Eichenauer equity investment gain and the tax benefit associated with the Company’s
environmental litigation settlement. This rate differs from the U.S. statutory rate primarily due to foreign
rates, which differ from those in the U.S., the realization of certain business tax credits including foreign
tax credits and favorable permanent differences between book and tax treatment for items, including
equity in affiliates’ earnings.
Following is a rollforward of the Company’s total gross unrecognized tax benefits for the year-to-date
periods ended December 31, 2010 and 2009, respectively. Of the total $27.6 million of unrecognized tax
benefits as of December 31, 2010, approximately $22.8 million of this total represents the amount that, if
recognized, would affect the Company’s effective income tax rate in future periods. This amount differs
from the gross unrecognized tax benefits presented in the table due to the decrease in the U.S. federal
income taxes which would occur upon recognition of the state tax benefits included therein.
millions of dollars
2010
2009
Balance, January 1
Additions based on tax positions related to current year
Additions (Reductions) for tax positions of prior years
Reductions for lapse in statute of limitations
Settlements
Translation adjustment
Balance, December 31
$ 34.8 $
1.1
0.3
(1.3)
(6.6)
(0.7)
$ 27.6 $
61.1
16.4
(16.5)
(17.0)
(9.9)
0.7
34.8
In 2010 the Company closed / settled certain open years for foreign jurisdictions that resulted in cash
payments of $6.6 million. Possible changes related to other examinations cannot be reasonably estimated
at this time.
Source: BORGWARNER INC, 10-K, February 10, 2011
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The Company recognizes interest and penalties related to unrecognized tax benefits in income tax
expense. The Company had accrued approximately $11.4 million for the payment of interest and
penalties at December 31, 2010. The Company had approximately $11.6 million for the payment of
interest and penalties accrued at December 31, 2009.
The Company and/or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and various states and foreign jurisdictions. The Company is no longer subject to income tax
examinations by tax authorities in its major tax jurisdictions as follows:
Tax Jurisdiction
U.S. Federal
Brazil
France
Germany
Hungary
Italy
Japan
South Korea
United Kingdom
Years No Longer
Subject to Audit
2006 and prior
2003 and prior
2006 and prior
2003 and prior
2007 and prior
2005 and prior
2008 and prior
2005 and prior
2008 and prior
In certain tax jurisdictions the Company may have more than one taxpayer. The table above reflects
the status of the significant taxpayers in each major tax jurisdiction. In Germany the open tax years for the
Company’s BERU subsidiary are from 2002 and forward.
The analysis of the variance of income taxes as reported from income taxes computed at the
U.S. statutory rate for consolidated operations is as follows:
(millions of dollars)
Income taxes at U.S. statutory rate of 35%
Increases (decreases) resulting from:
Income from non-U.S. sources including withholding taxes
State taxes, net of federal benefit
Business tax credits
Affiliates’ earnings
Accrual adjustment and settlement of prior year tax matters
Medicare prescription drug benefit
Goodwill impairment
Restructuring
Valuation allowance
Non-temporary differences and other
Provision for income taxes as reported
2010
2009
2008
$ 167.3 $
6.2 $
4.9
(55.8)
1.4
0.2
(13.8)
0.4
2.9
—
—
(21.2)
0.3
(17.1)
4.7
(1.9)
(7.5)
(6.3)
1.7
—
—
7.7
(6.0)
$
81.7 $ (18.5) $
(26.5)
0.9
(9.8)
(13.2)
6.0
1.1
54.9
0.6
13.1
1.3
33.3
During 2010, certain countries enacted changes to their respective statutory income tax rate which
are effective starting in 2011. In the UK, the statutory income tax rate was reduced 1% from 28% to 27%.
In Hungary, the statutory income tax rate was reduced 9% from 19% to 10% beginning in tax year 2013.
Following are the gross components of deferred tax assets and liabilities as of December 31, 2010
and 2009:
(millions of dollars)
Current deferred tax assets:
Employee related
Net operating loss carryforwards
Inventory
Warranties
Litigation & environmental
Customer claims
Derivatives
Other
Total current deferred tax assets
Current deferred tax liabilities:
Derivatives
Other
Total current deferred tax liabilities
Non-current deferred tax assets:
Foreign tax credits
Source: BORGWARNER INC, 10-K, February 10, 2011
2010
2009
$
26.2 $
9.8
8.6
6.3
5.8
2.0
1.2
6.8
$
66.7 $
$
$
— $
(7.6)
(7.6) $
23.9
4.7
9.3
4.5
6.9
2.9
1.9
6.4
60.5
(1.0)
(3.8)
(4.8)
$
183.4 $
138.3
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Other comprehensive income
Research and Development Capitalization
Pension and other post employment benefits
Employee related
Net operating loss carryforwards
Research and development credits
Warranties
Litigation and environmental
Capital loss carryforwards
Other
Total non-current deferred tax assets
Non-current deferred tax liabilities:
Goodwill & intangibles
Fixed assets
Dividends accrued
Other comprehensive income
Lease obligation — production equipment
Other
Total non-current deferred tax liabilities
Total deferred tax items
Valuation allowances
Net deferred tax asset
98.0
49.3
44.6
20.0
15.0
6.3
4.4
2.6
—
8.1
431.7 $
103.7
—
52.5
13.4
87.5
5.9
4.5
2.5
3.5
4.1
415.9
$
(84.8)
(2.8)
(3.0)
—
(7.7)
$ (130.3) $ (103.5)
(101.7)
—
(3.5)
(1.9)
(4.5)
$ (228.6) $ (215.1)
256.5
262.2 $
$
(43.8)
(13.0)
212.7
249.2 $
$
Foreign tax credit and net operating loss carryforwards are shown gross with the corresponding
valuation allowances located at the end of the table.
The deferred tax assets and liabilities recognized in the Company’s Consolidated Balance Sheets are
as follows:
(millions of dollars)
Deferred income taxes — current assets
Deferred income taxes — current liabilities
Other non-current assets
Other non-current liabilities
Net deferred tax asset (current and non-current)
2010
2009
$
$
60.2
75.8 $
(4.8)
(18.4)
247.1
305.5
(113.7)
(89.8)
249.2 $ 212.7
The other non-current assets and liabilities have been netted within their respective taxing
jurisdictions due to consolidation (primarily U.S. and Germany).
The deferred income taxes — current assets are primarily comprised of amounts from the U.S.,
France, Italy, Japan, Spain and the U.K. The deferred income taxes — current liabilities are primarily
comprised of amounts from Germany. The other non-current assets are primarily comprised of amounts
from the U.S.. The other non-current liabilities are primarily comprised of amounts from France, Germany,
Italy, Spain and the U.K.
At December 31, 2010, the Company has a U.S. net operating loss carryforward of $1.6 million that is
available to offset future taxable income. This loss carryforward expires in 2030. Certain
non-U.S. subsidiaries have net operating loss carryforwards totaling $69.5 million that are available to
offset future taxable income. Carryforwards of $29.7 million expire at various dates from 2011 through
2019 and the balance has no expiration date. A valuation allowance of $6.5 million has been recorded for
the tax effect on $26.3 million of the loss carryforwards. Certain U.S. subsidiaries have state net operating
loss carryforwards totaling $510.3 million which are completely offset by a valuation allowance due to risk
of realization. Certain non-U.S. subsidiaries located in China, Korea and Poland have tax exemptions or
tax holidays. The cumulative impact of these tax exemptions or tax holidays was a reduction of tax
expense of approximately $17.0 million in 2010.
No deferred income taxes have been provided on the excess of the amount for financial reporting
over the tax basis of investments in foreign subsidiaries or foreign equity affiliates totaling $1,574.6 million
in 2010, as these amounts are essentially permanent in nature. The excess amount will become taxable
upon repatriation of assets, sale, or liquidation of the investment. It is not practicable to determine the
unrecognized deferred tax liability on the excess amount because the actual tax liability on the excess
amount, if any, is dependent on circumstances existing when remittance occurs.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Balance Sheet Information
Balance Sheet Information
(USD $)
12 Months Ended
12/31/2010
BALANCE SHEET INFORMATION NOTE 5 BALANCE SHEET INFORMATION
Detailed balance sheet data are as follows:
(millions of dollars)
December 31,
Receivables:
Customers
Other
Gross receivables
Bad debt allowance(a)
Net receivables
Inventories:
Raw material and supplies
Work in progress
Finished goods
FIFO inventories
LIFO reserve
Net inventories
Other current assets:
Prepaid tooling
Product liability insurance asset
Derivatives
Prepaid tax
Other
Total other current assets
Property, plant and equipment:
Land
Buildings
Machinery and equipment
Capital leases
Construction in progress
Total property, plant and equipment
Accumulated depreciation
Tooling, net of amortization
Property, plant & equipment, net
Investments and advances:
Investment in equity affiliates
Other investments and advances
Total investments and advances
Other non-current assets:
Product liability insurance asset
Deferred income taxes
Other intangible assets
Other
Total other non-current assets
Accounts payable and accrued expenses:
Trade payables
Trade payables for capital expenditures
Payroll and employee related
Retirement related
Product warranties
Customer related
$
$
$
$
$
$
$
$
$
$
$
$
$
2010
2009
859.5 $
168.4
1,027.9
(4.0)
1,023.9 $
244.0 $
88.1
111.7
443.8
(13.2)
430.6 $
21.8 $
25.8
2.7
5.8
23.6
79.7 $
634.5
101.8
736.3
(4.3)
732.0
187.3
69.8
68.8
325.9
(11.6)
314.3
25.6
24.9
12.0
2.2
23.2
87.9
67.9 $
601.4
1,961.2
2.3
128.2
2,761.0
(1,308.0)
1,453.0
89.6
1,542.6 $
56.3
570.0
1,866.5
2.4
126.4
2,621.6
(1,211.6)
1,410.0
80.3
1,490.3
205.2 $
102.7
307.9 $
24.8 $
305.5
168.8
32.0
531.1 $
737.7 $
28.9
190.2
34.7
37.0
32.5
194.8
62.6
257.4
25.0
247.1
148.6
29.8
450.5
539.2
28.6
136.7
34.8
32.5
31.4
Source: BORGWARNER INC, 10-K, February 10, 2011
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Product liability
Severance
Insurance
Derivatives
Environmental
Interest
Legal and professional fees
Dividends payable to non-controlling shareholders
Current deferred income taxes
Other
Total accounts payable and accrued expenses
Other non-current liabilities:
Deferred income taxes
Cross currency swaps and derivatives
Product warranties
Product liability accrual
Deferred revenue
Environmental
Other
$
$
Total other non-current liabilities
$
25.8
4.6
11.9
3.3
21.0
14.3
8.6
4.2
18.4
51.0
1,224.1 $
113.7 $
78.8
29.8
24.8
23.4
8.2
84.2
362.9 $
24.9
17.5
16.2
14.6
12.2
11.2
9.1
5.4
4.8
58.0
977.1
89.8
54.2
29.2
25.0
22.7
10.1
64.6
295.6
(a) Bad debt allowance:
Beginning balance
Provision
Write-offs
Translation adjustment and other
Ending balance
2010
2009
2008
$ (4.3) $ (5.7) $ (5.2)
(2.4)
1.6
0.3
$ (4.0) $ (4.3) $ (5.7)
(1.1)
2.5
(1.1)
0.1
1.4
(0.1)
Interest costs capitalized during 2010 and 2009 were $11.2 million, respectively. As of
December 31, 2010 and December 31, 2009, accounts payable of $28.9 million and
$28.6 million, respectively, were related to property, plant and equipment purchases. As of
December 31, 2010 and December 31, 2009, specific assets of $3.4 million and
$3.7 million, respectively, were pledged as collateral under certain of the Company’s
long-term debt agreements.
As a result of the impairment charges recorded in the third and fourth quarters of 2008,
depreciation expense for the year ended December 31, 2010 and 2009 was reduced by
approximately $9 million and $11 million, respectively.
The automotive industry experienced unprecedented declines in production in the
fourth quarter of 2008 and projected continued declines for the full year of 2009. According
to Accounting Standards Codification (“ASC”) 250, future depreciation expense should be
revised due to a change in the estimated future benefits inherent in an asset, the pattern of
consumption of those benefits, or the information available to the entity about those
benefits. As a result of the 2008 and 2009 unprecedented declines in production activity,
the Company determined that its usage pattern for certain assets had changed significantly
and revised the useful lives of certain equipment starting in 2009. This adjustment was
considered to be a change in an accounting estimate.
The impact to the Company in 2010 and 2009 were as follows (unaudited):
(millions of dollars)
Q1
Q2
2010
Q3
Q4
Full Year
Operating income increase
Net earnings increase attributable
to BorgWarner Inc.
Earnings per share increase —
$
4.8 $
4.7 $
4.6 $
4.7 $
18.8
3.7
3.6
3.6
3.6
14.5
Basic
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
0.13
Earnings per share increase —
Diluted
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
0.11
(millions of dollars)
Q1
Q2
2009
Q3
Q4
Full Year
Operating income increase
$
4.6 $
4.6 $
4.6 $
4.6 $
18.4
Source: BORGWARNER INC, 10-K, February 10, 2011
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Net earnings increase attributable
to BorgWarner Inc.
Earnings per share increase —
3.5
3.5
3.5
3.5
14.0
Basic
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
0.12
Earnings per share increase —
Diluted
NSK-Warner
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
0.12
The Company has a 50% interest in NSK-Warner, a joint venture based in Japan that
manufactures automatic transmission components. The Company’s share of the earnings
or losses reported by NSK-Warner is accounted for using the equity method of accounting.
NSK-Warner has a fiscal year-end of March 31. The Company’s equity in the earnings of
NSK-Warner consists of the 12 months ended November 30 so as to reflect earnings on as
current a basis as is reasonably feasible. NSK-Warner is the joint venture partner with a
40% interest in the Drivetrain Group’s South Korean subsidiary, BorgWarner Transmission
Systems Korea Inc. Dividends received from NSK-Warner were $35.5 million, $48.0 million
and $40.8 million in calendar year 2010, 2009 and 2008, respectively.
Following are summarized financial data for NSK-Warner, translated using the ending
or periodic rates as of and for the years ended November 30, 2010, 2009 and 2008
(unaudited):
(millions of dollars)
Balance sheets:
Cash and securities
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total equity
Statements of operations:
Net sales
Gross profit
Net income
2010
2009
$ 109.1 $
310.2
174.9
151.4
41.9
291.8
83.0
279.1
182.6
137.9
45.0
278.8
2010
2009
2008
$ 634.7 $ 494.5 $ 637.9
140.0
67.6
131.9
68.3
89.2
35.8
There was no debt outstanding as of November 30, 2010 and 2009. Purchases from
NSK-Warner for the years ended December 31, 2010, 2009 and 2008 were $14.6 million,
$16.5 million and $25.4 million, respectively.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Goodwill and Other Intangibles
Goodwill and Other Intangibles
(USD $)
12 Months Ended
12/31/2010
GOODWILL AND OTHER
INTANGIBLES
NOTE 6 GOODWILL AND OTHER INTANGIBLES
The Company annually reviews its goodwill for impairment in the fourth quarter of each
year for all of its reporting units, or more often when events and circumstances warrant such
a review.
The Company’s goodwill impairment review, under ASC Topic 350, requires the
Company to make significant assumptions and estimates about the extent and timing of
future cash flows, discount rates and growth rates. The basis of our goodwill impairment
analysis is the Company’s annual budget and long-range plan (“LRP”). The annual budget
and LRP include a five year projection of future cash flows based on actual new products
and customer commitments. As part of the projection, we assumed the last year of the LRP
data is a fair indication of the future performance, including fundamental industry growth for
the business beyond the five year period into perpetuity. As the LRP is estimated over a
significant future period of time, those estimates and assumptions are subject to a high
degree of uncertainty. We also utilize market valuation models and other financial ratios,
which require us to make certain assumptions and estimates regarding the applicability of
those models to our assets and businesses. We believe that the assumptions and estimates
used to determine the estimated fair values of each of our reporting units are reasonable.
Different assumptions could materially affect the estimated fair value. The primary
assumptions affecting the Company’s December 31, 2010 goodwill impairment review are
as follows:
• Discount Rate: The Company used a 10% weighted average cost of capital (“WACC”)
as the discount rate for future cash flows. The WACC is intended to represent a rate
of return that would be expected by a market participant.
• Operating Income Margin: The Company utilized historical and expected operating
income margins, which varied based on the projections of each reporting unit being
evaluated.
In addition to the above significant assumptions, the Company notes the following risk to
volume assumptions that could have an impact on the discounted cash flow model:
• Our industry is cyclical and our results of operations will be adversely affected by
industry downturns.
• We are dependent on market segments that use our key products and would be
affected by decreasing demand in those segments.
• We are subject to risks related to our international operations.
Using the assumptions outlined above, the impairment testing conducted in the fourth
quarter of 2010 indicated that goodwill was not impaired in any reporting unit tested.
The estimated fair value of one reporting unit tested within the Engine operating
segment was 112% of its carrying value. Based on our sensitivity analysis, a 1% increase in
the discount rate or a 1% decrease in the operating margin assumptions would result in the
carrying value exceeding the estimated fair value, which would require further evaluation of
the reporting unit’s goodwill. This reporting unit had approximately $165 million of goodwill
at December 31, 2010.
In 2008 the Company recorded impairment charges totaling €111.5 ($156.8) million to
adjust BERU’s goodwill to its estimated fair value. The impairment charge is attributable to a
decrease in the operating unit’s estimated fair value based primarily upon the effect of the
decline in European market conditions on current and projected operating results. The
impairment charge was also impacted by the recognition of additional goodwill in the second
quarter of 2008, which was based on the court determined buy out value of €71.32 per
share related to the Domination and Profit Transfer Agreement. Any differences in future
results compared to management’s estimates could result in fair values different from
estimated fair values, which could materially impact the Company’s future results of
operations and financial condition.
Source: BORGWARNER INC, 10-K, February 10, 2011
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See Note 18, “Recent Transactions”, for further discussion on the BERU Domination and
Profit Transfer Agreement.
The changes in the carrying amount of goodwill for the year ended December 31, 2010
and 2009 are as follows:
(millions of dollars)
2010
2009
Engine
Drivetrain
Engine
Drivetrain
Gross goodwill balance as of
January 1
$
Accumulated impairment losses
Net goodwill balance as of
1,297.8 $
(501.8)
265.6 $
(0.2)
1,289.6 $
(501.8)
264.8
(0.2)
January 1
$
796.0 $
265.4 $
787.8 $
264.6
Goodwill during the year:
Acquired
Divested
Translation adjustment
Balance as of December 31
74.1
(1.4)
(18.6)
850.1 $
—
—
(2.0)
263.4 $
(1.1)
9.3
796.0 $
—
—
0.8
265.4
$
The Company’s other intangible assets, primarily from acquisitions consist of the
following:
(millions of dollars)
Amortized intangible
assets
Patented
technology
Unpatented
technology
Customer
relationships
Distribution
network
Miscellaneous
December 31, 2010
December 31, 2009
Gross
Carrying
Amount
Accumulated
Amortization
Carrying
Amount
Net
Gross
Carrying
Amount
Accumulated
Amortization
Carrying
Amount
Net
$
47.0 $
13.8 $
33.2 $
32.8 $
11.6 $
21.2
22.4
4.2
18.2
6.7
3.2
127.3
57.5
69.8
119.1
46.2
50.8
14.7
50.8
11.9
—
2.8
54.4
14.7
43.6
11.9
3.5
72.9
10.8
2.8
Total amortized
intangible assets
In-process R&D
Unamortized
trade names
262.2
13.1
138.2
—
124.0
13.1
227.7
13.1
116.5
—
111.2
13.1
31.7
—
31.7
24.3
—
24.3
Total intangible
assets
$
307.0 $
138.2 $
168.8 $
265.1 $
116.5 $
148.6
Amortization of other intangible assets was $28.4 million, $26.3 million and $27.1 million
in 2010, 2009 and 2008, respectively. The amortization totals include non-recurring charges
directly attributable to acquisitions, as described in Note 18, “Recent Transactions”. The
estimated useful lives of the Company’s amortized intangible assets range from 3 to
15 years. The Company utilizes the straight line method of amortization, recognized over
the estimated useful lives of the assets. The estimated future annual amortization expense,
primarily for acquired intangible assets, is as follows: $20.5 million in 2011, $20.5 million in
2012, $20.5 million in 2013, $15.2 million in 2014 and $10.0 million in 2015.
A roll-forward of the gross carrying amounts for the years ended December 31, 2010 and
2009 is presented below:
(millions of dollars)
Beginning balance
Acquisitions
Translation adjustment
Ending balance
2010
2009
$ 265.1 $ 231.2
27.7
6.2
$ 307.0 $ 265.1
55.0
(13.1)
A roll-forward of accumulated amortization for the years ended December 31, 2010 and
2009 is presented below:
(millions of dollars)
Beginning balance
Provisions
Source: BORGWARNER INC, 10-K, February 10, 2011
2010
2009
$ 116.5 $
28.4
82.8
26.3
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Non-recurring charges (write-offs)
Translation adjustment
Ending balance
—
(6.7)
4.6
2.8
$ 138.2 $ 116.5
On June 2, 2009, the Company announced the purchase of advanced gasoline ignition
technology and related intellectual property from Florida-based Etatech, Inc. In connection
with ASC amended Topic 805, Business Combinations, the Company capitalized
$13.1 million of in-process R&D. The Company intends to commercialize a high-frequency
ignition system based on Etatech technology in the next five years. Amortization of the
$13.1 million of in-process R&D will coincide with the commercial application of the
technology.
On April 10, 2010, the Company acquired 100% of Dytech ENSA S.L. (“Dytech”),
headquartered in Vigo, Spain. In connection with this acquisition, the Company capitalized
$15.6 million for customer relationships, $15.7 million for unpatented technology,
$9.0 million for trade names and $0.3 million in other miscellaneous intangible assets.
Customer relationships, unpatented technology and miscellaneous intangible assets will be
amortized over 8, 15 and 3 year useful life, respectively. Trade names will not be amortized.
On May 1 2010, the Company completed the acquisition of BERU-Eichenauer GmbH by
acquiring the shares of its former joint venture partner, Eichenauer Heizelemente GmbH &
Co. KG. In connection with this acquisition, the Company capitalized $14.4 million in
intangible assets related to adjusting the Company’s fifty percent investment to fair value
under ASC Topic 805.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Product Warranty
(USD $)
12 Months Ended
12/31/2010
PRODUCT WARRANTY NOTE 7 PRODUCT WARRANTY
Product Warranty
The changes in the carrying amount of the Company’s total product warranty liability for the
years ended December 31, 2010 and 2009 were as follows:
(millions of dollars)
Beginning balance
Acquisition
Provisions
Payments
Translation adjustment
Ending balance
2010
2009
$
$
61.7 $
3.0
39.3
(35.5)
(1.7)
66.8 $
82.1
—
46.0
(68.3)
1.9
61.7
The product warranty liability is classified in the consolidated balance sheets as follows:
(millions of dollars)
Accounts payable and accrued expenses
Other non-current liabilities
Total product warranty liability
2010
2009
$ 37.0 $ 32.5
29.2
$ 66.8 $ 61.7
29.8
Source: BORGWARNER INC, 10-K, February 10, 2011
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Notes Payable and Long-Term Debt
Notes Payable and Long-Term Debt
(USD $)
12 Months Ended
12/31/2010
NOTES PAYABLE AND LONG-TERM DEBT
NOTE 8 NOTES PAYABLE AND LONG-TERM DEBT
Following is a summary of notes payable and long-term debt, including the
current portion. The weighted average interest rate on all borrowings outstanding
as of December 31, 2010 and 2009 was 6.4% and 6.9%, respectively.
As of December 31, 2010 and 2009 the Company had notes payable and
long-term debt outstanding as follows:
(millions of dollars)
Short-term debt
Short-term borrowings
Receivables securitization(a)
Total short-term debt
Long-term debt
3.5% Convertible notes due 4/15/12
5.75% Senior notes due 11/01/16 ($150 million par
value)(b)
8.00% Senior notes due 10/01/19 ($134 million par
value)(b)
4.625% Senior notes due 09/15/20 ($250 million par
value)
7.125% Senior notes due 02/15/29 ($121 million par
value)
Term loan facilities & other
Impact of derivates on debt(b)
Total long-term debt
Less: current portion
Long-term debt, net of current portion
2010
2009
$
$
42.4 $
80.0
122.4 $
64.0
—
64.0
$
348.5 $ 330.2
149.4
149.3
133.9
133.9
247.5
—
119.3
31.6
27.8
119.3
14.2
31.4
$ 1,058.0 $ 778.3
6.1
5.1
$ 1,051.9 $ 773.2
(a) On January 1, 2010, the Company adopted ASC Topic 860. The impact of this
adoption is an increase in receivables, net of $80 million and an increase in
notes payable and other short-term debt of $80 million in the Company’s
December 31, 2010 Consolidated Balance Sheet. See Note 1 in the
Consolidated Financial Statements for more information regarding the
Company’s first quarter 2010 adoption of ASC Topic 860.
(b) In 2006, the Company entered into several interest rate swaps that had the
effect of converting $325.0 million of fixed rate notes to variable rates. In the
first quarter of 2009, $100 million in interest rate swaps related to the
Company’s 2009 fixed rate debt matured, and the Company terminated
$150 million in interest rate swap agreements related to the Company’s 2016
fixed rate debt and $75 million of interest rate swap agreements related to the
Company’s 2019 fixed rate debt. As a result of the first quarter 2009 swap
terminations, a $34.5 million gain remained in debt and is being amortized over
the remaining lives of the respective 2016 and 2019 debt. As of December 31,
2010 and 2009, the unamortized portion was $27.8 million and $31.4 million,
respectively.
Annual principal payments required as of December 31, 2010 are as follows (in
millions of dollars):
2011
2012
2013
2014
2015
After 2015
Total Payments
$
128.5
384.1
5.0
0.2
10.0
682.4
$ 1,210.2
Source: BORGWARNER INC, 10-K, February 10, 2011
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Less: Convertible Note Accretion
Less: Unamortized Discounts
Total
(25.3)
(4.5)
$ 1,180.4
The Company’s long-term debt includes various financial covenants, none of
which are expected to restrict future operations.
On March 31, 2010, the Company replaced its $250 million multi-currency
revolving credit facility with a new $550 million multi-currency revolving credit
facility, which includes a feature that allows the Company to increase its
borrowings to $600 million. The new facility provides for borrowings through
March 31, 2013, and is guaranteed by the Company’s domestic subsidiaries. The
Company has three key financial covenants as part of the credit agreement. These
covenants are a net worth test, a debt compared to EBITDA (“Earnings Before
Interest, Taxes, Depreciation and Amortization”) test, and an interest coverage test.
The Company was in compliance with all covenants at December 31, 2010 and
expects to remain compliant in future periods. At December 31, 2010 and
December 31, 2009 there were no outstanding borrowings under these facilities.
On September 16, 2010, the Company issued $250 million in 4.625% senior
notes due 2020. Interest is payable semi-annually on March 15 and September 15
of each year, beginning on March 15, 2011. The senior notes were issued under
the Company’s $750 million universal shelf registration filed with the Securities and
Exchange Commission, leaving approximately $126 million available as of
December 31, 2010.
On April 9, 2009, the Company issued $373.8 million in convertible senior notes
due April 15, 2012. Under ASC Topic 470, “Accounting for Convertible Debt
Instruments That May be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)”, the Company must account for the convertible senior notes by
bifurcating the instruments between their liability and equity components. The value
of the debt component is based on the fair value of issuing a similar nonconvertible
debt security. The equity component of the convertible debt security is calculated
by deducting the value of the liability from the proceeds received at issuance. The
Company’s December 31, 2010 Consolidated Balance Sheet includes debt of
$348.5 million and capital in excess of par of $36.5 million. Additionally, ASC Topic
470 requires the Company to accrete the discounted carrying value of the
convertible notes to their face value over the term of the notes. The Company’s
interest expense associated with this amortization is based on the effective interest
rate of the convertible senior notes of 9.365%. The total interest expense related to
the convertible notes in the Company’s Consolidated Statement of Operations for
the year ended December 31, 2010 and 2009 was as follows:
(millions of dollars)
Interest expense
Non-cash portion
2010
2009
$ 31.3 $ 22.2
$ 18.3 $ 12.7
The notes will pay interest semi-annually of $6.5 million, which is at a coupon
rate of 3.50% per year.
Holders of the notes may convert their notes at their option at any time prior to
the close of business on the second scheduled trading day immediately preceding
the maturity date of the notes, in multiples of $1,000 principal amount. The initial
conversion rate for the notes is 30.4706 shares of the Company’s common stock
per $1,000 principal amount of notes (representing an initial conversion price of
approximately $32.82 per share of common stock). The conversion price
represents a conversion premium of 27.50% over the last reported sale price of the
Company’s common stock on the New York Stock Exchange on April 6, 2009, of
$25.74 per share. Since the Company’s stock price was above the convertible
senior notes conversion price of $32.82 as of December 31, 2010, the if-converted
value was approximately $450.2 million and $4.6 million higher than the face value
of the convertible senior notes at December 31, 2010 and December 31, 2009,
respectively. In conjunction with the note offering, the Company entered into a
bond hedge overlay at a net pre-tax cost of $25.2 million, effectively raising the
conversion premium to 50.0%, or approximately $38.61 per share. Upon
conversion, the Company will pay or deliver cash, shares of our common stock or a
combination thereof at our election. The convertible senior notes were issued
under the Company’s $750 million universal shelf registration filed with the
Source: BORGWARNER INC, 10-K, February 10, 2011
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Securities and Exchange Commission (“SEC”).
As of December 31, 2010 and 2009, the estimated fair values of the Company’s
senior unsecured notes totaled $1,482.3 million and $776.0 million, respectively.
The estimated fair values were $483.7 million higher and $43.3 million higher at
December 31, 2010 and 2009, respectively than their carrying values. Fair market
values are developed by the use of estimates obtained from brokers and other
appropriate valuation techniques based on information available as of quarter-end
and year-end. The fair value estimates do not necessarily reflect the values the
Company could realize in the current markets.
The Company had outstanding letters of credit at December 31, 2010 and 2009
of $26.5 million and $15.2 million, respectively. The letters of credit typically act as
a guarantee of payment to certain third parties in accordance with specified terms
and conditions.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Fair Value Measurements
(USD $)
12 Months Ended
12/31/2010
FAIR VALUE MEASUREMENTS
Fair Value Measurements
NOTE 9 FAIR VALUE MEASUREMENTS
On January 1, 2009, the Company fully adopted as required, ASC Topic 820 — “Fair
Value Measurements” which expands the disclosure of fair value measurements and its
impact on the Company’s financial statements.
ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity
specific measurement. Therefore, a fair value measurement should be determined based on
assumptions that market participants would use in pricing an asset or liability. As a basis for
considering market participant assumptions in fair value measurements, ASC Topic 820
establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair values
as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either
directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the
reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of the following
three valuation techniques noted in ASC Topic 820:
A. Market approach: Prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities.
B. Cost approach: Amount that would be required to replace the service capacity of
an asset (replacement cost).
C. Income approach: Techniques to convert future amounts to a single present
amount based upon market expectations (including present value techniques,
option-pricing and excess earnings models).
The following table classifies the assets and liabilities measured at fair value on a
recurring basis as of December 31, 2010:
Basis of Fair Value Measurements
Quoted
Prices in Significant
Active
Other
Significant
(millions of dollars)
Assets:
Foreign exchange
contracts
Liabilities:
Foreign exchange
contracts
Net investment hedge
contracts
Balance at
December 31,
2010
Markets for Observable Unobservable
Identical
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Valuation
Technique
$
$
$
$
2.7 $
2.7 $
— $
— $
2.7 $
2.7 $
6.4 $
— $
6.4 $
75.7
82.1 $
—
— $
75.7
82.1 $
A
A
A
—
—
—
—
—
The following table classifies the assets and liabilities measured at fair value on a
recurring and non-recurring basis as of December 31, 2009:
Basis of Fair Value Measurements
Quoted
Prices in Significant
Active
Other
Significant
(millions of dollars)
Balance at
December 31,
2009
Markets for Observable Unobservable
Identical
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Valuation
Technique
Source: BORGWARNER INC, 10-K, February 10, 2011
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Assets:
Engine segment fixed
assets
$
Commodity contracts
Foreign exchange
contracts
$
Liabilities:
Commodity contracts $
Foreign exchange
contracts
Net investment hedge
contracts
$
— $
8.4
3.8
12.2 $
— $
—
—
— $
— $
8.4
3.8
12.2 $
0.1 $
— $
0.1 $
17.5
—
17.5
51.2
68.8 $
—
— $
51.2
68.8 $
B
A
A
A
A
A
—
—
—
—
—
—
—
—
The change in the fair value of the Company’s net fixed assets impaired in the second
quarter of 2009 was as follows:
(millions of dollars)
Net book value prior to impairment
Fixed asset impairment charge
Net book value after impairment charge
Fair Value
Measurements
Using Significant
Unobservable Inputs
(Level 3)
$
$
22.3
(22.3)
—
Refer to Note 17, “Restructuring” of the Notes to the Consolidated Financial Statements
for further discussion of this impairment charge.
Refer to Note 1, “Summary of Significant Accounting Policies” and Note 10, “Financial
Instruments”, for more detail surrounding the Company’s valuation methodology, inputs
used, and fair value adjustment recorded.
The following tables classify the Company’s defined benefit plan assets measured at fair
value on a recurring and non-recurring basis as of December 31, 2010:
Basis of Fair Value Measurements
Quoted
Prices in Significant
Active
Other
Significant
(millions of dollars)
U.S. Plans:
Fixed income
securities
Equity securities
Cash, real estate
and other
Non-U.S. Plans:
Fixed income
securities
Equity securities
Cash, real estate
and other
Balance at
December 31,
2010
Markets for Observable Unobservable
Identical
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Valuation
Technique
$
$
$
$
113.7 $
140.5
— $
48.5
113.7 $
92.0
33.0
287.2 $
—
48.5 $
33.0
238.7 $
59.6 $
88.4
6.6
154.6 $
— $
—
—
— $
59.6 $
88.4
6.6
154.6 $
—
—
—
—
—
—
—
—
A
A
A
A
A
A
The following tables classify the Company’s defined benefit plan assets measured at fair
value on a recurring and non-recurring basis as of December 31, 2009:
Source: BORGWARNER INC, 10-K, February 10, 2011
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Basis of Fair Value Measurements
Quoted
Prices in Significant
Active
Other
Significant
Markets for Observable Unobservable
Balance at
December 31,
2009
Identical
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Valuation
Technique
$
$
$
$
122.0 $
124.3
— $
43.3
122.0 $
81.0
22.8
269.1 $
—
43.3 $
22.8
225.8 $
42.1 $
72.7
29.2
144.0 $
— $
—
—
— $
42.1 $
72.7
29.2
144.0 $
—
—
—
—
—
—
—
—
A
A
A
A
A
A
(millions of dollars)
U.S. Plans:
Fixed income
securities
Equity securities
Cash, real estate
and other
Non-U.S. Plans:
Fixed income
securities
Equity securities
Cash, real estate
and other
Refer to Note 11, “Retirement Benefit Plans”, for more detail surrounding the plan’s asset
investment policies and strategies, target allocation percentages, and expected return on
plan asset assumptions.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial Instruments
(USD $)
12 Months Ended
12/31/2010
FINANCIAL INSTRUMENTS
Financial Instruments
NOTE 10 FINANCIAL INSTRUMENTS
On January 1, 2009, the Company adopted as required, ASC Topic 815, “Disclosures about
Derivative Instruments and Hedging Activities” which expands the disclosure of financial
instruments.
The Company’s financial instruments include cash and marketable securities. Due to the
short-term nature of these instruments, their book value approximates their fair value. The
Company’s financial instruments also include long-term debt, interest rate and currency swaps,
commodity forward contracts, and foreign currency forward contracts. All derivative contracts are
placed with counterparties that have an S&P, or equivalent, investment grade credit rating at the
time of the contracts’ placement. At December 31, 2010 and 2009 the Company had no
derivative contracts that contained credit risk related contingent features.
The Company selectively uses cross-currency swaps to hedge the foreign currency
exposure associated with our net investment in certain foreign operations (net investment
hedges). Fair values of cross currency swaps are based on observable inputs, such as interest
rate, yield curves, credit risks, currency exchange rates and other external valuation
methodology (Level 2 inputs under ASC Topic 820).
At December 31, 2010 and 2009 the following cross-currency swaps were outstanding:
(millions of dollars)
Floating $ to Floating €
Floating $ to Floating ¥
Notional
in USD
$ 75.0
$ 150.0
Cross-Currency Swaps
Notional
in Local Currency
€
58.5
¥ 17,581.5
Duration
Oct - 19
Nov - 16
The Company uses certain commodity derivative instruments to protect against commodity
price changes related to forecasted raw material and supplies purchases. The Company
primarily utilizes forward and option contracts, which are designated as cash flow hedges.
At December 31, 2010 and 2009 the following commodity derivative contracts were
outstanding:
Commodity
Nickel
Copper
Aluminum
Natural Gas
Commodity Hedges
Volume
Hedged
December 31,
2010
Volume
Hedged
December 31, 2009
Units of
Measure
—
—
—
258,900
780
759
330
392,396
Metric Tons
Metric Tons
Metric Tons
MMBtu
Duration
Dec - 10
Dec - 10
Dec - 10
Dec - 11
The Company uses foreign exchange forward and option contracts to protect against
exchange rate movements for forecasted cash flows for purchases, operating expenses or sales
transactions designated in currencies other than the functional currency of the operating unit.
Foreign currency contracts require the Company, at a future date, to either buy or sell foreign
currency in exchange for the operating units’ local currency.
At December 31, 2010 and 2009 the following foreign exchange derivative contracts were
outstanding:
Functional
Currency
British Pound
Euro
Euro
Euro
Euro
Indian Rupee
Currency Hedges (millions)
Notional in
Notional in
Traded
Currency
Traded Currency
December 31, 2010
Traded Currency
December 31, 2009
Duration
Euro
Hungarian Forint
British Pound
US Dollar
Japanese Yen
US Dollar
107.3
—
—
20.2
—
1.9
84.3
2,562.6
10.5
0.4
16.7
7.4
Dec - 13
Dec - 10
Jan - 10
Dec - 11
Mar - 10
Dec - 11
Source: BORGWARNER INC, 10-K, February 10, 2011
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Korean Won
Mexican Peso
US Dollar
US Dollar
Euro
Euro
Indian Rupee
Euro
45.7
13.5
141.5
1.7
62.3
—
372.9
—
Dec - 12
Mar - 11
Dec - 11
Mar - 11
In 2006, the Company entered into a series of interest rate swaps designated as fair value
hedges of a portion of its senior notes. In the first quarter of 2009 the company terminated
interest rate swaps designated as fair value hedges of debt. Therefore, the basis adjustments of
$34.5 million present at the termination of the hedging relationship are being amortized over the
remaining life of the respective debt maturing in 2016 and 2019. The $30.0 million cash received
related to the termination of these interest rate swaps is included in the Financing section of the
Statement of Cash Flows. The Company recognized $5.7 million in interest expense in the first
quarter of 2009 as a result of the early termination. As of December 31, 2010 and 2009, there
were no outstanding fixed to floating interest rate swap agreements.
At December 31, 2010 and 2009 the following amounts were recorded in the Company’s
balance sheet as being payable to or receivable from counterparties. The fair value of foreign
exchange and commodity forward option contracts are based on Level 2 inputs under ASC
Topic 820, as observed on recognized exchanges.
(millions of dollars)
Derivatives designated as
hedging instruments
under Topic 815
Foreign Exchange Contracts
Commodity Contracts
Net Investment Hedges
Location
Prepayments and
Other Current Assets
Other Non-Current
Assets
Prepayments and
Other Current Assets
Other Non-Current
Assets
Assets
December 31,
2010
December 31,
2009
Location
Liabilities
December 31,
2010
December 31,
2009
$
2.7 $
3.6
Accounts Payable
and Accrued
Expenses
$
3.3 $
—
—
—
Other Non-Current
Liabilities
0.2
Accounts Payable
and Accrued
Expenses
8.4
Other Non-Current
Liabilities
—
3.1
—
75.7
14.5
3.0
0.1
51.2
Effectiveness for cash flow, fair value and net investment hedges is assessed at the
inception of the hedging relationship and quarterly, thereafter. To the extent that derivative
instruments are deemed to be effective as defined by ASC Topic 815, gains and losses arising
from these contracts are deferred in other comprehensive income or loss (OCI). Such gains and
losses will be reclassified into income as the underlying operating transactions are realized.
Gains and losses not qualifying for deferral treatment have been credited/charged to income as
they are recognized.
The table below shows deferred gains and losses at the end of the period reported in OCI
and amounts expected to be reclassified to income or loss within the next twelve months. The
OCI gain or loss expected to be reclassified to income or loss in one year or less assumes no
change in the current relationship of the hedged item at December 31, 2010 market rates.
(millions of dollars)
Contract Type
Balance in OCI at
Gain (Loss) Expected to
be Reclassified to Income
December 31, 2010
December 31, 2009
in One Year or Less
Foreign Exchange
Commodity
Net Investment Hedges
$
Total
$
(3.7) $
1.6
(69.3)
(71.4) $
(11.4) $
7.3
(47.2)
(51.3) $
(0.6)
1.6
—
1.0
Net investment hedges are derivative contracts entered into to hedge against changes in
exchange rates that affect the overall value of net investments in foreign entities. Gains and
losses on net investment hedges are recorded in other comprehensive income or loss and are
used to offset equivalent gains or losses in the value of net investments that are recorded in
translation gains and losses which is also a component of other comprehensive income or loss.
Derivatives Designated as Net Investment Hedges under Topic 815
(millions of dollars)
Contract Type
Gain (Loss) Reclassified
from OCI to Income
(Effective Portion)
Year Ended
Gain (Loss)
Recognized in Income
(Ineffective Portion)
Year Ended
Location
December 31, 2010
December 31, 2009
Location
December 31, 2010
December 31, 2009
Cross-Currency Swap
Interest Expense
$ —
$ —
Interest Expense
$ (2.5)
$
1.1
Cash Flow hedges held during the period resulted in the following gains and losses recorded
in income. The effective portion of gains or losses exactly offset gains or losses in the underlying
transaction that they were designated to hedge, and are recorded on the same line in the
income statement. Ineffectiveness resulting from imperfect matches between changes in value
Source: BORGWARNER INC, 10-K, February 10, 2011
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of hedge contracts and changes in value of the underlying transaction are immediately
recognized in income.
Derivatives Designated as Cash Flow Hedging Instruments under Topic 815
Gain (Loss) Reclassified
from OCI to Income
(Effective Portion)
Year Ended
Gain (Loss)
Recognized in Income
(Ineffective Portion)
Year Ended
(millions of dollars)
Contract Type
Location
December 31,
2010
December 31,
2009
Location
December 31,
2010
December 31,
2009
Foreign Exchange
Sales
$
Foreign Exchange
Foreign Exchange
Commodity
Cost of Goods
Sold
SG&A Expense
Cost of Goods
Sold
(0.2)
(1.2)
(0.6)
8.2
$
(14.4) SG&A Expense $
5.2 SG&A Expense
(0.7) SG&A Expense
Cost of Goods
Sold
(7.2)
$
0.9
—
—
(0.2)
(4.5)
0.6
—
0.3
At December 31, 2010 derivative instruments that are designated as fair value hedging
instruments as defined by ASC Topic 815 were immaterial.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit
Plans
(USD $)
RETIREMENT
BENEFIT PLANS
Retirement Benefit Plans
12 Months Ended
12/31/2010
NOTE 11 RETIREMENT BENEFIT PLANS
The Company sponsors various defined contribution savings plans primarily in the U.S. that allow
employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan
specified guidelines. Under specified conditions, the Company will make contributions to the plans
and/or match a percentage of the employee contributions up to certain limits. Total expense related
to the defined contribution plans was $19.2 million, $16.6 million and $22.1 million in 2010, 2009 and
2008, respectively.
The Company has a number of defined benefit pension plans and other post employment benefit
plans covering eligible salaried and hourly employees and their dependents. The defined pension
benefits provided are primarily based on (i) years of service and (ii) average compensation or a
monthly retirement benefit amount. The Company provides defined benefit pension plans in the U.S.,
U.K., Germany, Japan, South Korea, Italy, France, Ireland, Monaco and Mexico. The other post
employment benefit plans, which provide medical and life insurance benefits, are unfunded plans. All
pension and other post employment benefit plans in the U.S. have been closed to new employees
since 1999. The measurement date for all plans is December 31.
In September 2008 and 2007, the Company made changes to its U.S. retiree medical program
that impact certain union and non-union active employees with a future retiree benefit and current
retirees participating in a health care plan. The effect of the changes to both groups is that most
members will pay a higher percentage of the annual premium for Company-sponsored retiree
medical coverage between retirement and age 65, and neither group will receive
Company-sponsored Medicare health plan coverage once entitled to Medicare. Instead, certain
active employees received a lump sum credit into a non-contributory cash balance pension plan
earning interest each year. Current retirees receive an annual per member allowance toward the
purchase of individual Medicare health plan coverage and for reimbursement of healthcare
out-of-pocket expenses.
On February 26, 2009, the Company’s subsidiary, BorgWarner Diversified Transmission
Products Inc. (“DTP”), entered into a Plant Shutdown Agreement with the United Auto Workers
(“UAW”) for its Muncie, Indiana automotive component plant (the “Muncie Plant”). Management
subsequently wound-down production activity at the plant, with operations effectively ceased as of
March 31, 2009. As a result of the closure of the Muncie Plant, the Company recorded a curtailment
gain of $41.9 million in the other post employment benefit plan in the first quarter of 2009.
The Plant Shutdown Agreement with the UAW for the Muncie Plant also included a settlement of
a portion of the UAW retiree health care obligation, resulting in the remeasurement of the retiree
medical plan. The financial impact of this settlement resulted in expense recognition of $14.0 million,
a $47.2 million reduction to retirement-related liabilities, a $27.2 million increase in accumulated other
comprehensive income and a $34.0 million increase in accounts payable and accrued expenses in
the first quarter of 2009. The $34.0 million in accounts payable and accrued expenses was paid in
monthly installments, which began in May 2009 and concluded in April 2010.
The combined pre-tax impact of these actions was a net gain of $27.9 million, comprised of a
$41.9 million curtailment gain and $14.0 million settlement loss in the first quarter of 2009.
In April 2009, the Company made changes to certain Muncie retirees medical program. The
effect of the changes to this group is that members will pay a higher percentage of the annual
premium for Company-sponsored retiree medical coverage from retirement to age 65, and the group
will not receive Company-sponsored Medicare Supplemental coverage once entitled to Medicare.
Consistent with the majority of other U.S. BorgWarner retiree medical plans, retirees will receive an
annual per member allowance toward the purchase of individual Medicare health plan coverage and
for reimbursement of healthcare out-of-pocket expenses. The financial impact of this change was a
$22.2 million reduction to retirement-related liabilities and a $22.2 million increase in accumulated
other comprehensive income.
In June 2009, the Company announced its plan to freeze its defined benefit plan at its Bradford
plant in the United Kingdom in consultation with affected employees and their representatives. The
effect of this change was that participants in the Bradford defined benefit plan ceased to accrue
defined benefits after October 31, 2009. Future pension benefits will be earned within an existing
Source: BORGWARNER INC, 10-K, February 10, 2011
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defined contribution plan going forward. The financial impact of this change was a $3.7 million
reduction to retirement-related liabilities, a $3.5 million increase in accumulated other comprehensive
income and $0.2 million in income recognition in the second quarter of 2009.
On March 24, 2010, the Company finalized its settlement agreement regarding the closure of the
Muncie Plant with the Pension Benefit Guaranty Corporation in which the Company will make certain
payments directly to the Muncie Plant’s defined benefit pension plan (the “Plan”). On December 23,
2009 the Company made an initial cash contribution of $23 million for the 2009 Plan year, consistent
with the settlement agreement. Also under the settlement agreement for each of the Plan years
beginning in 2011, 2012, and 2013, the Company will make a cash contribution to the Plan in the
amount of $15 million, unless this contribution exceeds the maximum amounts deductible under the
applicable U.S. tax regulations. The Company provided $35 million in the form of a surety bond and
will waive a credit balance valued at $8 million in 2014.
The following table summarizes the expenses for the Company’s defined contribution and
defined benefit pension plans and the other post employment defined benefit plans.
millions of dollars
Defined contribution expense
Defined benefit pension expense
Other post employment benefit expense
Total
2010
2009
2008
$ 19.2 $
19.8
17.5
$ 56.5 $
16.6 $ 22.1
19.2
33.1
1.3
(48.4)
1.3 $ 42.6
The following provides a rollforward of the plans’ benefit obligations, plan assets, funded status
and recognition in the Consolidated Balance Sheets.
millions of dollars
US
Non-US
US
Non-US
2010
2009
Pension Benefits
2010
2009
Other Post
Employment Benefits
Change in projected
benefit obligation:
Projected benefit
obligation at beginning
of year
Service cost
Interest cost
Plan participants’
contributions
Plan amendments
Curtailment/settlement
gain
Actuarial (gain) loss
Currency translation
Other
Benefits paid
Projected benefit
$ 316.5 $
—
17.5
326.5 $ 317.9 $
0.3
20.7
7.4
17.6
280.4 $
9.9
16.5
—
—
0.6
1.2
—
(13.5)
—
19.2
—
1.1
(28.1)
—
(0.4)
(12.2)
—
(14.7)
—
24.9
—
—
(33.8)
0.1
—
(4.3)
19.2
17.2
3.4
(15.9)
278.5
0.8
14.5
—
—
—
(7.2)
—
—
(24.7)
$
328.5
0.8
18.6
—
(22.2)
(30.9)
11.7
—
—
(28.0)
obligation at end of year $ 326.2 $
326.0 $ 316.5 $
326.5 $
261.9
$
278.5
Change in plan assets:
Fair value of plan assets at
beginning of year
Actual return on plan
assets
Employer contribution
Plan participants’
contribution
Currency translation
Other
Benefits paid
Fair value of plan assets at
$ 269.1 $
144.0 $ 230.8 $
114.0
35.6
10.6
—
—
—
(28.1)
14.2
14.5
49.1
23.0
0.5
(3.9)
—
(14.7)
—
—
—
(33.8)
18.0
16.3
0.1
11.6
(0.1)
(15.9)
end of year
$ 287.2 $
154.6 $ 269.1 $
144.0
Funded status
$
(39.0) $
(171.4) $
(47.4) $
(182.5) $
(261.9)
$
(278.5)
Amounts recognized in
the Consolidated
Balance Sheets
consist of:
Non-current assets
Current liabilities
$
— $
(0.1)
0.5 $
(8.1)
— $
—
0.1 $
(6.2)
—
(26.5)
$
—
(28.6)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Non-current liabilities
Net amount recognized
(38.9)
(39.0) $
(163.8)
(171.4) $
(47.4)
(47.4) $
(176.4)
(182.5) $
(235.4)
(261.9)
$
Amounts recognized in
accumulated other
comprehensive loss
consist of:
Net actuarial loss
Net prior service cost
(credit)
Net amount recognized*
Total accumulated
benefit obligation for
all plans
$ 145.7 $
37.4 $ 147.9 $
44.2 $
120.0
(12.1)
$ 133.6 $
1.4
(12.8)
38.8 $ 135.1 $
0.2
44.4 $
(59.5)
60.5
$ 326.2 $
316.8 $ 316.5 $
317.1
(249.9)
(278.5)
136.3
(66.4)
69.9
$
$
$
* Accumulated other comprehensive loss (“OCI”) shown above does not include our equity investee,
NSK-Warner. NSK-Warner had an OCI loss of $6.1 million in 2010 and $9.4 million in 2009.
The funded status of pension plans included above with accumulated benefit obligations in
excess of plan assets at December 31 is as follows:
(millions of dollars)
Accumulated benefit obligation
Plan assets
Deficiency
Pension deficiency by country:
United States
United Kingdom
Germany
Other
Total pension deficiency
2010
2009
$ (634.9) $ (630.5)
409.1
$ (202.7) $ (221.4)
432.2
$
(39.0) $
(7.5)
(128.0)
(28.2)
(47.4)
(19.1)
(131.1)
(23.8)
$ (202.7) $ (221.4)
The weighted average asset allocations of the Company’s funded pension plans at
December 31, 2010 and 2009, and target allocations by asset category are as follows:
U.S. Plans:
Cash, real estate and other
Fixed income securities
Equity securities
Non-U.S. Plans:
Cash, real estate and other
Fixed income securities
Equity securities
2010
2009
Allocation
Target
11%
40%
49%
100%
9%
36%
55%
100%
9%
45%
46%
100%
10%
31%
59%
100%
5-15%
35-55%
35-55%
7-11%
31-37%
54-60%
The Company’s investment strategy is to maintain actual asset weightings within a preset range
of target allocations. The Company believes these ranges represent an appropriate risk profile for the
planned benefit payments of the plans based on the timing of the estimated benefit payments. Within
each asset category, separate portfolios are maintained for additional diversification. Investment
managers are retained within each asset category to manage each portfolio against its benchmark.
Each investment manager has appropriate investment guidelines. In addition, the entire portfolio is
evaluated against a relevant peer group. The defined benefit pension plans did not hold any
Company securities as investments as of December 31, 2010 and 2009. A portion of pension assets
are invested in common and comingled trusts.
The Company expects to contribute a total of $30 million to $40 million into its defined benefit
pension plans during 2011, including $15 million related to the Company’s settlement agreement with
the PBGC discussed above. $23.2 million of the $30 million to $40 million in 2011 contributions are
contractually obligated, while the remaining payments are discretionary.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Refer to Note 9, “Fair Value Measurements”, for more detail surrounding the fair value of each
major category of plan assets as well as the inputs and valuation techniques used to develop the fair
value measurements of the plan’s assets at December 31, 2010 and 2009.
See the table below for a breakout between U.S. and non-U.S. pension plans:
(millions of dollars)
For the Year Ended December 31,
Components of net
periodic benefit cost:
Service cost
Interest cost
Expected return on plan
assets
Settlements, curtailments
and other
Amortization of
unrecognized prior
service benefit
Amortization of
unrecognized loss
Net periodic benefit cost
2010
Pension Benefits
2009
2008
Other Post
Employment Benefits
US
Non-US
US
Non-US
US
Non-US
2010
2009
2008
$
— $
17.5
7.4 $
17.6
0.3 $
20.7
9.9 $
16.5
2.0 $
20.9
10.4 $
17.3
0.8 $
14.5
0.8
18.6
$
2.2
22.7
(19.7)
(9.7)
(16.2)
(9.6)
(28.2)
(13.1)
—
—
—
—
—
3.3
0.6
7.5
—
—
(61.9)*
(8.7)
(0.7)
—
(0.5)
—
—
—
(6.9)
(13.2)
(25.0)
6.6
0.8
7.3
0.8
2.3
0.1
9.1
7.3
10.1
(benefit)
$
3.7 $
16.1 $
14.9 $
18.2 $
4.5 $
14.7 $ 17.5 $ (48.4)
$
1.3
* Note: In the year ended December 31, 2009, the other post employment benefits
settlement/curtailment of $61.9 million, in the table above, was offset by a $34.0 million cost to
settle, resulting in a net pre-tax gain of $27.9 million. Excluding the $61.9 million
settlement/curtailment gain, the Company’s 2009 other post employment benefit expense was
$13.5 million.
The estimated net loss for the defined benefit pension plans that will be amortized from
accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal
year is $7.2 million. The estimated net loss and prior service credit for the other post employment
plans that will be amortized from accumulated other comprehensive income (loss) into net periodic
benefit cost over the next fiscal year are $8.0 million and $(6.9) million, respectively.
The Company’s weighted-average assumptions used to determine the benefit obligations for its
defined benefit pension and other post employment plans as of December 31, 2010 and 2009 were
as follows:
percent
U.S. pension plans:
Discount rate
Rate of compensation increase
U.S. other post employment plans:
Discount rate
Rate of compensation increase
Non-U.S. pension plans:
Discount rate
Rate of compensation increase
2010
2009
5.17
3.50
5.75
3.50
4.75
N/A
5.50
N/A
5.37
2.80
5.43
2.57
The Company’s weighted-average assumptions used to determine the net periodic benefit cost
(benefit) for its defined benefit pension and other post employment benefit plans for the three years
ended December 31, 2010 were as follows:
percent
U.S. pension plans
Discount rate
Rate of compensation increase
Expected return on plan assets
U.S. other post employment plans
Discount rate
Rate of compensation increase
Expected return on plan assets
Non-U.S. pension plans
Discount rate
Rate of compensation increase
Expected return on plan assets
2010
2009
2008
5.75
3.50
7.50
7.09
3.50
7.50
6.50
3.50
8.75
5.50
N/A
N/A
7.00
N/A
N/A
6.50
N/A
N/A
5.47
2.75
7.12
5.72
2.77
7.10
5.42
3.10
7.05
The Company’s approach to establishing the discount rate is based upon the market yields of
high-quality corporate bonds, with appropriate consideration of each plan’s defined benefit payment
Source: BORGWARNER INC, 10-K, February 10, 2011
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terms and duration of the liabilities. The discount rate assumption is typically rounded up or down to
the nearest 25 basis points for each plan.
The Company determines its expected return on plan asset assumptions by evaluating estimates
of future market returns and the plans’ asset allocation. The Company also considers the impact of
active management of the plans’ invested assets. The Company’s expected return on assets
assumption reflects the asset allocation of each plan. The Company’s assumed long-term rate of
return on assets for its U.S. pension plans was 7.50% for 2010 and 2009 and 8.75% for 2008. The
Company’s assumed long-term rate of return on assets for its U.K. pension plan was 7.50% for 2010
and 2009 and 7.25% for 2008.
The estimated future benefit payments for the pension and other post employment benefits are
as follows:
millions of dollars
Year
2011
2012
2013
2014
2015
2016-2020
Pension Benefits
Other Post Employment Benefits
U.S.
Non-U.S.
Reimbursements
W/o Medicare
Part D
With Medicare
Part D
Reimbursements
$
27.1 $
26.5
26.2
25.2
24.4
114.1
15.4 $
14.3
15.3
16.9
17.1
96.5
$
28.0
27.4
26.4
25.5
24.6
109.7
27.1
26.6
25.5
24.7
23.8
106.4
The weighted-average rate of increase in the per capita cost of covered health care benefits is
projected to be 7.40% in 2011 for pre-65 and post-65 participants, decreasing to 5% by the year
2019. A one-percentage point change in the assumed health care cost trend would have the
following effects:
millions of dollars
Effect on other post employment benefit obligation
Effect on total service and interest cost components
One Percentage Point
Increase
$ 18.0
$ 0.9
Decrease
$ (16.0)
$ (0.8)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans
(USD $)
12 Months Ended
12/31/2010
STOCK INCENTIVE
PLANS
NOTE 12 STOCK INCENTIVE PLANS
Stock Incentive Plans
Under the Company’s 1993 Stock Incentive Plan (“1993 Plan”), the Company granted options to
purchase shares of the Company’s common stock at the fair market value on the date of grant. The
options vest over periods up to three years and have a term of ten years from date of grant. As of
December 31, 2003, there were no options available for future grants under the 1993 Plan. The 1993
Plan expired at the end of 2003 and was replaced by the Company’s 2004 Stock Incentive Plan,
which was amended at the Company’s 2009 Annual Stockholders Meeting, among other things, to
increase the number of shares available for issuance under the Plan. Under the BorgWarner Inc.
Amended and Restated 2004 Stock Incentive Plan (“2004 Stock Incentive Plan”), the number of
shares authorized for grant was 12,500,000, of which approximately 2,200,000 shares are available
for future issuance. As of December 31, 2010, there were a total of 3,253,181 outstanding options
under the 1993 and 2004 Stock Incentive Plans.
Stock Options Stock option compensation expense reduced earnings before income taxes and
noncontrolling interest and net earnings for the years ended December 31, 2010, 2009 and 2008 by:
(millions), except per share data
Earnings before income taxes and noncontrolling interest
Net earnings
Per share — basic
Per share — diluted
Year Ended
December 31,
2009
2008
2010
6.6 $ 12.2
$ 0.1 $
$ — $
9.1
5.1 $
$ — $ 0.04 $ 0.08
$ — $ 0.04 $ 0.08
A summary of the plans’ shares under option at December 31, 2010, 2009 and 2008 is as
follows:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic
Value
(In millions)
Shares
(thousands)
Outstanding at January 1, 2008
Exercised
Forfeited
Outstanding at December 31, 2008
Exercised
Forfeited
Outstanding at December 31, 2009
Exercised
Forfeited
Outstanding at December 31, 2010
Options exercisable at
December 31, 2010
6,331 $
(366)
(167)
5,798 $
(381) $
(240) $
5,177 $
(1,888) $
(36) $
3,253 $
27.75
23.82
32.58
27.86
23.89
32.16
27.98
26.73
33.95
28.64
7.7 $
$
130.8
8.3
6.7 $
$
5.8 $
$
6.0
3.4
29.7
50.3
4.9 $
142.2
3,253 $
28.64
4.9 $
142.2
The following table summarizes information about stock options outstanding at December 31,
2010:
Options Outstanding
Range of Exercise Prices
(Thousands)
Number
Outstanding
Weighted-Average
Remaining
Contractual
Life (Years)
Weighted-Average
Exercise Price
Exercisable
(Thousands)
Weighted-Average
Exercise Price
Options Exercisable
Number
$12.07 - 16.52
$22.15 - 34.95
319
2,934
3,253
0.2 $
4.7 $
4.9 $
14.27
30.21
28.64
319
2,934
3,253
$
$
$
14.27
30.21
28.64
Proceeds from stock option exercises for 2010, 2009 and 2008 were as follows:
Source: BORGWARNER INC, 10-K, February 10, 2011
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(millions of dollars)
Proceeds from stock options — gross
Tax benefit (loss)
Proceeds from stock options — net
Year Ended
December 31,
2009
2008
2010
$ 55.4 $
11.7
$ 67.1 $
9.4 $ 14.1
(0.7)
3.0
8.7 $ 17.1
Restricted Stock At its November 2007 meeting, our Compensation Committee decided that
restricted common stock and stock units would be awarded in place of stock options for long-term
incentive award grants to employees. These restricted shares and units for employees vest fifty
percent after two years and the remainder after three years from the date of grant. The Company
also grants restricted common stock to its non-employee directors. For non-employee directors
restricted shares generally vest ratably on the anniversary of the date of the grant over a period of
three years. The market value of the Company’s restricted common stock and stock units at the date
of grant determines the value of the restricted common stock. In February 2010, 570,954 restricted
shares and units were granted to employees under the 2004 Stock Incentive Plan. In April 2010,
19,440 restricted shares were granted to non-employee directors under the 2004 Stock Incentive
Plan. The value of the awards is recorded as unearned compensation within capital in excess of par
value in stockholders’ equity, and is amortized as compensation expense over the restriction periods.
Restricted stock compensation expense reduced earnings before income taxes and
noncontrolling interest and net earnings for the years ended December 31, 2010, 2009 and 2008 by:
(millions), except per share data
Earnings before income taxes and noncontrolling interest
Net earnings
Per share — basic
Per share — diluted
Year Ended
December 31,
2009
2010
2008
9.6
$ 18.9 $ 14.8 $
$ 14.7 $ 11.4 $
7.2
$ 0.13 $ 0.10 $ 0.06
$ 0.11 $ 0.10 $ 0.06
A summary of the status of the Company’s nonvested restricted stock for employees and
non-employee directors at December 31, 2010, 2009 and 2008 follows:
Nonvested at January 1, 2008
Granted
Vested
Forfeited
Nonvested at December 31, 2008
Granted
Vested
Forfeited
Nonvested at December 31, 2009
Granted
Vested
Forfeited
Nonvested at December 31, 2010
Shares
Subject to
Restriction
(Thousands)
Weighted
Average
Price
280.9 $
412.4
(14.6)
(17.2)
661.5 $
1,044.0
(23.5)
(134.9)
1,547.1 $
603.0
(188.4)
(91.1)
1,870.6 $
42.90
46.43
30.14
46.41
45.29
20.61
51.03
29.79
29.90
36.16
44.80
27.10
30.55
Performance Share Plans The 2004 Stock Incentive Plan provides for awarding of performance
shares to members of senior management at the end of successive three-year periods based on the
Company’s performance in terms of total shareholder return relative to a peer group of automotive
companies. Awards earned are generally payable 40% in cash and 60% in the Company’s common
stock.
The Company recognizes compensation expense for the 40% cash component and 60% stock
component ratably over the performance period. Compensation expense for the 60% stock
component is based on the performance shares fair value at the date of grant. This fair value is
calculated using a lattice model (Monte Carlo simulation). The compensation expense for the 40%
cash component is based on quarterly marking to market the cash liability. The amounts expensed
under the plan and the share issuances for the three-year measurement periods ended
December 31, 2010, 2009 and 2008 were as follows:
Source: BORGWARNER INC, 10-K, February 10, 2011
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Expense (millions of dollars)
Number of shares*
2010
2009
2008
$
23.9
104,205
$
10.7
269,896
$
4.3
287,816
* Shares are issued in February of the following year.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Other Comprehensive Income (Loss)
Other Comprehensive Income
(Loss) (USD $)
12 Months Ended
12/31/2010
OTHER COMPREHENSIVE INCOME (LOSS) NOTE 13 OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of tax,
in the Consolidated Balance Sheets are as follows:
(millions of dollars)
Foreign currency translation adjustments
Market value of hedge instruments
Defined benefit post employment plans
Unrealized gain on available-for-sale securities
Comprehensive loss attributable to the noncontrolling
$
2010
2009
147.1 $
(44.8)
(158.1)
1.2
210.6
(31.2)
(165.9)
—
interest
Accumulated other comprehensive income (loss)
0.9
(53.7) $
1.0
14.5
$
The amounts presented as changes in accumulated other comprehensive
income (loss), net of related taxes, are added to (deducted from) net earnings
(loss) resulting in comprehensive income (loss). The following table summarizes
the components of comprehensive income (loss) on an after-tax basis for the year
ended December 31, 2010, 2009 and 2008.
(millions of dollars)
2010
2009
2008
Foreign currency translation adjustments
Market value change of hedge instruments
Income taxes
$ (63.5) $
(20.5)
6.9
54.8 $
63.3
(18.2)
(88.6)
(56.8)
19.3
Net foreign currency translation and hedge
instruments adjustment
(77.1)
99.9
(126.1)
Unrealized gain (loss) on available-for-sale
securities
Defined benefit post employment plans
Income taxes
Net defined benefit post employment
plans
Change in accumulated other
comprehensive income (loss)
Net earnings (loss) attributable to
BorgWarner Inc.
Comprehensive income (loss)
Comprehensive income (loss) attributable to
noncontrolling interest*
Comprehensive income (loss) attributable
1.2
23.9
(16.1)
—
(13.1)
9.7
(1.4)
(104.5)
29.8
7.8
(3.4)
(74.7)
(68.1)
96.5
(202.2)
377.4
309.3
27.0
123.5
(35.6)
(237.8)
(0.1)
3.9
(10.8)
to BorgWarner Inc.
$ 309.2 $ 127.4 $ (248.6)
* Refer to Note 1, “Summary of Significant Accounting Policies” for implementation
of ASC Topic 810.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Contingencies
Contingencies
(USD $)
12 Months Ended
12/31/2010
CONTINGENCIES
NOTE 14 CONTINGENCIES
In the normal course of business the Company and its subsidiaries are parties to various commercial
and legal claims, actions and complaints, including matters involving warranty claims, intellectual
property claims, general liability and various other risks. It is not possible to predict with certainty whether
or not the Company and its subsidiaries will ultimately be successful in any of these commercial and
legal matters or, if not, what the impact might be. The Company’s environmental and product liability
contingencies are discussed separately below. The Company’s management does not expect that the
results in any of these commercial and legal claims, actions and complaints will have a material adverse
effect on the Company’s results of operations, financial position or cash flows.
Litigation
In January 2006, DTP, a subsidiary of the Company, filed a declaratory judgment action in United
States District Court, Southern District of Indiana (Indianapolis Division) against the United Automobile,
Aerospace, and Agricultural Implements Workers of America (“UAW”) Local No. 287 and Gerald Poor,
individually and as the representative of a defendant class. DTP sought the Court’s affirmation that DTP
did not violate the Labor-Management Relations Act or the Employee Retirement Income Security Act
(ERISA) by unilaterally amending certain medical plans effective April 1, 2006 and October 1, 2006, prior
to the expiration of the then-current collective bargaining agreements. On September 10, 2008, the Court
found that DTP’s reservation of the right to make such amendments reducing the level of benefits
provided to retirees was limited by its collectively bargained health insurance agreement with the UAW,
which did not expire until April 24, 2009. Thus, the amendments were untimely. In 2008 the Company
recorded a charge of $4.0 million as a result of the Court’s decision.
DTP filed a declaratory judgment action in the United States District Court, Southern District of
Indiana (Indianapolis Division) against the UAW Local No. 287 and Jim Barrett and others, individually
and as representatives of a defendant class, on February 26, 2009 again seeking the Court’s affirmation
that DTP will not violate the Labor — Management Relations Act or ERISA by modifying the level of
benefits provided retirees to make them comparable to other Company retiree benefit plans after
April 24, 2009. Certain retirees, on behalf of themselves and others, filed a mirror-image action in the
United States District Court, Eastern District of Michigan (Southern Division) on March 11, 2009, for
which a class has been certified. During the last quarter of 2009 the action pending in Indiana was
dismissed, while the action in Michigan is continuing and in the discovery phase. The Company is
vigorously defending against the suit. This contingency is subject to many uncertainties, therefore based
on the information available to date, the Company cannot estimate the amount or the range of potential
loss, if any.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by the United States Environmental Protection Agency
and certain state environmental agencies and private parties as potentially responsible parties (“PRPs”)
at various hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (“Superfund”) and equivalent state laws and, as such, may presently be
liable for the cost of clean-up and other remedial activities at 38 such sites. Responsibility for clean-up
and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation
formula.
The Company believes that none of these matters, individually or in the aggregate, will have a
material adverse effect on its results of operations, financial position, or cash flows. Generally, this is
because either the estimates of the maximum potential liability at a site are not material or the liability will
be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of
any such matter.
Based on information available to the Company (which in most cases includes: an estimate of
allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent
public companies, will fully pay the cost apportioned to them; currently available information from PRPs
and/or federal or state environmental agencies concerning the scope of contamination and estimated
remediation and consulting costs; remediation alternatives; and estimated legal fees), the Company has
an accrual for indicated environmental liabilities with a balance at December 31, 2010 of $28.0 million.
Source: BORGWARNER INC, 10-K, February 10, 2011
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The Company has accrued amounts that do not exceed $3.0 million related to any individual site except
for the Crystal Springs site discussed below, and we do not believe that the costs related to any of these
sites will have a material adverse effect on the Company’s results of operations, cash flows or financial
condition. The Company expects to pay out substantially all of the amounts accrued for environmental
liability over the next three to five years.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the
buyer and Kuhlman Electric for certain environmental liabilities, then unknown to the Company, relating
to certain operations of Kuhlman Electric that pre-date the Company’s 1999 acquisition of Kuhlman
Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental
contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. The
Company is continuing to work with the Mississippi Department of Environmental Quality and Kuhlman
Electric to investigate and remediate to the extent necessary, historical contamination at the plant and
surrounding area. Kuhlman Electric and others, including the Company, were sued in numerous related
lawsuits, in which multiple claimants alleged personal injury and property damage relating to the alleged
environmental contamination. In 2005, the Company and other defendants entered into settlements that
resolved approximately 99% of those claims and the remainder of them have since been dismissed.
In 2007 and 2008, four additional lawsuits were filed against Kuhlman Electric and others, including
the Company, on behalf of approximately 340 plaintiffs, alleging personal injury relating to the alleged
environmental contamination. One of the lawsuits, involving a single plaintiff, was dismissed by the trial
court in April 2010 and the plaintiff’s appeal of that decision was dismissed by the appellate court in
August 2010. The Company entered into a settlement in July 2010 regarding the personal injury claims
of the plaintiffs in the other three lawsuits and those of approximately 2,700 unfiled claimants
represented by those plaintiffs’ attorneys. In exchange for, among other things, the dismissal with
prejudice of these lawsuits and the release of claims by the unfiled claimants, the Company agreed to
pay up to $28 million in settlement funds, which was expensed in the second quarter of 2010. In
November 2010 the Company paid $13.9 million related to this settlement. The remaining payment of
approximately $14 million is expected to be paid in February 2011.
Conditional Asset Retirement Obligations
In March 2005, ASC Topic 410, Accounting for Conditional Asset Retirement Obligations, which
requires the Company to recognize legal obligations to perform asset retirements in which the timing
and/or method of settlement are conditional on a future event that may or may not be within the control of
the entity. Certain government regulations require the removal and disposal of asbestos from an existing
facility at the time the facility undergoes major renovations or is demolished. The liability exists because
the facility will not last forever, but it is conditional on future renovations (even if there are no immediate
plans to remove the materials, which pose no health or safety hazard in their current condition). Similarly,
government regulations require the removal or closure of underground storage tanks and above ground
storage tanks when their use ceases, the disposal of polychlorinated biphenyl transformers and
capacitors when their use ceases, and the disposal of used furnace bricks and liners, and lead-based
paint in conjunction with facility renovations or demolition. The Company currently has 45 manufacturing
locations that have been identified as containing these items. The fair value to remove and dispose of
this material has been estimated and recorded at $1.2 million as of December 31, 2010 and $1.3 million
at December 31, 2009.
Product Liability
Like many other industrial companies who have historically operated in the U.S., the Company (or
parties the Company is obligated to indemnify) continues to be named as one of many defendants in
asbestos-related personal injury actions. We believe that the Company’s involvement is limited because,
in general, these claims relate to a few types of automotive friction products that were manufactured
many years ago and contained encapsulated asbestos. The nature of the fibers, the encapsulation and
the manner of use lead the Company to believe that these products are highly unlikely to cause harm. As
of December 31, 2010 and December 31, 2009 the Company had approximately 17,000 and 23,000
pending asbestos-related product liability claims, respectively. Of the 17,000 outstanding claims at
December 31, 2010, approximately 8,000 were pending in just three jurisdictions, where significant tort
and judicial reform activities are underway.
The Company’s policy is to vigorously defend against these lawsuits and the Company has been
successful in obtaining dismissal of many claims without any payment. The Company expects that the
vast majority of the pending asbestos-related product liability claims where it is a defendant (or has an
obligation to indemnify a defendant) will result in no payment being made by the Company or its insurers.
In 2010, of the approximately 7,700 claims resolved, 245 (3.2%) resulted in any payment being made to
a claimant by or on behalf of the Company. In the full year of 2009, of the approximately 5,300 claims
resolved, only 223 (4.2%) resulted in any payment being made to a claimant by or on behalf of the
Company.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Prior to June 2004, the settlement and defense costs associated with all claims were covered by the
Company’s primary layer insurance coverage, and these carriers administered, defended, settled and
paid all claims under a funding arrangement. In addition to the primary insurance available for
asbestos-related claims, the Company has substantial additional layers of insurance available for
potential future asbestos-related product claims. As such, the Company continues to believe that its
coverage is sufficient to meet foreseeable liabilities.
In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion of
their policy limits. This led the Company to access the next available layer of insurance coverage. Since
June 2004, secondary layer insurers have been responsible for asbestos-related litigation defense and
settlement expenses pursuant to a funding arrangement.
A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois
by Continental Casualty Company and related companies (“CNA”) against the Company and certain of
its other historical general liability insurers. CNA provided the Company with both primary and additional
layer insurance, and, in conjunction with other insurers, is currently defending and indemnifying the
Company in its pending asbestos-related product liability claims. The lawsuit seeks to determine the
extent of insurance coverage available to the Company including whether the available limits exhaust on
a “per occurrence” or an “aggregate” basis, and to determine how the applicable coverage
responsibilities should be apportioned. On August 15, 2005, the Court issued an interim order regarding
the apportionment matter. The interim order has the effect of making insurers responsible for all defense
and settlement costs pro rata to time-on-the-risk, with the pro-ration method to hold the insured harmless
for periods of bankrupt or unavailable coverage. Appeals of the interim order were denied. However, the
issue is reserved for appellate review at the end of the action.
Although it is impossible to predict the outcome of pending or future claims or the impact of tort
reform legislation that may be enacted at the State or Federal levels, due to the encapsulated nature of
the products, the Company’s experiences in vigorously defending and resolving claims in the past, and
the Company’s significant insurance coverage with solvent carriers as of the date of this filing,
management does not believe that asbestos-related product liability claims are likely to have a material
adverse effect on the Company’s results of operations, cash flows or financial condition.
To date, the Company has paid and accrued $153.1 million in defense and indemnity in advance of
insurers’ reimbursement, which includes the $40.7 million referred to below, and has received
$32.5 million in cash from insurers. The net outstanding balance of $120.6 million is expected to be fully
recovered, of which approximately $43 million is expected to be recovered within one year. Timing of the
recovery is dependent on final resolution of the declaratory judgment action referred to above. At
December 31, 2009, insurers owed $58.6 million in association with these claims.
On April 5, 2010 the Superior Court of New Jersey Appellate Division affirmed a lower court
judgment in an asbestos-related action against the Company and others. The Company filed its Notice of
Petition to the Supreme Court of New Jersey in late April, seeking to appeal the decisions of the lower
courts. On July 8, 2010 the Supreme Court of New Jersey denied the Company’s Notice of Petition
appealing the decision of the lower courts. The total claim of $40.7 million was paid by the Company in
July 2010.
In addition to the $120.6 million net outstanding balance relating to past settlements and defense
costs, the Company has estimated a liability of $50.6 million for claims asserted, but not yet resolved and
their related defense costs at December 31, 2010. The Company also has a related asset of
$50.6 million to recognize proceeds from the insurance carriers. Insurance carrier reimbursement of
100% is expected based on the Company’s experience, its insurance contracts and decisions received to
date in the declaratory judgment action referred to below. At December 31, 2009, the comparable value
of the insurance asset and accrued liability was $49.9 million.
The amounts recorded in the Consolidated Balance Sheets related to the estimated future settlement
of existing claims are as follows:
(millions of dollars)
Assets:
Prepayments and other current assets
Other non-current assets
Total insurance assets
Liabilities:
Accounts payable and accrued expenses
Other non-current liabilities
Total accrued liability
2010
2009
$ 25.8 $ 24.9
25.0
49.9
24.8
50.6 $
$
$
$
25.8 $
24.8
50.6 $
24.9
25.0
49.9
Source: BORGWARNER INC, 10-K, February 10, 2011
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The Company cannot reasonably estimate possible losses, if any, in excess of those for which it has
accrued, because it cannot predict how many additional claims may be brought against the Company (or
parties the Company has an obligation to indemnify) in the future, the allegations in such claims, the
possible outcomes, or the impact of tort reform legislation that may be enacted at the State or Federal
levels.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Leases and Commitments
(USD $)
12 Months Ended
12/31/2010
LEASES AND COMMITMENTS
Leases and Commitments
NOTE 15 LEASES AND COMMITMENTS
Certain assets are leased under long-term operating leases. These include rent for the
corporate headquarters and one airplane. Most leases contain renewal options for various
periods. Leases generally require the Company to pay for insurance, taxes and maintenance
of the leased property. The Company leases other equipment such as vehicles and certain
office equipment under short-term leases. Total rent expense was $25.6 million in 2010,
$28.5 million in 2009, and $31.5 million in 2008. The Company does not have any material
capital leases.
On September 30, 2010 the Company paid $6.0 million for certain machinery and
equipment it had previously leased. The Company’s $6.0 million payment has been recorded
as a capital expenditure in the investing activity section of the Company’s Consolidated
Statement of Cash Flows for the year ended December 31, 2010.
Future minimum operating lease payments at December 31, 2010 were as follows:
(millions of dollars)
2011
2012
2013
2014
2015
After 2015
Total minimum lease payments
$ 9.3
7.6
6.7
5.9
5.5
8.0
$ 43.0
Source: BORGWARNER INC, 10-K, February 10, 2011
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Earnings
(Loss) Per Share (USD $)
12 Months Ended
12/31/2010
EARNINGS (LOSS) PER SHARE
Earnings (Loss) Per Share
NOTE 16 EARNINGS (LOSS) PER SHARE
The Company presents both basic and diluted earnings per share of common stock
(“EPS”) amounts. Basic EPS is calculated by dividing net earnings (loss) attributable to
BorgWarner Inc. by the weighted average shares of common stock outstanding during the
reporting period. Diluted EPS is calculated by dividing net earnings (loss) attributable to
BorgWarner Inc. by the weighted average shares of common stock and common equivalent
stock outstanding during the reporting period. The dilutive impact of stock based
compensation is calculated using the treasury stock method. The treasury stock method
assumes that the Company uses the proceeds from the exercise of awards to repurchase
common stock at the average market pricing during the period. The assumed proceeds under
the treasury stock method include the purchase price that the grantee will pay in the future,
compensation cost for future service that the Company has not yet recognized and any
windfall tax benefits that would be credited to capital in excess of par value when the award
generates a tax deduction. If there would be a shortfall resulting in a charge to capital in
excess of par value, such an amount would be a reduction in proceeds.
Options are only dilutive when the average market price of the underlying common stock
exceeds the exercise price of the options because it is unlikely they would be exercised if the
exercise price were higher than the market price.
For the year ended December 31, 2008, the impact of the approximately 1.578 million
options and restricted stock in the table below were excluded from the calculation of fully
diluted earnings as this would have reduced the Company’s loss per share. For the
year-ended December 31, 2009, there were approximately 2.711 million options where the
exercise price exceeded the market price. For the year-ended December 31, 2010, the
market price exceeded the exercise price for all outstanding options.
The potential common shares associated with the Company’s 3.50% convertible notes
due April 15, 2012 are reflected in diluted earnings per share in 2010 using the “if-converted”
method. Under this method, if dilutive, the common stock is assumed issued as of the
beginning of the reporting period and included in calculating diluted earnings per share of
common stock. In addition, if dilutive, interest expense, net of tax, related to the convertible
notes is added back to the numerator in calculating diluted earnings per share of common
stock.
Separately and concurrently with the issuance of the Company’s 3.50% convertible notes,
the Company entered into a bond hedge overlay, including warrants and options. If the
Company’s weighted-average share price exceeds $38.61 per share for any period
presented, the warrants will be dilutive to the Company’s earnings. If the Company’s
weighted average share price exceeds $32.82 for any period presented the offsetting bond
hedge will be anti-dilutive.
For the year ended December 31, 2009, the 11.389 million share impact of the
Company’s convertible bond was not included in the calculation of fully diluted earnings
because using the if-converted method would increase earnings per share. At December 31,
2009, the common stock share price was less than the warrant exercise price of $38.62.
Therefore, no value was assigned as anti-dilutive in the table below.
The following table reconciles the numerators and denominators used to calculate basic
and diluted earnings (loss) per share of common stock
(millions of dollars, except per share amounts)
2010
2009
2008*
Basic earnings (loss) per share:
Net earnings (loss) attributable to BorgWarner
Inc.
$
377.4 $
27.0 $
(35.6)
Weighted average shares of common stock
outstanding
Basic earnings (loss) per share of common
114.155
116.522
116.007
stock
$
3.31 $
0.23 $
(0.31)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Diluted earnings (loss) per share:
Net earnings (loss) attributable to BorgWarner
Inc.
$
377.4 $
27.0 $
(35.6)
Adjustment for net interest expense on
convertible notes
Diluted net earnings (loss) attributable to
20.4
—
—
BorgWarner Inc.
$
397.8 $
27.0 $
(35.6)
Weighted average shares of common stock
outstanding
Effect of 3.50% convertible notes
Effect of warrant
Effect of stock-based compensation
Total dilutive effect on weighted average
shares of common stock outstanding
Weighted average shares of common stock
outstanding including dilutive shares
Diluted earnings (loss) per share of common
114.155
11.389
1.464
2.567
116.522
—
—
0.417
116.007
—
—
—
15.420
0.417
—
129.575
116.939
116.007
stock
$
3.07 $
0.23 $
(0.31)
Total anti-dilutive shares
3.50% convertible notes
Bond hedge
Stock-based compensation
Total anti-dilutive shares
—
2.836
—
2.836
11.389
0.034
2.711
14.134
—
—
1.578
1.578
* The Company had a loss for the year ended December 31, 2008. As a result, diluted loss
per share is the same as basic loss per share in the period, as any dilutive securities would
reduce the loss per share.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Restructuring
Restructuring
(USD $)
12 Months Ended
12/31/2010
RESTRUCTURING
NOTE 17 RESTRUCTURING
On July 31, 2008, the Company announced a restructuring of its operations to align ongoing
operations with a continuing, fundamental market shift in the auto industry. As a continuation of the
Company’s third quarter restructuring, on December 11, 2008, the Company announced plans for
additional restructuring actions. As a result of these third and fourth quarter 2008 restructuring actions,
the Company had reduced its North American workforce by approximately 2,400 people, or 33%; its
European workforce by approximately 1,600 people, or 18%; and its Asian workforce by approximately
400 people, or 17%. The restructuring expense recognized for employee termination benefits was
$54.6 million. In addition to employee termination costs, the Company recorded $72.9 million of asset
impairment charges related to the North American and European restructuring. The combined
restructuring expenses of $127.5 million are broken out by segment as follows: Engine $85.3 million,
Drivetrain $40.9 million and Corporate $1.3 million for the year ended December 31, 2008.
In the second quarter of 2009, the Company took additional restructuring actions. The Company
reduced its North American workforce by approximately 550 people, or 12%; its European workforce by
approximately 150 people, or 2%; and its Asian workforce by approximately 60 people, or 3% in the
second quarter. The net restructuring expense recognized in the second quarter was $9.0 million for
employee termination benefits. In addition to employee termination costs, the Company recorded
$36.3 million of asset impairment and $5.0 million of other charges in the second quarter of 2009 related
to the North American and European restructuring. The combined 2009 restructuring expenses of
$50.3 million are broken out by segment as follows: Engine $27.2 million, Drivetrain $19.7 million and
Corporate $3.4 million for the year ended December 31, 2009.
Included in the second quarter of 2009 asset impairment charge is $22.3 million related to one of the
Company’s European locations. During the second quarter of 2009 circumstances caused the Company
to evaluate the long range outlook of the facility using an undiscounted and discounted cash flow model,
both of which indicated that assets were impaired. The Company then used a replacement cost
technique to determine the fair value of the assets at the facility. This reduction of asset value was
included in the Engine segment.
Estimates of restructuring expense are based on information available at the time such charges are
recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts
paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record
revisions of previous estimates by adjusting previously established reserves.
The following table displays a roll forward of the employee related restructuring and other accruals
recorded within the Company’s Consolidated Balance Sheet and the related cash flow activity:
(millions of dollars)
Balance at January 1, 2008
Provision
Cash Payments
Translation Adjustment
Balance at December 31, 2008
Provision
Cash Payments
Translation Adjustment
Balance at December 31, 2009
Cash Payments
Translation Adjustment
Balance at December 31, 2010
Drivetrain
Employee Related and Other Costs
Corporate
Engine
$
$
$
$
9.1
18.8
(6.0)
(0.9)
21.0 $
6.0
(22.8)
0.3
4.5 $
(3.6)
(0.1)
0.8 $
—
34.5
(4.5)
(0.7)
29.3 $
4.6
(23.4)
0.4
10.9 $
(6.4)
(0.7)
3.8 $
— $
1.3
(0.6)
—
0.7 $
3.4
(2.0)
—
2.1 $
(2.1)
—
— $
Total
9.1
54.6
(11.1)
(1.6)
51.0
14.0
(48.2)
0.7
17.5
(12.1)
(0.8)
4.6
Source: BORGWARNER INC, 10-K, February 10, 2011
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Recent Transactions
Recent Transactions
(USD $)
12 Months Ended
12/31/2010
RECENT TRANSACTIONS
NOTE 18 RECENT TRANSACTIONS
Traction Systems division of Haldex Group
On January 31, 2011, the Company acquired the Traction Systems division of Haldex Group,
a leading provider of innovative all-wheel drive (AWD) products for the global vehicle industry
headquartered in Stockholm, Sweden. The purchase price was approximately $205 million
(1.425 billion Swedish Krona). The operating results will be reported within the Company’s
Drivetrain reporting segment from the date of acquisition.
This acquisition is expected to accelerate BorgWarner’s growth in the global AWD market as it
continues to shift toward front-wheel drive (FWD) based vehicles. The acquisition will add industry
leading FWD/AWD technologies, with a strong European customer base, to BorgWarner’s
existing portfolio of front and rear-wheel drive based products. This enables BorgWarner to
provide global customers a broader range of all-wheel drive solutions to meet their vehicle needs.
BERU-Eichenauer GmbH
In anticipation of market growth expected for its electric cabin heaters, the Company
completed the acquisition of BERU-Eichenauer GmbH by acquiring the shares of its former joint
venture partner, Eichenauer Heizelemente GmbH & Co. KG. The former 50/50 joint venture was
formed in 2000 to develop and manufacture electric cabin heaters. The acquisition formally took
effect on May 1, 2010.
The pre-tax impact of this acquisition was an increase in intangible and other assets of
$17.6 million related to adjusting the Company’s fifty percent investment to fair value under ASC
Topic 805, a gain of $8.0 million and a decrease in cash of $9.6 million. The Company’s
$9.6 million payment has been recorded as an investing activity in the Company’s December 31,
2010 Consolidated Statement of Cash Flows.
Dytech ENSA S.L.
On April 10, 2010, the Company acquired 100% of Dytech ENSA S.L. (“Dytech”),
headquartered in Vigo, Spain. The gross cost of this acquisition is $147.7 million, or
$147.6 million, net of cash and cash equivalents. Dytech is a leading producer of exhaust gas
recirculation (EGR) coolers, EGR tubes, and integrated EGR modules including valves for
automotive and commercial vehicle applications, both on- and off-road. This acquisition enhances
the Company’s emissions products offering and system/module expertise, further differentiating
BorgWarner as a leader in highly engineered automotive systems. In addition, Dytech’s
geographic footprint and customer base complements and strengthens the Company’s market
presence with global automakers. The operating results of Dytech are reported within the
Company’s Engine reporting segment from the date of acquisition. The Company’s $147.6 million
payment has been recorded as an investing activity in the Company’s December 31, 2010
Consolidated Statement of Cash Flows.
The following table summarizes the aggregate estimated fair values of the assets acquired
and liabilities assumed on April 10, 2010, the date of acquisition.
(millions of dollars)
Receivables, net
Inventories, net
Property, plant and equipment, net
Goodwill
Other intangible assets, net of tax
Accounts payable and accrued expenses
Other assets and liabilities, net
Assumed debt
Net cash consideration
Etatech, Inc. Technology
$
54.3
44.7
45.0
74.1
31.1
(81.5)
(9.3)
(10.8)
$ 147.6
Source: BORGWARNER INC, 10-K, February 10, 2011
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On June 2, 2009, the Company announced the purchase of advanced gasoline ignition
technology and related intellectual property from Florida-based Etatech, Inc. The high-frequency
ignition technology enables high-performing, lean burning engines to significantly improve fuel
economy and reduce emissions compared with conventional combustion technologies.
Amortization expense for the year ended December 31, 2009 was approximately $1.3 million. For
the year ended December 31, 2009, a $7.5 million payment for Etatech, Inc. has been reflected
as an investing activity in the Consolidated Statement of Cash Flows.
In May 2010, the Company made the final payment regarding the June 2009 purchase of
Etatech, Inc. The $7.5 million payment has been reflected as an investing activity in the
Company’s December 31, 2010 Consolidated Statement of Cash Flows.
BERU
The Company acquired approximately 82.2% of the outstanding shares of BERU
Aktiengesellschaft (“BERU”), headquartered in Ludwigsburg, Germany prior to 2008.
In the second quarter of 2008, the Company and BERU completed a Domination and Profit
Transfer Agreement (“DPTA”), giving BorgWarner full control of BERU. Under this agreement
BERU is obligated to transfer 100% of its annual profits or losses to the Company. Upon request
of BERU noncontrolling shareholders, the Company is obligated to purchase their shares for a
cash payment of €71.32 per share. Those BERU noncontrolling shareholders who did not sell
their shares are entitled to receive an annual compensatory payment (perpetual dividend) of
€4.23 (net) per share. The DPTA is a binding agreement. However, certain noncontrolling
shareholders of BERU initiated an appraisal proceeding in the German court system that
challenged the valuation of the €71.32 purchase price and €4.23 annual compensatory payment
(perpetual dividend).
On January 7, 2009 the Company informed BERU of its intention to purchase the remaining
outstanding shares at that time of approximately 4%, using the required German legal process
referred to as a “squeeze-out” to gain 100% ownership. This process included an affirmative vote
of BERU shareholders at its May 20, 2009 annual shareholder meeting. The registration of the
“squeeze-out” was challenged by certain noncontrolling shareholders of BERU with the
commercial register in June 2009. The “squeeze-out” share price passed by the BERU
shareholders in May 2009 was €73.39. The increase in price per share of €2.07 resulting from the
“squeeze out” was reflected as an increase to the Company’s total DPTA obligation.
On September 18, 2009 the noncontrolling shareholders of BERU who had challenged the
“squeeze-out” resolution dropped their complaint. The elimination of all actions against the
resolution allowed BERU to register the “squeeze-out” with the commercial register. The
“squeeze-out” became effective on, September 30, 2009, making the Company the only
shareholder of BERU. On October 2, 2009, BERU was delisted as a public company in Germany.
In October 2009, the Company paid €22.9 ($33.5) million for the approximately 311,000
outstanding shares of BERU. Certain noncontrolling shareholders have challenged the “squeeze
out” share price of €73.39. A hearing date for this action has been scheduled for April 2011.
As a result of the tendering of shares, the Company owned 100% of all BERU’s outstanding
shares at December 31, 2009. The tendering of approximately 4.4% of BERU shares, at a cost of
$46.6 million, has been reflected as a Financing activity in the Consolidated Statements of Cash
Flows for the year ended December 31, 2009. Additionally, on May 22, 2009, the Company paid
the annual perpetual dividend of $1.9 million, which is also reflected as a Financing activity in the
Consolidated Statement of Cash Flows for the year ended December 31, 2009.
The table below summarizes activity related to the Company’s DPTA obligation as of
December 31, 2009 as follows:
(millions of dollars)
Domination and Profit Transfer Agreement Obligation at December 31, 2008
Shares Purchased During the Year Ended December 31, 2009
Share Resolution to €73.39 per Share
Translation Adjustment
Domination and Profit Transfer Agreement Obligation at December 31, 2009
$ 44.0
(46.6)
0.9
1.7
—
$
The table below summarizes the net cash paid related to the Company’s step acquisition of
BERU as follows (in millions of dollars):
Year
Percentage
Acquired
Amount
Paid
Source: BORGWARNER INC, 10-K, February 10, 2011
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2005
2007
2008
2009
Total
69.4% $ 477.2(a)
138.8(b)
12.8%
136.8(b)
13.4%
46.6(b)
4.4%
100.0% $ 799.4
(a) The Company’s payment of $477.2 million has been reflected as an Investing activity in the
Consolidated Statements of Cash Flows for the year ended December 31, 2005.
(b) The Company’s payments of $46.6 million, $136.8 million and $138.8 million have been
reflected as a Financing activity in the Consolidated Statements of Cash Flows for the year
ended December 31, 2009, 2008 and 2007, respectively.
See Note 6, “Goodwill and Other Intangible Assets”, for further discussion on BERU’s goodwill
impairment charge recorded in 2008.
Other
In the third quarter of 2008, the Company purchased the remaining 26% interest in its joint
venture located in India, BorgWarner Morse TEC Murugappa Pvt. Ltd, for $4.4 million.
In the third quarter of 2008, BERU divested its 50% interest in Impco BERU Technologies
B.V. (located in the Netherlands) for $5.5 million, which approximated its carrying value.
On November 18, 2008, the Company entered into a joint venture agreement with China
Automobile Development United Investment Company, a company owned by leading Chinese
automakers, to produce various dual clutch transmission modules. The joint venture’s operations
will be located in Dalian, China and production is scheduled to begin in 2011. BorgWarner owns
66% of the joint venture.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Reporting Segments and Related Information
(USD $)
12 Months Ended
12/31/2010
Reporting Segments and Related Information
REPORTING SEGMENTS AND
RELATED INFORMATION
NOTE 19 REPORTING SEGMENTS AND RELATED INFORMATION
The Company’s business is comprised of two reporting segments: Engine and
Drivetrain. These segments are strategic business groups, which are managed
separately as each represents a specific grouping of related automotive components
and systems.
The Company allocates resources to each segment based upon the projected
after-tax return on invested capital (“ROIC”) of its business initiatives. The ROIC is
comprised of projected earnings before interest, income taxes and noncontrolling
interest (“EBIT”) adjusted for restructuring, goodwill impairment charges, affiliates’
earnings and other items not reflective of on-going operating profit or loss (“Adjusted
EBIT”) compared to the projected average capital investment required.
Adjusted EBIT is the measure of segment profit or loss used by the Company. The
Company believes Adjusted EBIT is most reflective of the operational profitability or loss
of our reporting segments.
The following tables show segment information and Adjusted EBIT for the
Company’s reporting segments.
(millions of dollars)
Customers
Segment
Net
Net Sales
Inter-
Year-End
Assets
Depr./
Amort.
Long-lived
Asset
Expenditures (b)
$
4,041.4 $
1,611.4
19.4 $ 4,060.8 $
1,611.4
—
3,277.7
1,230.5
$
184.4 $
63.6
—
5,652.8
—
5,652.8 $
(19.4)
(19.4)
5,652.8
—
—
—
— $ 5,652.8 $
—
4,508.2
1,046.8
5,555.0(a) $
—
248.0
4.9
252.9 $
(millions of dollars)
Customers
Segment
Net
Net Sales
Inter-
Year-End
Assets
Depr./
Amort.
Long-lived
Asset
Expenditures (b)
$
2,868.3 $
1,093.5
14.9 $ 2,883.2 $
1,093.5
—
2,812.8
1,104.1
$
188.7 $
65.9
—
3,961.8
—
3,961.8 $
(14.9)
(14.9)
3,961.8
—
—
—
— $ 3,961.8 $
—
3,916.9
894.5
4,811.4(a) $
—
254.6
6.3
260.9 $
(millions of dollars)
Customers
Segment
Net
Net Sales
Inter-
Year-End
Assets
Depr./
Amort.
Long-lived
Asset
Expenditures (b)
2010 Segment
Information
Engine
Drivetrain
Inter-segment
eliminations
Total
Corporate(a)
Consolidated
$
2009 Segment
Information
Engine
Drivetrain
Inter-segment
eliminations
Total
Corporate(a)
Consolidated
$
2008 Segment
Information
Engine
Drivetrain
Inter-segment
eliminations
Total
Corporate(a)
Consolidated
$
$
3,837.5 $
1,426.4
24.0 $ 3,861.5 $
1,426.4
—
3,065.3
1,211.8
$
199.4 $
78.6
—
5,263.9
—
5,263.9 $
(24.0)
(24.0)
5,263.9
—
—
—
— $ 5,263.9 $
—
4,277.1
366.9
4,644.0(a) $
—
278.0
8.8
286.8 $
181.3
83.5
—
264.8
11.8
276.6
115.6
44.6
—
160.2
11.8
172.0
231.0
112.2
—
343.2
26.5
369.7
(a) Corporate assets include cash, equity in affiliates’, investments and advances and
deferred income taxes. The December 31, 2009 and 2008 assets are net of trade
receivables securitized and sold to third parties.
(b) Long-lived asset expenditures include capital expenditures and tooling outlays.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Adjusted Earnings (Loss) Before Interest, Income Taxes and Noncontrolling
Interest (Adjusted “EBIT”)
(millions of dollars)
Engine
Drivetrain
Adjusted EBIT
Muncie closure retiree obligation net gain
Environmental litigation settlement
BERU-Eichenauer equity investment gain
Corporate, including equity in affiliates’ earnings
and stock-based compensation
Restructuring expense
Goodwill impairment charge
Interest income
Interest expense and finance charges
Earnings before income taxes and
noncontrolling interest
Provision (benefit) for income taxes
Net earnings (loss)
Net earnings attributable to the noncontrolling
interest, net of tax
Net earnings (loss) attributable to BorgWarner
2010
2009
2008
$ 537.9 $ 219.8 $ 394.9
(4.9)
390.0
—
—
—
137.0
674.9
—
28.0
(8.0)
(13.5)
206.3
(27.9)
—
—
111.0
111.3
—
—
(2.8)
68.8
477.9
81.7
396.2
50.3
—
(2.5)
57.2
17.9
(18.5)
36.4
60.0
127.5
156.8
(7.1)
38.8
14.0
33.3
(19.3)
18.8
9.4
16.3
Inc.
$ 377.4 $
27.0 $ (35.6)
Geographic Information
Outside the U.S., only China, Germany, France, Hungary and South Korea,
exceeded 5% of consolidated net sales in 2010, attributing sales to the sources of the
product rather than the location of the customer. Also, the Company’s 50% equity
investment in NSK-Warner (see Note 5) amounting to $180.3 million, $174.0 million and
$192.5 million at December 31, 2010, 2009 and 2008, respectively, are excluded from
the definition of long-lived assets, as are goodwill and certain other non-current assets.
(millions of dollars)
2010
Net sales
2009
2008
2010
Long-Lived Assets
2009
2008
$
1,451.1 $
1,090.4 $
1,499.6 $
466.6 $
469.4 $
529.3
United States
Europe:
Germany
Hungary
France
Other Europe
Total Europe
South Korea
China
Other foreign
Total
$
1,839.9
418.3
318.7
546.1
3,123.0
358.0
330.6
390.1
5,652.8 $
1,419.9
292.4
229.5
282.9
2,224.7
212.4
184.1
250.2
3,961.8 $
1,948.4
398.2
244.3
431.8
3,022.7
251.8
131.1
358.7
5,263.9 $
447.5
53.0
63.0
173.7
737.2
94.8
104.9
139.1
1,542.6 $
500.0
58.4
72.9
138.1
769.4
69.1
66.1
116.3
1,490.3 $
546.7
55.7
84.2
142.9
829.5
63.1
55.1
109.2
1,586.2
Sales to Major Customers
Consolidated net sales to a single customer (including their subsidiaries), which
exceeded 10% of our total sales, were to Volkswagen of approximately 19%, 22%, and
19%; and to Ford of approximately 11%, 12%, and 9% for the years ended
December 31, 2010, 2009 and 2008, respectively. Both of the Company’s reporting
segments had significant sales to Volkswagen and Ford in 2010, 2009 and 2008.
Accounts receivable from these customers at December 31, 2010 comprised
approximately 17% ($178.0 million) of total accounts receivable. Such sales consisted
of a variety of products to a variety of customer locations and regions. No other single
customer accounted for more than 10% of consolidated sales in any year of the periods
presented.
Sales by Product Line
Sales of turbochargers for light-vehicles represented approximately 26%, 27%, and
24% of the Company’s total revenues for 2010, 2009 and 2008, respectively. The
Company currently supplies light-vehicle turbochargers to many OEMs including
Source: BORGWARNER INC, 10-K, February 10, 2011
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Volkswagen, Renault, PSA, Daimler, Hyundai, Fiat, BMW, Ford and General Motors.
No other single product line accounted for more than 10% of consolidated sales in
any year of the periods presented.
Interim Financial Information (Unaudited)
(millions of dollars, except per share amounts)
Quarter Ended
Mar-31
Jun-30
2010
Sep-30
Dec-31
Year
Mar-31
Jun-30
2009
Sep-30
Dec-31
Year
Net sales
$
1,286.8
$
1,421.7
$
1,410.9
$
1,533.4
$
5,652.8
$
819.5
$
916.2
$
1,027.8 $
1,198.3
$
3,961.8
Cost of sales
1,048.3
1,146.3
1,137.6
1,227.3
4,559.5
Gross profit
238.5
275.4
273.3
306.1
1,093.3
739.9
79.6
800.0
116.2
876.0
985.1
3,401.0
151.8
213.2
560.8
130.3
137.8
150.2
148.3
566.6
74.1
115.4
125.9
144.4
459.8
—
1.6
—
20.3
—
0.1
—
0.4
—
22.4
—
—
50.3
—
—
(1.6)
—
1.5
106.6
117.3
123.0
157.4
504.3
5.5
(49.5)
27.5
67.3
(9.3)
(0.6)
14.2
(10.0)
(0.6)
14.2
(10.5)
(0.6)
18.4
(9.8)
(1.0)
22.0
(39.6)
(2.8)
(0.2)
(0.5)
68.8
19.1
102.3
113.7
115.7
146.2
477.9
(12.9)
(4.8)
(0.7)
9.0
(53.0)
(19.1)
(6.5)
(0.5)
(10.3)
(0.8)
13.0
16.1
21.5
62.3
1.5
5.7
Provision (benefit)
for income taxes
20.9
4.2
30.6
81.7
(6.6)
26.0
87.7
81.4
111.5
115.6
396.2
(6.3)
(33.9)
20.0
56.6
36.4
50.3
(0.1)
50.8
(21.8)
(2.5)
57.2
17.9
(18.5)
5.2
4.9
4.8
3.9
18.8
0.7
2.0
2.8
3.9
9.4
76.2(1)
82.8(2)
106.7(3) $
111.7
$
377.4
$
(7.0)(4) $
(35.9)(5) $
17.2 $
52.7(6) $
27.0
0.65
$
0.72
$
0.95
$
1.00
$
3.31
$
(0.06)*
$
(0.31)*
$
0.15 $
0.45
$
0.23
0.63**
$
0.68**
$
0.87**
$
0.89** $
3.07** $
(0.06)*
$
(0.31)*
$
0.15 $
0.45
$
0.23
Selling, general and
administrative
expenses
Restructuring
expense
Other (income)
expense
Operating income
(loss)
Equity in affiliates’
earnings, net of
tax
Interest income
Interest expense and
finance charges
Earnings (loss)
before income
taxes and
noncontrolling
interest
Net earnings
(loss)
Net earnings
attributable to the
noncontrolling
interest, net of tax
Net earnings
(loss)
attributable of
BorgWarner
Inc.
Earnings (loss) per
share — basic
Earnings (loss) per
share — diluted
$
$
* The Company had a loss for the quarters ended March 31, 2009 and June 30, 2009.
As a result, diluted loss per share is the same as basic loss per share in each period,
as any dilutive securities would reduce the loss per share.
** The Company’s diluted earnings per share for each quarter in 2010 and the year
ended December 31, 2010 includes the impact of the Company’s 3.50% convertible
notes and associated warrants. Refer to Note 16, “Earnings (Loss) Per Share”, for
further information on our diluted earnings calculation.
(1) The Company’s first quarter 2010 results were impacted by the following:
• $2.5 million Medicare Part D tax adjustment
(2) The Company’s second quarter 2010 results were impacted by the following:
• $8.0 million BERU-Eichenauer Equity investment gain.
• $28.0 million Environmental litigation settlement.
(3) The Company’s third quarter 2010 results were impacted by the following:
• $21.2 million foreign tax credit valuation allowance reversal.
(4) The Company’s first quarter 2009 results were impacted by the following:
• $4.8 million charge related to the adoption of Topic 805.
• $27.9 million net gain related to retiree obligations resulting from the closure of the
Muncie, Indiana, Drivetrain facility.
• $11.4 million net loss from interest rate derivative agreements.
(5) The Company’s second quarter 2009 results were impacted by the following:
• $50.3 million of restructuring expenses, including $9.0 million for employee
termination benefits, $36.3 million of asset impairment and $5.0 million of other
charges.
• $6.6 million net gain from interest rate derivative agreement.
Source: BORGWARNER INC, 10-K, February 10, 2011
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(6) The Company’s fourth quarter 2009 results were impacted by the following:
• $3.1 million tax benefit related to an ASC Topic 740 adjustment.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting Policies
(Policies) (USD $)
12 Months Ended
12/31/2010
Summary of Significant Accounting Policies (Policies)
Basis of presentation
Use of estimates
Concentrations of risk
Revenue recognition
Cash
Accounts receivable
Basis of presentation The Company’s presentation of the
Consolidated Balance Sheets, Consolidated Statements of Operations,
Consolidated Statements of Equity and Comprehensive Income (Loss),
and Reporting Segments and Related Information Note have been
adjusted to conform with the requirements of Accounting Standards
Codification (“ASC”) Topic 810, Noncontrolling Interest in Consolidated
Financial Statements and ASC Topic 805, Business Combinations. Refer
to New Accounting Pronouncements for further information regarding
these reclassifications.
Use of estimates The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Concentrations of risk Cash is maintained with several financial
institutions. Deposits held with banks may exceed the amount of
insurance provided on such deposits. Generally, these deposits may be
redeemed upon demand and are maintained with financial institutions of
reputable credit and therefore bear minimal risk.
Revenue recognition The Company recognizes revenue when title
and risk of loss pass to the customer, which is usually upon shipment of
product. Although the Company may enter into long-term supply
agreements with its major customers, each shipment of goods is treated
as a separate sale and the prices are not fixed over the life of the
agreements.
Cash Cash is valued at fair market value. It is the Company’s policy to
classify all highly liquid investments with original maturities of three
months or less as cash.
Accounts receivable The Company securitizes certain receivables
through third party financial institutions without recourse. The amount can
vary each month based on the amount of underlying receivables. The
Company continues to administer the collection of these receivables on
behalf of the third party.
On April 24, 2009 the Company’s $50 million accounts receivable
securitization facility matured and was repaid. On December 21, 2009 the
Company entered into a new $50 million accounts receivable
securitization facility.
On September 8, 2010 the Company amended the December 21,
2009 Receivable Purchase Agreement, which increased the accounts
receivable securitization facility from $50 million to $80 million. This facility
matures on December 21, 2012.
The Company was required to adopt amended ASC Topic 860,
“Accounting for Transfer of Financial Assets”, on January 1, 2010. This
adoption required the Company to reflect its receivable securitization
facility in its financial statements in the current year of change. Accounting
rules prior to January 1, 2010 allowed qualifying special-purpose entities
off-balance sheet treatment. The impact of this adoption was an increase
in receivables, net of $80 million and an increase in notes payable and
Source: BORGWARNER INC, 10-K, February 10, 2011
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other short-term debt of $80 million in the Company’s December 31, 2010
Consolidated Balance Sheet.
During the years ended December 31, 2010 and 2009, total cash
proceeds from sales of accounts receivable were approximately
$720 million and $250 million, respectively. The Company paid servicing
fees related to these receivables for the year ended December 31, 2010,
2009 and 2008 of $1.2 million, $0.4 million, and $1.9 million, respectively.
These amounts are recorded in interest expense and finance charges in
the Consolidated Statements of Operations.
The Company was required to adopt amended ASC Topic 860,
“Accounting for Transfer of Financial Assets”, on January 1, 2010. This
adoption required the Company to reflect its receivable securitization
facility in its financial statements in the current year of change. Accounting
rules prior to January 1, 2010 allowed qualifying special-purpose entities
off-balance sheet treatment. The impact of this adoption was an increase
in receivables, net of $80 million and an increase in notes payable and
other short-term debt of $80 million in the Company’s December 31, 2010
Consolidated Balance Sheet.
Inventories Inventories are valued at the lower of cost or market. Cost
of U.S. inventories is determined by the last-in, first-out (“LIFO”) method,
while the foreign operations use the first-in, first-out (“FIFO”) or
average-cost methods. Inventory held by U.S. operations was
$100.1 million and $81.2 million at December 31, 2010 and 2009,
respectively. Such inventories, if valued at current cost instead of LIFO,
would have been greater by $13.2 million in 2010 and $11.6 million in
2009.
See Note 5 to the Consolidated Financial Statements for more
information on inventories.
Pre-production costs related to long-term supply arrangements
Engineering, research and development, and other design and
development costs for products sold on long-term supply arrangements
are expensed as incurred unless the Company has a contractual
guarantee for reimbursement from the customer. Costs for molds, dies
and other tools used to make products sold on long-term supply
arrangements for which the Company either has title to the assets or has
the non-cancelable right to use the assets during the term of the supply
arrangement are capitalized in property, plant and equipment. Capitalized
items specifically designed for a supply arrangement are amortized to
cost of sales over the shorter of the term of the arrangement or over the
estimated useful lives of the assets, typically 3 to 5 years. Costs for
molds, dies and other tools used to make products sold on long-term
supply arrangements for which the Company has a contractual guarantee
for lump sum reimbursement from the customer are capitalized in
prepayments and other current assets.
Property, plant and equipment and depreciation Property, plant and
equipment are valued at cost less accumulated depreciation.
Expenditures for maintenance, repairs and renewals of relatively minor
items are generally charged to expense as incurred. Renewals of
significant items are capitalized. Depreciation is computed generally on a
straight-line basis over the estimated useful lives of the assets. Useful
lives for buildings range from 15 to 40 years and useful lives for
machinery and equipment range from 3 to 12 years. For income tax
purposes, accelerated methods of depreciation are generally used. The
Company’s property, plant and equipment are all held for use at
December 31, 2010 and 2009.
See Note 5 to the Consolidated Financial Statements for more
information on property, plant and equipment and depreciation.
Impairment of long-lived assets The Company reviews the carrying
Adoption of ASC Topic 860 and its impact
Inventories
Precontract Costs, policy
Property, plant and equipment and depreciation
Impairment of long-lived assets
Source: BORGWARNER INC, 10-K, February 10, 2011
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value of its long-lived assets, whether held for use or disposal, including
other amortizing intangible assets, when events and circumstances
warrant such a review under ASC Topic 360. A recoverability review is
performed using the undiscounted cash flows if there is a triggering event.
If the undiscounted cash flow test for recoverability identifies a possible
impairment, management will perform a fair value analysis. Management
determines fair value under ASC Topic 820 using the appropriate
valuation technique of market, income or cost approach. If the carrying
value of a long-lived asset is considered impaired, an impairment charge
is recorded for the amount by which the carrying value of the long-lived
asset exceeds its fair value.
Management believes that the estimates of future cash flows and fair
value assumptions are reasonable; however, changes in assumptions
underlying these estimates could affect the evaluations. Long-lived assets
held for sale are recorded at the lower of their carrying amount or fair
value less cost to sell. Significant judgments and estimates used by
management when evaluating long-lived assets for impairment include:
(i) an assessment as to whether an adverse event or circumstance has
triggered the need for an impairment review; and (ii) undiscounted future
cash flows generated by the asset (iii) fair valuation of the asset.
See Note 17, “Restructuring” and Note 9 “Fair Value Measurements”,
to the Consolidated Financial Statements for more information regarding
the Company’s impairment of long-lived assets and a discussion of
market-based measurements.
Goodwill and other indefinite-lived intangible assets Under ASC
Topic 350, goodwill and other indefinite-lived intangibles are not
amortized; however, they must be tested for impairment at least annually
or upon a triggering event. In the fourth quarter of each year, or when
events and circumstances warrant such a review, the Company reviews
the goodwill of all of its reporting units for impairment. The Company’s
goodwill impairment review, under ASC Topic 350, requires the Company
to make significant assumptions and estimates about the extent and
timing of future cash flows, discount rates and growth rates. The fair value
of the Company’s reporting units used in the determination of goodwill
impairment is computed using the expected present value of associated
future cash flows. The cash flows are estimated over a significant future
period of time, which makes those estimates and assumptions subject to
an even higher degree of uncertainty. The Company also utilizes market
valuation models and other financial ratios, which require the Company to
make certain assumptions and estimates regarding the applicability of
those models to its assets and businesses. The Company believes that
the assumptions and estimates used to determine the estimated fair
values of each of its reporting units are reasonable. The Company
recognized goodwill impairment of $156.8 million in the Engine segment
in 2008.
A considerable amount of management judgment and assumptions are
required in performing the impairment tests. While no impairment existed
at December 31, 2010, different assumptions and estimates could
materially change the estimated fair values and therefore, change
impairment charges.
See Note 6 to the Consolidated Financial Statements for more
information on goodwill and other indefinite-lived intangible assets.
Product warranty The Company provides warranties on some of its
products. The warranty terms are typically from one to three years.
Provisions for estimated expenses related to product warranty are made
at the time products are sold. These estimates are established using
historical information about the nature, frequency, and average cost of
warranty claim settlements as well as product manufacturing and industry
developments and recoveries from third parties. Management actively
studies trends of warranty claims and takes action to improve product
quality and minimize warranty claims. Management believes that the
Goodwill and other indefinite-lived intangible assets
Product warranty
Source: BORGWARNER INC, 10-K, February 10, 2011
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Other loss accruals and valuation allowances
Derivative financial instruments
Foreign currency
Environmental Contingencies
warranty accrual is appropriate; however, actual claims incurred could
differ from the original estimates, requiring adjustments to the accrual.
The accrual is represented in both current and non-current liabilities on
the balance sheet.
See Note 7 to the Consolidated Financial Statements for more
information on product warranties.
Other loss accruals and valuation allowances The Company has
numerous other loss exposures, such as customer claims, workers’
compensation claims, litigation, and recoverability of assets. Establishing
loss accruals or valuation allowances for these matters requires the use of
estimates and judgment in regard to the risk exposure and ultimate
realization. The Company estimates losses under the programs using
consistent and appropriate methods; however, changes to its
assumptions could materially affect its recorded accrued liabilities for loss
or asset valuation allowances.
Derivative financial instruments The Company recognizes that
certain normal business transactions generate risk. Examples of risks
include exposure to exchange rate risk related to transactions
denominated in currencies other than the functional currency, changes in
cost of major raw materials and supplies, and changes in interest rates. It
is the objective and responsibility of the Company to assess the impact of
these transaction risks, and offer protection from selected risks through
various methods including financial derivatives. Virtually all derivative
instruments held by the Company are designated as hedges, have high
correlation with the underlying exposure and are highly effective in
offsetting underlying price movements. Accordingly, gains and losses
from changes in qualifying hedge fair values are matched with the
underlying transactions. All hedge instruments are carried at their fair
value based on quoted market prices for contracts with similar maturities.
The Company does not engage in any derivative transactions for
purposes other than hedging specific risks.
See Note 10 to the Consolidated Financial Statements for more
information on derivative financial instruments.
Foreign currency The financial statements of foreign subsidiaries are
translated to U.S. Dollars using the period-end exchange rate for assets
and liabilities and an average exchange rate for each period for revenues,
expenses, and capital expenditures. The local currency is the functional
currency for substantially all the Company’s foreign subsidiaries.
Translation adjustments for foreign subsidiaries are recorded as a
component of accumulated other comprehensive income (loss) in
stockholders’ equity. The Company recognizes transaction gains and
losses arising from fluctuations in currency exchange rates on
transactions denominated in currencies other than the functional currency
in earnings as incurred, except for those transactions which hedge
purchase commitments and for those intercompany balances which are
designated as long-term investments.
See Note 13 to the Consolidated Financial Statements for more
information on other comprehensive income (loss).
Environmental Contingencies The Company accounts for
environmental costs in accordance with ASC Topic 450. Costs related to
environmental assessments and remediation efforts at operating facilities
are accrued when it is probable that a liability has been incurred and the
amount of that liability can be reasonably estimated. Estimated costs are
recorded at undiscounted amounts, based on experience and
assessments and are regularly evaluated. The liabilities are recorded in
other current liabilities and other long-term liabilities in the Company’s
consolidated balance sheets.
See Note 14 to the Consolidated Financial Statements for more
information regarding environmental contingencies.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Pensions and other postretirement employee defined benefits
Income Taxes
Pensions and Other Postretirement Employee Defined Benefits
The Company’s defined benefit pension and other postretirement
employee benefit plans are accounted for in accordance with ASC Topic
715. Disability, early retirement and other postretirement employee
benefits are accounted for in accordance with ASC Topic 712.
Pensions and other postretirement employee benefit costs and related
liabilities and assets are dependent upon assumptions used in calculating
such amounts. These assumptions include discount rates, expected
returns on plan assets, health care cost trends, compensation and other
factors. In accordance with GAAP, actual results that differ from the
assumptions used are accumulated and amortized over future periods,
and accordingly, generally affect recognized expense in future periods.
See Note 11 to the Consolidated Financial Statements for more
information regarding the Company’s retirement benefit plans.
Income Taxes The Company accounts for income tax expense based
on expected income and statutory tax rates in the various jurisdictions in
which we operate. Judgment is required in determining our income tax
expense. We establish accruals under ASC Topic 740. For uncertain tax
positions, the ASC Topic 740 approach is based on a two-step benefit
recognition model. In the first step, ASC Topic 740 requires that a position
taken or expected to be taken in a tax return be recognized in the
financial statements when it is more likely than not, based on the
technical merits and without consideration of detection risk, that the
position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step is to measure the
appropriate amount of the benefit to recognize. The amount of benefit to
recognize is measured as the largest amount of the tax benefit that is
greater than 50 percent likely to ultimately be realized upon settlement.
The tax position must be derecognized when it is no longer more likely
than not to be sustained. The interpretation also provides guidance on
recognition and classification of related penalties and interest,
classification of liabilities, and disclosures of unrecognized tax benefits.
The Company’s effective tax rate includes the impact of accrual
provisions and changes to accruals that we consider appropriate, as well
as interest and penalties. A period of time may elapse before a particular
matter, for which we have or have not established an accrual is audited
and finally resolved. While it is often difficult to predict the final outcome or
the timing of resolution of any particular tax matter, we believe that our
accruals are appropriate under GAAP. Favorable or unfavorable
adjustments of an accrual for any particular issue would be recognized as
an increase or decrease to our income tax expense in the period of a
change in facts and circumstances.
Tax laws require items to be included in the tax return at different times
than the items are reflected in the financial statements. As a result, the
income tax expense reflected in our financial statements is different than
the liability reported in our tax return. Some of the differences are
permanent in nature, however, there are many differences that are
temporary differences, such as depreciation expense. 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
may not be realized. This assessment requires significant judgment, and
must be done on a jurisdiction-by-jurisdiction basis. In determining the
need for a valuation allowance, all available positive and negative
evidence, including historical and projected financial performance, is
considered along with any other pertinent information.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Adoption Of Topic 820 And its impact
Adoption of ASC Topic 825 and its impact
Adoption of Topic 805 and its impact
Adoption of ASC Topic 810 and its impact
Adoption of Topic 470 and its impact
See Note 4 to the Consolidated Financial Statements for more
information regarding income taxes.
In September 2006, the FASB ASC amended Topic 820, Fair Value
Measurements and Disclosures. ASC Topic 820 defines fair value,
establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. On January 1, 2009, the
Company fully adopted as required, ASC Topic 820. See Note 9 to the
Consolidated Financial Statements for more information regarding the
implementation of ASC Topic 820.
In February 2007, the FASB ASC amended Topic 825, Financial
Instruments. ASC Topic 825 allows entities to irrevocably elect to
recognize most financial assets and financial liabilities at fair value on an
instrument-by-instrument basis. The stated objective of ASC Topic 825 is
to improve financial reporting by giving entities the opportunity to elect to
measure certain financial assets and liabilities at fair value in order to
mitigate earnings volatility caused when related assets and liabilities are
measured differently. ASC Topic 825 was effective for the Company
beginning with its quarter ending March 31, 2008. The Company chose to
not make the election to adopt.
In December 2007, the FASB ASC amended Topic 805, Business
Combinations. ASC Topic 805 establishes principles and requirements for
recognizing identifiable assets acquired, liabilities assumed,
noncontrolling interest in the acquiree, goodwill acquired in the
combination or the gain from a bargain purchase, and disclosure
requirements. Under this revised statement, all costs incurred to effect an
acquisition are recognized separately from the acquisition. Also,
restructuring costs that are expected but the acquirer is not obligated to
incur are recognized separately from the acquisition. On January 1, 2009,
the Company adopted ASC Topic 805. In the first quarter of 2009, the
Company expensed $4.8 million related to on-going acquisition related
activity.
In December 2007, the FASB ASC amended Topic 810, Consolidation.
For consolidated subsidiaries that are less than wholly owned, the third
party holdings of equity interests are referred to as noncontrolling
interests. The portion of net income (loss) attributable to noncontrolling
interests for such subsidiaries is presented as net income (loss)
applicable to noncontrolling interest on the consolidated statement of
operation, and the portion of stockholders’ equity of such subsidiaries is
presented as noncontrolling interest on the consolidated balance sheet.
Effective January 1, 2009, the Company adopted ASC Topic 810.
The adoption of ASC Topic 810 did not have a material impact on the
Company’s financial condition, results of operations or cash flows.
However, it did impact the presentation and disclosure of noncontrolling
(minority) interests in our consolidated financial statements and notes to
the consolidated financial statements. As a result of the retrospective
presentation and disclosure requirements of ASC Topic 810, the
Company was required to reflect the change in presentation and
disclosure for the period ending March 31, 2009 and all periods presented
in future filings.
In May 2008, the FASB ASC amended Topic 470, Debt. Under ASC
Topic 470, an entity must separately account for the liability and equity
components of the convertible debt instruments that may be settled
entirely or partially in cash upon conversion in a manner that reflects the
issuer’s interest cost. ASC Topic 470 is effective for fiscal years beginning
after December 15, 2008, and for interim periods within those fiscal years,
with retrospective application required. As a result of our adoption of ASC
Topic 470 for fiscal 2009 and the Company’s April 9, 2009 issuance of
$373.8 million convertible senior notes due April 15, 2012, we recorded
the equity and liability components of the notes on our December 31,
2009 Consolidated Balance Sheet. Additionally, ASC Topic 470 requires
Source: BORGWARNER INC, 10-K, February 10, 2011
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Adoption of Topic 105 and its impact
us to accrete the discounted carrying value of the convertible notes to
their face value over the term of the notes. The Company’s interest
expense associated with this amortization is based on the effective
interest rate of the convertible senior notes of 9.365%. See Note 8 to the
Consolidated Financial Statements for more information regarding the
implementation of ASC Topic 470.
In June 2009, the FASB ASC amended Topic 105, “Generally
Accepted Accounting Principles”. This ASC Topic instituted a major
change in the way accounting standards are organized. The accounting
standards Codification became the single official source of authoritative,
nongovernmental GAAP. As of September 30, 2009 only one level of
authoritative GAAP exists, other than guidance issued by the SEC. All
other literature is non-authoritative. The Company adopted the
Codification in the third quarter of 2009. The adoption of the Codification
had no impact on the Company’s consolidated financial position, results
of operations or cash flows.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting Policies (Tables)
Summary of Significant Accounting Policies
(Tables) (USD $)
Principal effect on the prior year Balance Sheets related to the adoption of
ASC Topic 810
12 Months Ended
12/31/2010
(millions of dollars)
Balance Sheet
Principal effect on the prior year Statement of Operations related to the
adoption of ASC Topic 810
Total equity, as previously reported
Increase for Topic 810 reclass of
noncontrolling interest
Total equity, as adjusted
(millions of dollars)
Consolidated Statement of Operations
December 31,
2008
$
2,006.0
31.5
2,037.5
$
Year Ended
December 31,
2008
Principal effect on the prior year Statement of Cash Flows related to the
adoption of ASC Topic 810
Principal effect on the prior year Comprehensive Income related to the
adoption of ASC Topic 810
Principal effect on the prior year Cash Flows due to presentation of cash
payments related to the adoption of ASC Topic 810 from investing to
financing section
Net loss, as previously reported
Topic 810 reclass of noncontrolling interest
Net loss, as adjusted
Less: Net earnings attributable to noncontrolling
interest
Net loss attributable to BorgWarner Inc.
$
$
$
(35.6)
(16.3)
(19.3)
16.3
(35.6)
(millions of dollars)
Statement of Cash Flows
Net loss, as previously reported
Topic 810 reclass of noncontrolling interest
Net loss, as adjusted
(millions of dollars)
Statement of Cash Flows
Year Ended
December 31,
2008
$
$
(35.6)
(16.3)
(19.3)
Year Ended
December 31,
2008
Equity in affiliates’ earnings, net of dividends
received, minority interest and other, as
previously reported
$
Less: Topic 810 reclass of noncontrolling interest
28.3
(16.3)
Equity in affiliates’ earnings, net of dividends
received and other
$
12.0
(millions of dollars)
Net foreign currency translation and hedge
instruments adjustment, as previously
reported
Topic 810 reclass of noncontrolling interest
Net foreign currency translation and hedge
instruments adjustment, as adjusted
(millions of dollars)
Statement of Cash Flows
Payments for businesses acquired, net of cash
acquired, as previously reported
Less: Topic 805 reclass of noncontrolling
interest
Payments for businesses acquired, net of
cash acquired
December 31,
2008
$
(136.9)
(10.8)
$
(126.1)
Year Ended
December 31,
2008
$
(141.2)
141.2
$
—
Source: BORGWARNER INC, 10-K, February 10, 2011
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(millions of dollars)
Statement of Cash Flows
Net cash used in investing activities, as
previously reported
Less: Topic 805 reclass of noncontrolling
interest
Net cash used in investing activities
(millions of dollars)
Statement of Cash Flows
Net cash provided by financing activities, as
previously reported
Less: Topic 805 reclass of noncontrolling
interest
Net cash used in financing activities
Year Ended
December 31,
2008
$
(485.1)
141.2
(343.9)
$
Year Ended
December 31,
2008
$
$
5.1
(141.2)
(136.1)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Research and Development Costs (Tables)
Research and Development Costs
(Tables) (USD $)
12 Months Ended
12/31/2010
Gross and net expenditures on research and development
("Ractivities
(millions of dollars)
Year Ended December 31,
2010
2009
2008
Gross R&D expenditures
Customer reimbursements
Net R&D expenditures
$ 233.2 $ 219.0 $ 273.4
(67.7)
$ 185.0 $ 155.2 $ 205.7
(48.2)
(63.8)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Other Expense (Income) (Tables)
Other Expense
(Income) (Tables) (USD $)
12 Months Ended
12/31/2010
Other Expense (Income)
(millions of dollars)
Year Ended December 31,
Environmental litigation settlement
BERU-Eichenauer equity
investment gain
2010
2009
2008
$ 28.0 $ — $ —
Loss on the sale of a product line
Net loss (gain) on asset disposals
Other
Total other expense (income)
(8.0) — —
2.2
1.5 —
2.0
1.8
(0.1)
(0.2)
(0.9) —
4.0
$ 22.4 $ (0.1) $
Source: BORGWARNER INC, 10-K, February 10, 2011
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Earnings before
income taxes and
provision for income
taxes
Reconciliation of the
total gross
unrecognized tax
benefits
Tax Jurisdiction
Analysis of variance of
income taxes as
reported from income
taxes computed at
statutory rate
Income Taxes
(Tables) (USD $)
12 Months Ended
12/31/2010
Income Taxes (Tables)
(millions of dollars)
Year Ended December 31,
U.S.
2010
Non-U.S.
Total
U.S.
Non-U.S.
Total
U.S.
2009
2008
Non-U.S.
Total
Earnings (loss) before taxes $
(26.7)
$
504.6
$
477.9
$
(138.5)
$
156.4
$
17.9
$
(123.8)
$
137.8
$
14.0
Provision for income taxes:
Current:
Federal/foreign
State
Total current
Deferred
Total provision for income
14.0
2.2
16.2
(48.9)
117.7
—
117.7
(3.3)
131.7
2.2
133.9
(52.2)
(2.7)
1.5
(1.2)
(51.6)
42.7
—
42.7
(8.4)
40.0
1.5
41.5
(60.0)
7.7
1.0
8.7
(44.7)
99.5
—
99.5
(30.2)
107.2
1.0
108.2
(74.9)
taxes
$
(32.7)
$
114.4
$
81.7
$
(52.8)
$
34.3
$
(18.5)
$
(36.0)
$
69.3
$
33.3
Effective tax rate
(122.5)%
22.7%
17.1%
(38.1)%
21.9%
(103.4)%
(29.1)%
50.3%
237.9%
millions of dollars
2010
2009
Balance, January 1
Additions based on tax positions related to current year
Additions (Reductions) for tax positions of prior years
Reductions for lapse in statute of limitations
Settlements
Translation adjustment
Balance, December 31
Tax Jurisdiction
U.S. Federal
Brazil
France
Germany
Hungary
Italy
Japan
South Korea
United Kingdom
(millions of dollars)
Income taxes at U.S. statutory rate of 35%
Increases (decreases) resulting from:
Income from non-U.S. sources including withholding taxes
State taxes, net of federal benefit
Business tax credits
Affiliates’ earnings
Accrual adjustment and settlement of prior year tax matters
Medicare prescription drug benefit
Goodwill impairment
Restructuring
Valuation allowance
Non-temporary differences and other
Provision for income taxes as reported
$ 34.8 $
1.1
0.3
(1.3)
(6.6)
(0.7)
$ 27.6 $
61.1
16.4
(16.5)
(17.0)
(9.9)
0.7
34.8
Years No Longer
Subject to Audit
2006 and prior
2003 and prior
2006 and prior
2003 and prior
2007 and prior
2005 and prior
2008 and prior
2005 and prior
2008 and prior
2010
2009
2008
$ 167.3 $
6.2 $
4.9
(55.8)
1.4
0.2
(13.8)
0.4
2.9
—
—
(21.2)
0.3
(17.1)
4.7
(1.9)
(7.5)
(6.3)
1.7
—
—
7.7
(6.0)
$
81.7 $ (18.5) $
(26.5)
0.9
(9.8)
(13.2)
6.0
1.1
54.9
0.6
13.1
1.3
33.3
$
2010
2009
26.2 $
9.8
8.6
6.3
5.8
2.0
1.2
6.8
23.9
4.7
9.3
4.5
6.9
2.9
1.9
6.4
Summary of gross
components of deferred
tax assets and liabilities
(millions of dollars)
Current deferred tax assets:
Employee related
Net operating loss carryforwards
Inventory
Warranties
Litigation & environmental
Customer claims
Derivatives
Other
Source: BORGWARNER INC, 10-K, February 10, 2011
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Total current deferred tax assets
Current deferred tax liabilities:
Derivatives
Other
Total current deferred tax liabilities
Non-current deferred tax assets:
Foreign tax credits
Other comprehensive income
Research and Development Capitalization
Pension and other post employment benefits
Employee related
Net operating loss carryforwards
Research and development credits
Warranties
Litigation and environmental
Capital loss carryforwards
Other
Total non-current deferred tax assets
Non-current deferred tax liabilities:
Goodwill & intangibles
Fixed assets
Dividends accrued
Other comprehensive income
Lease obligation — production equipment
Other
Total non-current deferred tax liabilities
Total deferred tax items
Valuation allowances
Net deferred tax asset
$
66.7 $
60.5
$
$
$
$
— $
(7.6)
(7.6) $
183.4 $
98.0
49.3
44.6
20.0
15.0
6.3
4.4
2.6
—
8.1
431.7 $
(1.0)
(3.8)
(4.8)
138.3
103.7
—
52.5
13.4
87.5
5.9
4.5
2.5
3.5
4.1
415.9
(84.8)
(2.8)
(3.0)
—
(7.7)
$ (130.3) $ (103.5)
(101.7)
—
(3.5)
(1.9)
(4.5)
$ (228.6) $ (215.1)
256.5
$
(43.8)
212.7
262.2 $
(13.0)
249.2 $
$
Deferred Tax Assets
(Liabilities), net
(millions of dollars)
Deferred income taxes — current assets
Deferred income taxes — current liabilities
Other non-current assets
Other non-current liabilities
Net deferred tax asset (current and non-current)
2010
2009
$
$
60.2
75.8 $
(4.8)
(18.4)
247.1
305.5
(113.7)
(89.8)
249.2 $ 212.7
Source: BORGWARNER INC, 10-K, February 10, 2011
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Balance Sheet Information
(Tables) (USD $)
Balance Sheet Information
Balance Sheet Information (Tables)
12 Months Ended
12/31/2010
(millions of dollars)
December 31,
Receivables:
Customers
Other
Gross receivables
Bad debt allowance(a)
Net receivables
Inventories:
Raw material and supplies
Work in progress
Finished goods
FIFO inventories
LIFO reserve
Net inventories
Other current assets:
Prepaid tooling
Product liability insurance asset
Derivatives
Prepaid tax
Other
Total other current assets
Property, plant and equipment:
Land
Buildings
Machinery and equipment
Capital leases
Construction in progress
Total property, plant and equipment
Accumulated depreciation
Tooling, net of amortization
Property, plant & equipment, net
Investments and advances:
Investment in equity affiliates
Other investments and advances
Total investments and advances
Other non-current assets:
Product liability insurance asset
Deferred income taxes
Other intangible assets
Other
Total other non-current assets
Accounts payable and accrued expenses:
Trade payables
Trade payables for capital expenditures
Payroll and employee related
Retirement related
Product warranties
Customer related
Product liability
Severance
$
$
$
$
$
$
$
$
$
$
$
$
$
2010
2009
859.5 $
168.4
1,027.9
(4.0)
1,023.9 $
244.0 $
88.1
111.7
443.8
(13.2)
430.6 $
21.8 $
25.8
2.7
5.8
23.6
79.7 $
634.5
101.8
736.3
(4.3)
732.0
187.3
69.8
68.8
325.9
(11.6)
314.3
25.6
24.9
12.0
2.2
23.2
87.9
67.9 $
601.4
1,961.2
2.3
128.2
2,761.0
(1,308.0)
1,453.0
89.6
1,542.6 $
56.3
570.0
1,866.5
2.4
126.4
2,621.6
(1,211.6)
1,410.0
80.3
1,490.3
205.2 $
102.7
307.9 $
24.8 $
305.5
168.8
32.0
531.1 $
737.7 $
28.9
190.2
34.7
37.0
32.5
25.8
4.6
194.8
62.6
257.4
25.0
247.1
148.6
29.8
450.5
539.2
28.6
136.7
34.8
32.5
31.4
24.9
17.5
Source: BORGWARNER INC, 10-K, February 10, 2011
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Insurance
Derivatives
Environmental
Interest
Legal and professional fees
Dividends payable to non-controlling shareholders
Current deferred income taxes
Other
Total accounts payable and accrued expenses
$
Other non-current liabilities:
Deferred income taxes
Cross currency swaps and derivatives
Product warranties
Product liability accrual
Deferred revenue
Environmental
Other
$
Total other non-current liabilities
$
11.9
3.3
21.0
14.3
8.6
4.2
18.4
51.0
1,224.1 $
113.7 $
78.8
29.8
24.8
23.4
8.2
84.2
362.9 $
16.2
14.6
12.2
11.2
9.1
5.4
4.8
58.0
977.1
89.8
54.2
29.2
25.0
22.7
10.1
64.6
295.6
(a) Bad debt allowance:
Beginning balance
Provision
Write-offs
Translation adjustment and other
Ending balance
Impact to company
2010
2009
2008
$ (4.3) $ (5.7) $ (5.2)
(2.4)
1.6
0.3
$ (4.0) $ (4.3) $ (5.7)
0.1
1.4
(0.1)
(1.1)
2.5
(1.1)
(millions of dollars)
Q1
Q2
2010
Q3
Q4
Full Year
Operating income increase
Net earnings increase
attributable to BorgWarner
Inc.
Earnings per share
increase — Basic
Earnings per share
increase — Diluted
$
4.8 $
4.7 $
4.6 $
4.7 $
18.8
3.7
3.6
3.6
3.6
14.5
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
0.13
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
0.11
(millions of dollars)
Q1
Q2
2009
Q3
Q4
Full Year
Summarized financial data for NSK-Warner
Operating income increase
Net earnings increase
attributable to BorgWarner
Inc.
Earnings per share
increase — Basic
Earnings per share
increase — Diluted
(millions of dollars)
Balance sheets:
Cash and securities
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total equity
Statements of operations:
Net sales
Gross profit
$
4.6 $
4.6 $
4.6 $
4.6 $
18.4
3.5
3.5
3.5
3.5
14.0
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
0.12
$ 0.03 $ 0.03 $ 0.03 $ 0.03 $
0.12
2010
2009
$ 109.1 $
310.2
174.9
151.4
41.9
291.8
83.0
279.1
182.6
137.9
45.0
278.8
2010
2009
2008
$ 634.7 $ 494.5 $ 637.9
140.0
131.9
89.2
Source: BORGWARNER INC, 10-K, February 10, 2011
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Net income
68.3
35.8
67.6
Source: BORGWARNER INC, 10-K, February 10, 2011
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Goodwill And Other Intangibles (Tables)
Goodwill And Other Intangibles
(Tables) (USD $)
12 Months Ended
12/31/2010
Changes in the carrying amount of
goodwill
Engine
Drivetrain
Engine
Drivetrain
Other intangible assets
(millions of dollars)
2010
2009
Gross goodwill balance as of
January 1
Accumulated impairment
losses
Net goodwill balance as of
January 1
Goodwill during the year:
Acquired
Divested
Translation adjustment
Balance as of December 31
$
1,297.8 $
265.6 $
1,289.6 $
264.8
(501.8)
(0.2)
(501.8)
(0.2)
$
796.0 $
265.4 $
787.8 $
264.6
74.1
(1.4)
(18.6)
850.1 $
—
—
(2.0)
263.4 $
(1.1)
9.3
796.0 $
—
—
0.8
265.4
$
(millions of dollars)
Amortized intangible
assets
Patented
technology
Unpatented
technology
Customer
relationships
Distribution
network
Miscellaneous
December 31, 2010
December 31, 2009
Gross
Carrying
Amount
Accumulated
Amortization
Carrying
Amount
Net
Gross
Carrying
Amount
Accumulated
Amortization
Carrying
Amount
Net
$
47.0 $
13.8 $
33.2 $
32.8 $
11.6 $
21.2
22.4
4.2
18.2
6.7
3.2
127.3
57.5
69.8
119.1
46.2
50.8
14.7
50.8
11.9
—
2.8
54.4
14.7
43.6
11.9
3.5
72.9
10.8
2.8
Total amortized
intangible assets
In-process R&D
Unamortized
trade names
262.2
13.1
138.2
—
124.0
13.1
227.7
13.1
116.5
—
111.2
13.1
31.7
—
31.7
24.3
—
24.3
Total intangible
assets
$
307.0 $
138.2 $
168.8 $
265.1 $
116.5 $
148.6
Intangible Assets Gross Roll Forward
Accumulated amortization net
(millions of dollars)
Beginning balance
Acquisitions
Translation adjustment
Ending balance
(millions of dollars)
Beginning balance
Provisions
Non-recurring charges (write-offs)
Translation adjustment
Ending balance
2010
2009
$ 265.1 $ 231.2
27.7
6.2
$ 307.0 $ 265.1
55.0
(13.1)
2010
2009
$ 116.5 $
82.8
26.3
4.6
2.8
$ 138.2 $ 116.5
28.4
—
(6.7)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Product Warranty
(Tables) (USD $)
12 Months Ended
12/31/2010
Warranty accrual accounts
Product Warranty (Tables)
(millions of dollars)
Beginning balance
Acquisition
Provisions
Payments
Translation adjustment
Ending balance
2010
2009
$
$
61.7 $
3.0
39.3
(35.5)
(1.7)
66.8 $
82.1
—
46.0
(68.3)
1.9
61.7
Product warranty liability
(millions of dollars)
2010
2009
Accounts payable and accrued expenses $ 37.0 $ 32.5
29.2
Other non-current liabilities
$ 66.8 $ 61.7
Total product warranty liability
29.8
Source: BORGWARNER INC, 10-K, February 10, 2011
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Notes Payable and Long-Term Debt (Tables)
Notes Payable and Long-Term Debt
(Tables) (USD $)
Outstanding notes payable and long-term debt
12 Months Ended
12/31/2010
(millions of dollars)
2010
2009
Short-term debt
Short-term borrowings
Receivables securitization(a)
Total short-term debt
Long-term debt
3.5% Convertible notes due 4/15/12
5.75% Senior notes due 11/01/16
($150 million par value)(b)
8.00% Senior notes due 10/01/19
($134 million par value)(b)
4.625% Senior notes due 09/15/20
($250 million par value)
7.125% Senior notes due 02/15/29
($121 million par value)
Term loan facilities & other
Impact of derivates on debt(b)
Total long-term debt
Less: current portion
Long-term debt, net of current portion
$
$
42.4 $
80.0
122.4 $
64.0
—
64.0
$
348.5 $ 330.2
149.4
149.3
133.9
133.9
247.5
—
119.3
119.3
31.6
14.2
31.4
27.8
$ 1,058.0 $ 778.3
6.1
5.1
$ 1,051.9 $ 773.2
(a) On January 1, 2010, the Company adopted ASC Topic 860. The
impact of this adoption is an increase in receivables, net of
$80 million and an increase in notes payable and other
short-term debt of $80 million in the Company’s December 31,
2010 Consolidated Balance Sheet. See Note 1 in the
Consolidated Financial Statements for more information
regarding the Company’s first quarter 2010 adoption of ASC
Topic 860.
(b) In 2006, the Company entered into several interest rate swaps
that had the effect of converting $325.0 million of fixed rate
notes to variable rates. In the first quarter of 2009, $100 million
in interest rate swaps related to the Company’s 2009 fixed rate
debt matured, and the Company terminated $150 million in
interest rate swap agreements related to the Company’s 2016
fixed rate debt and $75 million of interest rate swap agreements
related to the Company’s 2019 fixed rate debt. As a result of the
first quarter 2009 swap terminations, a $34.5 million gain
remained in debt and is being amortized over the remaining
lives of the respective 2016 and 2019 debt. As of December 31,
2010 and 2009, the unamortized portion was $27.8 million and
$31.4 million, respectively.
2011
2012
2013
2014
2015
After 2015
Total Payments
Less: Convertible Note Accretion
Less: Unamortized Discounts
Total
$
128.5
384.1
5.0
0.2
10.0
682.4
$ 1,210.2
(25.3)
(4.5)
$ 1,180.4
Annual principal payments
Source: BORGWARNER INC, 10-K, February 10, 2011
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Total interest expense related to the convertible notes in the
Company's Consolidated Statement of Operations
(millions of dollars)
Interest expense
Non-cash portion
2010
2009
$ 31.3 $ 22.2
$ 18.3 $ 12.7
Source: BORGWARNER INC, 10-K, February 10, 2011
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Fair Value Measurements (Tables)
Fair Value Measurements
(Tables) (USD $)
Assets and liabilities measured at fair value
12 Months Ended
12/31/2010
(millions of dollars)
Assets:
Foreign exchange
Basis of Fair Value Measurements
Quoted
Prices in
Active
Markets for
Identical
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Balance at
December 31,
2010
Significant
Unobservable
Inputs
(Level 3)
Valuation
Technique
Change in fair value of net fixed assets impaired
Fair value Defined benefit plan assets measured at recurring
and non-recurring basis
contracts
$
$
2.7 $
2.7 $
— $
— $
2.7 $
2.7 $
Liabilities:
Foreign exchange
contracts
Net investment
$
6.4 $
— $
6.4 $
hedge contracts
$
75.7
82.1 $
—
— $
75.7
82.1 $
A
A
A
—
—
—
—
—
(millions of dollars)
Fair Value
Measurements
Using Significant
Unobservable Inputs
(Level 3)
Net book value prior to impairment
Fixed asset impairment charge
Net book value after impairment charge
$
$
22.3
(22.3)
—
Balance at
December 31,
(millions of dollars)
2010
Basis of Fair Value Measurements
Quoted
Prices in
Active
Markets for
Identical
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Valuation
Technique
U.S. Plans:
Fixed income
securities
Equity securities
Cash, real estate
and other
Non-U.S. Plans:
Fixed income
securities
Equity securities
Cash, real estate
and other
$
$
$
$
113.7 $
140.5
33.0
287.2 $
59.6 $
88.4
6.6
154.6 $
— $
48.5
—
48.5 $
— $
—
—
— $
113.7 $
92.0
33.0
238.7 $
59.6 $
88.4
6.6
154.6 $
—
—
—
—
—
—
—
—
A
A
A
A
A
A
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial Instruments (Tables)
Financial Instruments
(Tables) (USD $)
Cross Currency Swaps
Outstanding
12 Months Ended
12/31/2010
(millions of dollars)
Floating $ to Floating €
Floating $ to Floating ¥
Notional
in USD
$ 75.0
$ 150.0
Cross-Currency Swaps
Notional
in Local Currency
58.5
€
¥ 17,581.5
Duration
Oct - 19
Nov - 16
Commodity Derivative Contracts
Outstanding
Foreign exchange derivative
contracts outstanding
Derivative Instruments in
Statement of Financial Position
Fair Value
Deferred Losses Reported In
Other Comprehensive Income
Loss
Derivatives Designated as Net
Investment Hedges under Topic
815
Commodity Hedges
Volume
Hedged
December 31,
2010
Volume
Hedged
December 31, 2009
Units of
Measure
—
—
—
258,900
780
759
330
392,396
Metric Tons
Metric Tons
Metric Tons
MMBtu
Duration
Dec - 10
Dec - 10
Dec - 10
Dec - 11
Currency Hedges (millions)
Notional in
Notional in
Traded
Currency
Traded Currency
December 31, 2010
Traded Currency
December 31, 2009
Duration
Euro
Hungarian Forint
British Pound
US Dollar
Japanese Yen
US Dollar
Euro
Euro
Indian Rupee
Euro
107.3
—
—
20.2
—
1.9
45.7
13.5
141.5
1.7
84.3
2,562.6
10.5
0.4
16.7
7.4
62.3
—
372.9
—
Dec - 13
Dec - 10
Jan - 10
Dec - 11
Mar - 10
Dec - 11
Dec - 12
Mar - 11
Dec - 11
Mar - 11
Location
Prepayments and
Other Current
Assets
Other Non-Current
Assets
Prepayments and
Other Current
Assets
Other Non-Current
Assets
Assets
December 31,
2010
December 31,
2009
Location
Liabilities
December 31,
2010
December 31,
2009
$
2.7 $
3.6
Accounts Payable
and Accrued
Expenses
$
3.3 $
—
—
—
Other Non-Current
Liabilities
0.2
Accounts Payable
and Accrued
Expenses
8.4
Other Non-Current
Liabilities
—
3.1
—
75.7
14.5
3.0
0.1
51.2
Commodity
Nickel
Copper
Aluminum
Natural Gas
Functional
Currency
British Pound
Euro
Euro
Euro
Euro
Indian Rupee
Korean Won
Mexican Peso
US Dollar
US Dollar
(millions of dollars)
Derivatives designated as
hedging instruments
under Topic 815
Foreign Exchange Contracts
Commodity Contracts
Net Investment Hedges
(millions of dollars)
Contract Type
December 31, 2010
December 31, 2009
Balance in OCI at
Gain (Loss) Expected to
be Reclassified to Income
in One Year or Less
$
Foreign Exchange
Commodity
Net Investment Hedges
$
Total
(3.7) $
1.6
(69.3)
(71.4) $
(11.4) $
7.3
(47.2)
(51.3) $
(0.6)
1.6
—
1.0
Derivatives Designated as Net Investment Hedges under Topic 815
(millions of dollars)
Contract Type
Gain (Loss) Reclassified
from OCI to Income
(Effective Portion)
Year Ended
Gain (Loss)
Recognized in Income
(Ineffective Portion)
Year Ended
Location
December 31, 2010
December 31, 2009
Location
December 31, 2010
December 31, 2009
Cross-Currency Swap
Interest Expense
$ —
$ —
Interest Expense
$ (2.5)
$
1.1
Source: BORGWARNER INC, 10-K, February 10, 2011
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Derivatives Designated as Cash
Flow Hedging Instruments under
Topic 815
Gain (Loss) Reclassified
from OCI to Income
(Effective Portion)
Year Ended
Gain (Loss)
Recognized in Income
(Ineffective Portion)
Year Ended
(millions of dollars)
Contract Type
Location
December 31,
2010
December 31,
2009
Location
December 31,
2010
December 31,
2009
Foreign Exchange
Sales
$
Foreign Exchange
Foreign Exchange
Commodity
Cost of Goods
Sold
SG&A Expense
Cost of Goods
Sold
(0.2)
(1.2)
(0.6)
8.2
$
(14.4) SG&A Expense $
5.2 SG&A Expense
(0.7) SG&A Expense
Cost of Goods
Sold
(7.2)
$
0.9
—
—
(0.2)
(4.5)
0.6
—
0.3
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit
Plans
(Tables) (USD $)
Expense for defined
contribution and
defined benefit
pension plans and
other post employment
defined benefit plans
Reconciliation of the
plans' benefit
obligations, plan
assets, funded status
and recognition
Retirement Benefit Plans (Tables)
12 Months Ended
12/31/2010
millions of dollars
Defined contribution expense
Defined benefit pension expense
Other post employment benefit expense
Total
2010
2009
2008
$ 19.2 $
19.8
17.5
$ 56.5 $
16.6 $ 22.1
19.2
33.1
1.3
(48.4)
1.3 $ 42.6
millions of dollars
US
Non-US
US
Non-US
2010
2009
Pension Benefits
2010
2009
Other Post
Employment Benefits
Change in projected
benefit obligation:
Projected benefit
obligation at beginning
of year
Service cost
Interest cost
Plan participants’
contributions
Plan amendments
Curtailment/settlement
gain
Actuarial (gain) loss
Currency translation
Other
Benefits paid
Projected benefit
$ 316.5 $
—
17.5
326.5 $ 317.9 $
0.3
20.7
7.4
17.6
280.4 $
9.9
16.5
—
—
0.6
1.2
—
(13.5)
—
19.2
—
1.1
(28.1)
—
(0.4)
(12.2)
—
(14.7)
—
24.9
—
—
(33.8)
0.1
—
(4.3)
19.2
17.2
3.4
(15.9)
278.5
0.8
14.5
—
—
—
(7.2)
—
—
(24.7)
$
328.5
0.8
18.6
—
(22.2)
(30.9)
11.7
—
—
(28.0)
obligation at end of year $ 326.2 $
326.0 $ 316.5 $
326.5 $
261.9
$
278.5
Change in plan assets:
Fair value of plan assets at
beginning of year
Actual return on plan
assets
Employer contribution
Plan participants’
contribution
Currency translation
Other
Benefits paid
Fair value of plan assets at
$ 269.1 $
144.0 $ 230.8 $
114.0
35.6
10.6
—
—
—
(28.1)
14.2
14.5
49.1
23.0
0.5
(3.9)
—
(14.7)
—
—
—
(33.8)
18.0
16.3
0.1
11.6
(0.1)
(15.9)
end of year
$ 287.2 $
154.6 $ 269.1 $
144.0
Funded status
$
(39.0) $
(171.4) $
(47.4) $
(182.5) $
(261.9)
$
(278.5)
Amounts recognized in
the Consolidated
Balance Sheets
consist of:
Non-current assets
Current liabilities
Non-current liabilities
Net amount recognized
Amounts recognized in
accumulated other
comprehensive loss
consist of:
Net actuarial loss
Net prior service cost
(credit)
Net amount recognized*
$
$
— $
(0.1)
(38.9)
(39.0) $
0.5 $
(8.1)
(163.8)
(171.4) $
— $
—
(47.4)
(47.4) $
0.1 $
(6.2)
(176.4)
(182.5) $
—
(26.5)
(235.4)
(261.9)
$ 145.7 $
37.4 $ 147.9 $
44.2 $
120.0
(12.1)
$ 133.6 $
1.4
(12.8)
38.8 $ 135.1 $
0.2
44.4 $
(59.5)
60.5
$
$
$
$
—
(28.6)
(249.9)
(278.5)
136.3
(66.4)
69.9
Source: BORGWARNER INC, 10-K, February 10, 2011
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Funded status of
pension plans with
accumulated benefit
obligations in excess
of plan assets
Weighted average
asset allocations of
funded pensions plans
and target allocations
Components of net
periodic benefit cost
Total accumulated
benefit obligation for
all plans
$ 326.2 $
316.8 $ 316.5 $
317.1
* Accumulated other comprehensive loss (“OCI”) shown above does not include our equity investee,
NSK-Warner. NSK-Warner had an OCI loss of $6.1 million in 2010 and $9.4 million in 2009.
(millions of dollars)
Accumulated benefit obligation
Plan assets
Deficiency
Pension deficiency by country:
United States
United Kingdom
Germany
Other
Total pension deficiency
U.S. Plans:
Cash, real estate and other
Fixed income securities
Equity securities
Non-U.S. Plans:
Cash, real estate and other
Fixed income securities
Equity securities
2010
2009
$ (634.9) $ (630.5)
409.1
$ (202.7) $ (221.4)
432.2
$
(39.0) $
(7.5)
(128.0)
(28.2)
(47.4)
(19.1)
(131.1)
(23.8)
$ (202.7) $ (221.4)
2010
2009
Allocation
Target
11%
40%
49%
100%
9%
36%
55%
100%
9%
45%
46%
100%
10%
31%
59%
100%
5-15%
35-55%
35-55%
7-11%
31-37%
54-60%
(millions of dollars)
For the Year Ended December 31,
Components of net
periodic benefit cost:
Service cost
Interest cost
Expected return on plan
assets
Settlements, curtailments
and other
Amortization of
unrecognized prior
service benefit
Amortization of
unrecognized loss
Net periodic benefit cost
2010
Pension Benefits
2009
2008
Other Post
Employment Benefits
US
Non-US
US
Non-US
US
Non-US
2010
2009
2008
$
— $
17.5
7.4 $
17.6
0.3 $
20.7
9.9 $
16.5
2.0 $
20.9
10.4 $
17.3
0.8 $
14.5
0.8
18.6
$
2.2
22.7
(19.7)
(9.7)
(16.2)
(9.6)
(28.2)
(13.1)
—
—
—
—
—
3.3
0.6
7.5
—
—
(61.9)*
(8.7)
(0.7)
—
(0.5)
—
—
—
(6.9)
(13.2)
(25.0)
6.6
0.8
7.3
0.8
2.3
0.1
9.1
7.3
10.1
(benefit)
$
3.7 $
16.1 $
14.9 $
18.2 $
4.5 $
14.7 $ 17.5 $ (48.4)
$
1.3
Defined Benefit Plan
Weighted Average
Assumptions Used In
Calculating Benefit
Obligations
percent
U.S. pension plans:
Discount rate
Rate of compensation increase
U.S. other post employment plans:
Discount rate
Rate of compensation increase
Non-U.S. pension plans:
Discount rate
Rate of compensation increase
2010
2009
5.17
3.50
5.75
3.50
4.75
N/A
5.50
N/A
5.37
2.80
5.43
2.57
Source: BORGWARNER INC, 10-K, February 10, 2011
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Defined Benefit Plan
Weighted Average
Assumptions Used In
Calculating Net
Periodic Benefit Cost
Defined Benefit Plan
Estimated Future
Benefit Payments
Defined Benefit Plan
Effect Of One
Percentage Point
Change In Assumed
Health Care Cost
Trend Rates
percent
U.S. pension plans
Discount rate
Rate of compensation increase
Expected return on plan assets
U.S. other post employment plans
Discount rate
Rate of compensation increase
Expected return on plan assets
Non-U.S. pension plans
Discount rate
Rate of compensation increase
Expected return on plan assets
2010
2009
2008
5.75
3.50
7.50
7.09
3.50
7.50
6.50
3.50
8.75
5.50
N/A
N/A
7.00
N/A
N/A
6.50
N/A
N/A
5.47
2.75
7.12
5.72
2.77
7.10
5.42
3.10
7.05
Pension Benefits
Other Post Employment Benefits
U.S.
Non-U.S.
Reimbursements
W/o Medicare
Part D
With Medicare
Part D
Reimbursements
millions of dollars
Year
2011
2012
2013
2014
2015
2016-2020
millions of dollars
$
27.1 $
26.5
26.2
25.2
24.4
114.1
15.4 $
14.3
15.3
16.9
17.1
96.5
$
28.0
27.4
26.4
25.5
24.6
109.7
27.1
26.6
25.5
24.7
23.8
106.4
One Percentage Point
Increase
$ 18.0
$ 0.9
Decrease
$ (16.0)
$ (0.8)
Effect on other post employment benefit obligation
Effect on total service and interest cost components
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans (Tables)
Stock Incentive Plans
(Tables) (USD $)
12 Months Ended
12/31/2010
Stock option compensation
expense
(millions), except per share data
Earnings before income taxes and noncontrolling interest
Net earnings
Per share — basic
Per share — diluted
Summary of the plans' shares
Year Ended
December 31,
2009
2008
2010
6.6 $ 12.2
$ 0.1 $
$ — $
9.1
5.1 $
$ — $ 0.04 $ 0.08
$ — $ 0.04 $ 0.08
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic
Value
(In millions)
Shares
(thousands)
Outstanding at January 1, 2008
Exercised
Forfeited
Outstanding at December 31,
2008
Exercised
Forfeited
Outstanding at December 31,
2009
Exercised
Forfeited
Outstanding at December 31,
2010
Options exercisable at
December 31, 2010
6,331 $
(366)
(167)
27.75
23.82
32.58
5,798 $
27.86
(381) $
(240) $
23.89
32.16
5,177 $
27.98
(1,888) $
(36) $
26.73
33.95
7.7 $
$
130.8
8.3
6.7 $
$
5.8 $
$
6.0
3.4
29.7
50.3
3,253 $
28.64
4.9 $
142.2
3,253 $
28.64
4.9 $
142.2
Options Outstanding
Range of Exercise Prices
(Thousands)
Number
Outstanding
Weighted-Average
Remaining
Contractual
Life (Years)
Options Exercisable
Number
Weighted-Average
Exercise Price
Exercisable
(Thousands)
Weighted-Average
Exercise Price
$12.07 - 16.52
$22.15 - 34.95
319
2,934
3,253
0.2 $
4.7 $
4.9 $
14.27
30.21
28.64
319
2,934
3,253
$
$
$
14.27
30.21
28.64
Summarize information
about stock options
outstanding
Proceeds from stock option
exercises
(millions of dollars)
Proceeds from stock options — gross
Tax benefit (loss)
Proceeds from stock options — net
Restricted stock
compensation expense
(millions), except per share data
Year Ended
December 31,
2009
2010
2008
$ 55.4 $
11.7
$ 67.1 $
9.4 $ 14.1
(0.7)
3.0
8.7 $ 17.1
Year Ended
December 31,
2009
2010
2008
Earnings before income taxes and noncontrolling interest
Net earnings
Per share — basic
Per share — diluted
9.6
$ 18.9 $ 14.8 $
$ 14.7 $ 11.4 $
7.2
$ 0.13 $ 0.10 $ 0.06
$ 0.11 $ 0.10 $ 0.06
Source: BORGWARNER INC, 10-K, February 10, 2011
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Status of nonvested restricted
stock
Nonvested at January 1, 2008
Granted
Vested
Forfeited
Nonvested at December 31, 2008
Granted
Vested
Forfeited
Nonvested at December 31, 2009
Granted
Vested
Forfeited
Nonvested at December 31, 2010
Shares
Subject to
Restriction
(Thousands)
Weighted
Average
Price
280.9 $
412.4
(14.6)
(17.2)
661.5 $
1,044.0
(23.5)
(134.9)
1,547.1 $
603.0
(188.4)
(91.1)
1,870.6 $
42.90
46.43
30.14
46.41
45.29
20.61
51.03
29.79
29.90
36.16
44.80
27.10
30.55
Amounts expenses under
plan and share issuance -
Performance Share Plans
Expense (millions of dollars)
Number of shares*
2010
2009
2008
$
23.9
104,205
$
10.7
269,896
$
4.3
287,816
* Shares are issued in February of the following year.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Other Comprehensive Income (Loss) (Tables)
Other Comprehensive Income
(Loss) (Tables) (USD $)
12 Months Ended
12/31/2010
The Components of Accumulated Other Comprehensive
Income (loss), net of tax
(millions of dollars)
Foreign currency translation adjustments
Market value of hedge instruments
Defined benefit post employment plans
Unrealized gain on available-for-sale securities
Comprehensive loss attributable to the
$
2010
2009
147.1 $
(44.8)
(158.1)
1.2
210.6
(31.2)
(165.9)
—
Changes in Other Comprehensive income (loss) in
Consolidated Statement of Shareholders' Equity
(millions of dollars)
2010
2009
2008
noncontrolling interest
Accumulated other comprehensive income (loss) $
0.9
(53.7) $
1.0
14.5
Foreign currency translation
adjustments
Market value change of hedge
instruments
Income taxes
Net foreign currency translation and
hedge instruments adjustment
Unrealized gain (loss) on
available-for-sale securities
Defined benefit post employment plans
Income taxes
Net defined benefit post employment
$ (63.5) $
54.8 $
(88.6)
(20.5)
6.9
63.3
(18.2)
(56.8)
19.3
(77.1)
99.9
(126.1)
1.2
23.9
(16.1)
—
(13.1)
9.7
(1.4)
(104.5)
29.8
plans
7.8
(3.4)
(74.7)
Change in accumulated other
comprehensive income (loss)
Net earnings (loss) attributable to
BorgWarner Inc.
Comprehensive income (loss)
Comprehensive income (loss)
attributable to noncontrolling interest*
Comprehensive income (loss)
(68.1)
96.5
(202.2)
377.4
309.3
27.0
123.5
(35.6)
(237.8)
(0.1)
3.9
(10.8)
attributable to BorgWarner Inc.
$ 309.2 $ 127.4 $ (248.6)
* Refer to Note 1, “Summary of Significant Accounting Policies” for
implementation of ASC Topic 810.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Contingencies (Tables)
Contingencies
(Tables) (USD $)
Estimated future settlement of existing claims
12 Months Ended
12/31/2010
(millions of dollars)
Assets:
2010
2009
Prepayments and other current assets $ 25.8 $ 24.9
25.0
Other non-current assets
49.9
Total insurance assets
24.8
50.6 $
$
Liabilities:
Accounts payable and accrued
expenses
Other non-current liabilities
Total accrued liability
$
$
25.8 $
24.8
50.6 $
24.9
25.0
49.9
Source: BORGWARNER INC, 10-K, February 10, 2011
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Leases and Commitments
(Tables) (USD $)
12 Months Ended
12/31/2010
Future minimum operating lease payments
Leases and Commitments (Tables)
(millions of dollars)
2011
2012
2013
2014
2015
After 2015
$ 9.3
7.6
6.7
5.9
5.5
8.0
Total minimum lease payments $ 43.0
Source: BORGWARNER INC, 10-K, February 10, 2011
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Earnings
(Loss) Per Share (Tables) (USD $)
12 Months Ended
12/31/2010
Earnings (Loss) Per Share (Tables)
Calculation of basic and diluted earnings (loss) per
share of common stock
(millions of dollars, except per share amounts)
2010
2009
2008*
Basic earnings (loss) per share:
Net earnings (loss) attributable to
BorgWarner Inc.
Weighted average shares of common
stock outstanding
Basic earnings (loss) per share of
common stock
Diluted earnings (loss) per share:
Net earnings (loss) attributable to
BorgWarner Inc.
Adjustment for net interest expense on
convertible notes
Diluted net earnings (loss) attributable to
$
377.4 $
27.0 $
(35.6)
114.155
116.522
116.007
$
3.31 $
0.23 $
(0.31)
$
377.4 $
27.0 $
(35.6)
20.4
—
—
BorgWarner Inc.
$
397.8 $
27.0 $
(35.6)
Weighted average shares of common
stock outstanding
Effect of 3.50% convertible notes
Effect of warrant
Effect of stock-based compensation
Total dilutive effect on weighted average
114.155
11.389
1.464
2.567
116.522
—
—
0.417
116.007
—
—
—
shares of common stock outstanding
15.420
0.417
—
Weighted average shares of common
stock outstanding including dilutive
shares
Diluted earnings (loss) per share of
common stock
Total anti-dilutive shares
3.50% convertible notes
Bond hedge
Stock-based compensation
Total anti-dilutive shares
129.575
116.939
116.007
$
3.07 $
0.23 $
(0.31)
—
2.836
—
2.836
11.389
0.034
2.711
14.134
—
—
1.578
1.578
* The Company had a loss for the year ended December 31, 2008. As a
result, diluted loss per share is the same as basic loss per share in the
period, as any dilutive securities would reduce the loss per share.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Restructuring
(Tables) (USD $)
12 Months Ended
12/31/2010
Restructuring (Tables)
Rollforward of the employee related restructuring and other
accruals
(millions of dollars)
Drivetrain
Engine
Corporate
Total
Employee Related and Other Costs
Balance at January 1,
2008
Provision
Cash Payments
Translation
Adjustment
Balance at
December 31, 2008
Provision
Cash Payments
Translation
Adjustment
Balance at
December 31, 2009
Cash Payments
Translation
Adjustment
Balance at
$
$
9.1
18.8
(6.0)
—
34.5
(4.5)
— $
1.3
(0.6)
9.1
54.6
(11.1)
(0.9)
(0.7)
—
(1.6)
21.0 $
6.0
(22.8)
29.3 $
4.6
(23.4)
0.7 $
3.4
(2.0)
51.0
14.0
(48.2)
0.3
0.4
—
0.7
$
4.5 $
(3.6)
10.9 $
(6.4)
2.1 $
(2.1)
17.5
(12.1)
(0.1)
(0.7)
—
(0.8)
December 31, 2010
$
0.8 $
3.8 $
— $
4.6
Source: BORGWARNER INC, 10-K, February 10, 2011
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Recent Transactions (Tables)
Recent Transactions
(Tables) (USD $)
12 Months Ended
12/31/2010
Aggregate estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition consummated
(millions of dollars)
Receivables, net
Inventories, net
Property, plant and equipment, net
Goodwill
Other intangible assets, net of tax
Accounts payable and accrued expenses
Other assets and liabilities, net
Assumed debt
Net cash consideration
$
54.3
44.7
45.0
74.1
31.1
(81.5)
(9.3)
(10.8)
$ 147.6
Activity related to the Company's DPTA obligation
(millions of dollars)
Domination and Profit Transfer Agreement Obligation at
December 31, 2008
Shares Purchased During the Year Ended December 31, 2009
Share Resolution to €73.39 per Share
Translation Adjustment
Domination and Profit Transfer Agreement Obligation at
December 31, 2009
$ 44.0
(46.6)
0.9
1.7
$
—
Net cash paid related to the Company's step acquisition of
BERU
Year
2005
2007
2008
2009
Total
Percentage
Amount
Acquired
Paid
69.4% $ 477.2(a)
138.8(b)
12.8%
136.8(b)
13.4%
46.6(b)
4.4%
100.0% $ 799.4
(a) The Company’s payment of $477.2 million has been reflected as an
Investing activity in the Consolidated Statements of Cash Flows for the
year ended December 31, 2005.
(b) The Company’s payments of $46.6 million, $136.8 million and
$138.8 million have been reflected as a Financing activity in the
Consolidated Statements of Cash Flows for the year ended
December 31, 2009, 2008 and 2007, respectively.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Reporting Segments and Related Information (Tables)
Reporting Segments and Related Information
(Tables) (USD $)
12 Months Ended
12/31/2010
Segment Information
(millions of dollars)
Customers
Segment
Net
Net Sales
Inter-
Year-End
Assets
Depr./
Amort.
Long-lived
Asset
Expenditures (b)
Consolidated
$
Segment Earnings (Loss) Before Interest
Income and Taxes
(millions of dollars)
2010 Segment
Information
Engine
Drivetrain
Inter-segment
eliminations
Total
Corporate(a)
$
4,041.4 $
1,611.4
19.4 $ 4,060.8 $
1,611.4
—
3,277.7
1,230.5
$
184.4 $
63.6
—
5,652.8
—
5,652.8 $
(19.4)
(19.4)
5,652.8
—
—
—
— $ 5,652.8 $
—
4,508.2
1,046.8
5,555.0(a) $
—
248.0
4.9
252.9 $
181.3
83.5
—
264.8
11.8
276.6
Engine
Drivetrain
Adjusted EBIT
Muncie closure retiree obligation net gain
Environmental litigation settlement
BERU-Eichenauer equity investment gain
Corporate, including equity in affiliates’ earnings
and stock-based compensation
Restructuring expense
Goodwill impairment charge
Interest income
Interest expense and finance charges
Earnings before income taxes and
noncontrolling interest
Provision (benefit) for income taxes
Net earnings (loss)
Net earnings attributable to the noncontrolling
interest, net of tax
Net earnings (loss) attributable to BorgWarner
2010
2009
2008
$ 537.9 $ 219.8 $ 394.9
(4.9)
390.0
—
—
—
137.0
674.9
—
28.0
(8.0)
(13.5)
206.3
(27.9)
—
—
111.0
111.3
—
—
(2.8)
68.8
477.9
81.7
396.2
50.3
—
(2.5)
57.2
17.9
(18.5)
36.4
60.0
127.5
156.8
(7.1)
38.8
14.0
33.3
(19.3)
18.8
9.4
16.3
Inc.
$ 377.4 $
27.0 $ (35.6)
Geographic Information - Sales and
Long-Lived Assets
(millions of dollars)
2010
Net sales
2009
2008
2010
Long-Lived Assets
2009
2008
$
1,451.1 $
1,090.4 $
1,499.6 $
466.6 $
469.4 $
529.3
United States
Europe:
Germany
Hungary
France
Other Europe
Total Europe
South Korea
China
Other foreign
Total
$
1,839.9
418.3
318.7
546.1
3,123.0
358.0
330.6
390.1
5,652.8 $
1,419.9
292.4
229.5
282.9
2,224.7
212.4
184.1
250.2
3,961.8 $
1,948.4
398.2
244.3
431.8
3,022.7
251.8
131.1
358.7
5,263.9 $
447.5
53.0
63.0
173.7
737.2
94.8
104.9
139.1
1,542.6 $
500.0
58.4
72.9
138.1
769.4
69.1
66.1
116.3
1,490.3 $
546.7
55.7
84.2
142.9
829.5
63.1
55.1
109.2
1,586.2
Interim Financial Information
(millions of dollars, except per share amounts)
Quarter Ended
Mar-31
Jun-30
2010
Sep-30
Dec-31
Year
Mar-31
Jun-30
2009
Sep-30
Dec-31
Year
Net sales
$
1,286.8
$
1,421.7
$
1,410.9
$
1,533.4
$
5,652.8
$
819.5
$
916.2
$
1,027.8 $
1,198.3
$
3,961.8
Cost of sales
1,048.3
1,146.3
1,137.6
1,227.3
4,559.5
Gross profit
238.5
275.4
273.3
306.1
1,093.3
739.9
79.6
800.0
116.2
876.0
985.1
3,401.0
151.8
213.2
560.8
Selling, general and
administrative
expenses
Restructuring
expense
Other (income)
expense
Operating income
(loss)
130.3
137.8
150.2
148.3
566.6
74.1
115.4
125.9
144.4
459.8
—
1.6
—
20.3
—
0.1
—
0.4
—
22.4
—
—
50.3
—
—
(1.6)
—
1.5
106.6
117.3
123.0
157.4
504.3
5.5
(49.5)
27.5
67.3
50.3
(0.1)
50.8
Source: BORGWARNER INC, 10-K, February 10, 2011
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Equity in affiliates’
earnings, net of
tax
Interest income
Interest expense and
finance charges
Earnings (loss)
before income
taxes and
noncontrolling
interest
(9.3)
(0.6)
14.2
(10.0)
(0.6)
14.2
(10.5)
(0.6)
18.4
(9.8)
(1.0)
22.0
(39.6)
(2.8)
(0.2)
(0.5)
68.8
19.1
102.3
113.7
115.7
146.2
477.9
(12.9)
Provision (benefit)
for income taxes
20.9
4.2
30.6
81.7
(6.6)
(4.8)
(0.7)
9.0
(53.0)
(19.1)
(6.5)
(0.5)
(10.3)
(0.8)
13.0
16.1
21.5
62.3
1.5
5.7
(21.8)
(2.5)
57.2
17.9
(18.5)
81.4
111.5
115.6
396.2
(6.3)
(33.9)
20.0
56.6
36.4
26.0
87.7
Net earnings
(loss)
Net earnings
attributable to the
noncontrolling
interest, net of tax
Net earnings
(loss)
attributable of
BorgWarner
Inc.
Earnings (loss) per
share — basic
Earnings (loss) per
share — diluted
$
$
5.2
4.9
4.8
3.9
18.8
0.7
2.0
2.8
3.9
9.4
76.2(1)
82.8(2)
106.7(3) $
111.7
$
377.4
$
(7.0)(4) $
(35.9)(5) $
17.2 $
52.7(6) $
27.0
0.65
$
0.72
$
0.95
$
1.00
$
3.31
$
(0.06)*
$
(0.31)*
$
0.15 $
0.45
$
0.23
0.63**
$
0.68**
$
0.87**
$
0.89** $
3.07** $
(0.06)*
$
(0.31)*
$
0.15 $
0.45
$
0.23
* The Company had a loss for the quarters ended March 31, 2009 and June 30, 2009.
As a result, diluted loss per share is the same as basic loss per share in each period,
as any dilutive securities would reduce the loss per share.
** The Company’s diluted earnings per share for each quarter in 2010 and the year
ended December 31, 2010 includes the impact of the Company’s 3.50% convertible
notes and associated warrants. Refer to Note 16, “Earnings (Loss) Per Share”, for
further information on our diluted earnings calculation.
(1) The Company’s first quarter 2010 results were impacted by the following:
• $2.5 million Medicare Part D tax adjustment
(2) The Company’s second quarter 2010 results were impacted by the following:
• $8.0 million BERU-Eichenauer Equity investment gain.
• $28.0 million Environmental litigation settlement.
(3) The Company’s third quarter 2010 results were impacted by the following:
• $21.2 million foreign tax credit valuation allowance reversal.
(4) The Company’s first quarter 2009 results were impacted by the following:
• $4.8 million charge related to the adoption of Topic 805.
• $27.9 million net gain related to retiree obligations resulting from the closure of the
Muncie, Indiana, Drivetrain facility.
• $11.4 million net loss from interest rate derivative agreements.
(5) The Company’s second quarter 2009 results were impacted by the following:
• $50.3 million of restructuring expenses, including $9.0 million for employee
termination benefits, $36.3 million of asset impairment and $5.0 million of other
charges.
• $6.6 million net gain from interest rate derivative agreement.
(6) The Company’s fourth quarter 2009 results were impacted by the following:
• $3.1 million tax benefit related to an ASC Topic 740 adjustment.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting Policies (Details)
Summary of Significant Accounting Policies
(Details) (USD $) (in Millions)
12/31/2010 12/31/2009 12/31/2008
Principal effect on the prior year Balance Sheets related to the adoption of ASC Topic
810
Total equity
Increase for Topic 810 reclass of noncontrolling interest
$ 2,309.8
$ 2,222.7
$ 2,037.5
$ 31.5
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting
Policies
(Details 1) (USD $) (in Millions)
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Summary of Significant Accounting Policies (Details 1)
Principal effect on the prior year
Statement of Operations related to the
adoption of ASC Topic 810
Net earnings (loss)
$ 115.6
$ 111.5
$ 87.7
$ 81.4
$ 56.6
$ 20
$ (33.9)
$ (6.3)
$ 396.2
$ 36.4
$ (19.3)
Topic 810 reclass of noncontrolling
interest
Less: Net earnings attributable to
noncontrolling interest
3.9
4.8
4.9
5.2
3.9
2.8
2
0.7
18.8
9.4
16.3
(16.3)
Net earnings (loss) attributable to
BorgWarner Inc.
[16] - The Company's third quarter 2010 results were impact by the following: $21.2 million foreign tax credit valuation allowance reversal.
$ 377.4
$ 111.7
$ 17.2
$ 106.7[16]
$ 82.8[15]
$ 76.2[14]
$ (35.9)[12]
$ 52.7[13]
$ (7)[11]
$ 27
$ (35.6)
[15] - The Company's second quarter 2010 results were impact by the following: $8.0 million BERU-Eichenauer Equity investment gain. $28.0 million Environmental
litigation settlement.
[14] - The Company's first quarter 2010 results were impact by the following: $2.5 million Medicare Part D tax adjustment.
[13] - The Company's fourth quarter 2009 results were impacted by the following: $3.1 million tax benefit related to an ASC Topic 740 adjustment.
[12] - The Company's second quarter 2009 results were impacted by the following: $50.3 million of restructuring expenses, including $9.0 million for employee
termination benefits,$36.3 million of asset impairment and $5.0 million of other charges. $6.6 million net gain from interest rate derivative agreement.
[11] - The Company's first quarter 2009 results were impacted by the following: $4.8 million charge related to the adoption of Topic 805. $27.9 million net gain related
to retiree obligations resulting from the closure of the Muncie, Indiana, Drivetrain facility. $11.4 million net loss from interest rate derivative agreements.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting
Policies
(Details 2) (USD $) (in Millions)
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Summary of Significant Accounting Policies (Details 2)
Principal effect on the prior year
Statement of Cash Flows related to
the adoption of ASC Topic 810
Net earnings (loss)
$ 115.6
$ 111.5
$ 87.7
$ 81.4
$ 56.6
$ 20
$ (33.9)
$ (6.3)
$ 396.2
$ 36.4
$ (19.3)
Topic 810 reclass of noncontrolling
interest
Equity in affiliates' earnings, net of
dividends received, and other
(16.3)
$ 1.7
$ 21.3
$ 12
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting Policies (Details 3)
Summary of Significant Accounting Policies
(Details 3) (USD $) (in Millions)
Principal effect on the prior year Comprehensive Income related to the adoption of ASC Topic 810
Adjustment Effect of ASC Topic 810, Noncontrolling Interest
Net foreign currency translation and hedge instruments adjustment, as adjusted
12 Months Ended
12/31/2008
$ (10.8)
$ (126.1)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting Policies (Details 4)
Summary of Significant Accounting Policies
(Details 4) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Principal effect on the prior year Cash Flows related to the adoption of ASC Topic
810
Payments for business acquired, net of cash acquired
Less: Topic 805 reclass of noncontrolling interest
Net cash used in investing activities
$ 164.7
$ 7.5
$ 0
141.2
$ (429.5)
$ (154.8)
$ (343.9)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting Policies (Details 5)
Summary of Significant Accounting Policies
(Details 5) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Principal effect on the prior year Cash Flows related to the adoption of ASC Topic
810
Net cash used in financing activities
Less: Topic 805 reclass of noncontrolling interest
$ (13.2)
$ 44.8
$ (136.1)
$ (141.2)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Summary of Significant Accounting Policies (Details Textual)
Summary of Significant Accounting Policies
(Details Textual) (USD $) (in Millions)
Goodwill impairment recognized for Engine segment
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Equity method Investments affiliates
20% to 50%
Accounts receivable securitization facility matured and repaid
Company entered into a new accounts receivable securitization facility
Accounts receivable securitization facility prior to amendment
Accounts receivable facility after amendment
Increase in receivables due to adoption of ASC Topic 860
Increase in notes payable and other short-term debt due to adoption of ASC Topic
860
Total cash proceeds from sales of accounts receivable
Servicing fees paid for accounts receivable facility
Inventory Held By US Operations
Impact on inventory if valued at current cost, instead of LIFO
Amortization period of capitalized item, Minimum
Amortization period of capitalized item, Maximum
$ 80
80
720
1.2
100.1
$ 13.2
3
5
250
0.4
81.2
$ 11.6
Range of product warranty period
One to three years
Largest amount of recognizable tax benefit likely to be realized upon settlement
greater than 50 percent
Company expensed related to on-going acquisition related activity
Issue of convertible senior notes due on April 15, 2012
Effective interest rate of the convertible senior notes
0.09365
Source: BORGWARNER INC, 10-K, February 10, 2011
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Research and Development Costs
(Details) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Research and Development Costs (Details)
Research and Development
Gross RDexpenditures
Customer reimbursements
Net RDexpenditures
Net RDexpenditures as a percentage of net
sales
$ 233.2
(48.2)
185
0.033
$ 219
(63.8)
155.2
0.039
$ 273.4
(67.7)
205.7
0.039
Maximum value of RDcontract
$ 6
Source: BORGWARNER INC, 10-K, February 10, 2011
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Other Expense (Income) (Details)
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
6 Months
Ended
06/30/2010
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Other Expense
(Income) (Details) (USD $) (in
Millions)
Other (Income) Expense
Environmental litigation settlement
BERU-Eichenauer equity investment
gain
Loss on the sale of a product line
Net loss (gain) on asset disposals
Other
Other (income) expense
$ 0.4
$ 0.1
$ 20.3
$ 1.6
$ 1.5
$ (1.6)
(8)
$ 28
(8)
1.5
1.8
(0.9)
$ 22.4
(0.1)
$ (0.1)
2.2
2
(0.2)
$ 4
Source: BORGWARNER INC, 10-K, February 10, 2011
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Income Taxes
(Details) (USD $) (in
Millions)
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Income Taxes (Details)
Earnings before income
taxes and the provision for
income taxes
Earnings (loss) before taxes
$ 146.2
$ 115.7
$ 113.7
$ 102.3
$ 62.3
$ 21.5
$ (53)
$ (12.9)
$ 477.9
$ 17.9
$ 14
Provision for income taxes:
Current:
Federal/foreign
State
Total current
Deferred
Provision (benefit) for
income taxes
Effective Tax Rate -
Percentage
$ 30.6
$ 4.2
$ 26
$ 20.9
$ 5.7
$ 1.5
$ (19.1)
$ (6.6)
131.7
2.2
133.9
(52.2)
$ 81.7
40
1.5
41.5
(60)
$ (18.5)
107.2
1
108.2
(74.9)
$ 33.3
0.171
(1.034)
2.379
Source: BORGWARNER INC, 10-K, February 10, 2011
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Income Taxes
(Details 1) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Income Taxes (Details 1)
Reconciliation of the total gross unrecognized tax
benefits
Balance, January 1
Additions based on tax positions related to current year
Additions (Reductions) for tax positions of prior years
Reductions for lapse in statute of limitations
Settlements
Translation adjustment
Balance, December 31
$ 34.8
1.1
0.3
(1.3)
(6.6)
(0.7)
$ 27.6
$ 61.1
16.4
(16.5)
(17)
(9.9)
0.7
$ 34.8
Source: BORGWARNER INC, 10-K, February 10, 2011
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Income Taxes
(Details 2) (USD $)
Income Taxes (Details 2)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Income Taxes (Details 3)
Income Taxes
(Details 3) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Analysis of variance of income taxes as reported from income taxes computed at statutory
rate
Income taxes at U.S. statutory rate of 35%
Increases (decreases) resulting from:
$ 167.3
$ 6.2
$ 4.9
Income from non-U.S. sources including withholding taxes
(55.8)
(17.1)
State taxes, net of federal benefit
Business tax credits
Affiliates' earnings
Accrual adjustment and settlement of prior year tax matters
Medicare prescription drug benefit
Goodwill impairment
Restructuring
Valuation allowance
Non-temporary differences and other
Provision (benefit) for income taxes
1.4
0.2
(13.8)
0.4
2.9
(21.2)
0.3
$ 81.7
4.7
(1.9)
(7.5)
(6.3)
1.7
7.7
(6)
(26.5)
0.9
(9.8)
(13.2)
6
1.1
54.9
0.6
13.1
1.3
$ (18.5)
$ 33.3
Source: BORGWARNER INC, 10-K, February 10, 2011
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Income Taxes
(Details 4) (USD $) (in Millions)
Summary of gross components of deferred tax assets and
liabilities
Income Taxes (Details 4)
12/31/2010 12/31/2009
Current deferred tax assets:
Employee related
Net operating loss carryforwards
Inventory
Warranties
Litigation environmental
Customer claims
Derivatives
Other
Total current deferred tax assets
Current deferred tax liabilities:
Derivatives
Other
Total current deferred tax liabilities
Deferred tax liabilities gross components current
Non-Current deferred tax assets
Foreign tax credits
Other comprehensive income
Research and development capitalization
Pension and other post employment benefits
Employee related
Net operating loss carryforwards
Research and development credits
Warranties
Litigation and environmental
Capital loss carryforwards
Other
Total non-current deferred tax assets
Non-current deferred tax liabilities:
Goodwill intangibles
Fixed assets
Dividends accrued
Other comprehensive income
Lease obligation - production equipment
Other
Total non-current deferred tax liabilities
Total deferred tax items
Valuation allowances
Net deferred tax asset
$ 26.2
$ 23.9
9.8
8.6
6.3
5.8
2
1.2
6.8
4.7
9.3
4.5
6.9
2.9
1.9
6.4
66.7
60.5
(1)
(3.8)
(4.8)
(4.8)
138.3
103.7
52.5
13.4
87.5
5.9
4.5
2.5
3.5
4.1
415.9
(7.6)
(18.4)
(7.6)
183.4
98
49.3
44.6
20
15
6.3
4.4
2.6
8.1
431.7
(130.3)
(103.5)
(84.8)
(101.7)
(2.8)
(3)
(7.7)
(3.5)
(1.9)
(4.5)
(228.6)
(215.1)
262.2
(13)
256.5
(43.8)
$ 249.2
$ 212.7
Source: BORGWARNER INC, 10-K, February 10, 2011
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Income Taxes (Details 5)
Income Taxes
(Details 5) (USD $) (in Millions)
Deferred Tax Assets (Liabilities), net
Deferred income taxes - current assets
Deferred income taxes - current liabilities
Other non-current assets
Other non-current liabilities
Net deferred tax asset (current and
non-current)
12/31/2010 12/31/2009
$ 75.8
(18.4)
305.5
(113.7)
$ 60.2
(4.8)
247.1
(89.8)
$ 249.2
$ 212.7
Source: BORGWARNER INC, 10-K, February 10, 2011
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Income Taxes
(Details Textual) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Summary of variance of income taxes computed for US statutory rate (Textuals)
Income Taxes (Details Textual)
Statuatory income tax rate current
Company's effective tax rate
Company's effective tax rate - percentage
Favorable impact due to the reversal of the Company's valuation allowance
Company's projected annual effective tax rate - percentage
Additional Tax expense for company's loss on future tax benefit related to Medicare Part D subsidy
Unrecognized tax benefits balance
Portion of 2010 unrecognized tax benefit that would affect the Company's effective tax rate if recognized
Cash payments for settlement of examinations
Accrued payment of interest and penalties
Cash payments requirement for foreign jurisdictions
US state net operating loss carryforwards
Foreign tax credits
US net operating loss carryforward available to offset future taxable income
Expiration of US net operating loss carryforward - year
Non-US net operating loss carryforward available to offset future taxable income
Non-US carryforwards that expire from 2011 - 2019
Carryforwards expiration
Valuation allowance for tax effect
State net operating loss
Reduction to 2010 tax expense for tax exemptions or holidays
Investments in foreign subsidiaries
(1.034)
(1.034)
(1.034)
34.8
21.4
11.6
0.171
0.171
0.171
$ 21.2
0.171
2.9
27.6
22.8
11.4
6.6
510.3
1.6
2,030
69.5
29.7
2011 through 2019
6.5
26.3
17
$ 1,574.6
Source: BORGWARNER INC, 10-K, February 10, 2011
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Balance Sheet Information
(Details) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Balance Sheet Information (Details)
Receivables:
Customers
Other
Gross receivables
Bad debt allowance
Net receivables
Inventories
Raw material and supplies
Work in progress
Finished goods
FIFO inventories
LIFO reserve
Net inventories
Other current assets
Prepaid tooling
Product liability insurance asset
Derivatives
Prepaid tax
Other
Total other current assets
Property, plant and equipment:
Land
Buildings
Machinery and equipment
Capital leases
Construction in progress
Total property, plant and equipment
Accumulated depreciation
Property, plant and equipment-net of accumulated
depreciation
Tooling, net of amortization
Property, plant equipment, net
Investments and advances:
Investment in equity affiliates
Other investments and advances
Total investments and advances
Other non-current assets:
Product liability insurance receivable
Deferred income taxes
Other intangible assets
Other
Total other non-current assets
Accounts payable and accrued expenses:
$ 859.5
168.4
1,027.9
(4)
1,023.9
244
88.1
111.7
443.8
(13.2)
430.6
21.8
25.8
2.7
5.8
23.6
79.7
67.9
601.4
1,961.2
2.3
128.2
2,761
(1,308)
1,453
89.6
1,542.6
205.2
102.7
307.9
24.8
305.5
168.8
32
531.1
$ 634.5
101.8
736.3
(4.3)
732
187.3
69.8
68.8
325.9
(11.6)
314.3
25.6
24.9
12
2.2
23.2
87.9
56.3
570
1,866.5
2.4
126.4
2,621.6
(1,211.6)
1,410
80.3
1,490.3
194.8
62.6
257.4
25
247.1
148.6
29.8
450.5
Trade payables
737.7
539.2
Source: BORGWARNER INC, 10-K, February 10, 2011
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Trade payables for capital expenditures
Payroll and employee related
Retirement related
Product warranties
Customer related
Product liability
Severance
Insurance
Derivatives
Environmental
Interest
Legal and professional fees
Dividends payable to non-controlling shareholders
Current deferred income taxes
Other
28.9
190.2
34.7
37
32.5
25.8
4.6
11.9
3.3
21
14.3
8.6
4.2
18.4
51
Total accounts payable and accrued expenses
1,224.1
Other non-current liabilities:
Deferred income taxes
Cross currency swaps and derivatives
Product warranties
Product liability accrual
Deferred revenue
Environmental
Other
Total other non-current liabilities
Translation adjustment and other
Beginning balance
Provision
Write-offs
Translation adjustment
Ending balance
28.6
136.7
34.8
32.5
31.4
24.9
17.5
16.2
14.6
12.2
11.2
9.1
5.4
4.8
49.9
977.1
89.8
54.2
29.2
25
22.7
10.1
64.6
113.7
78.8
29.8
24.8
23.4
8.2
84.2
362.9
295.6
(4.3)
(1.1)
2.5
(1.1)
$ (4)
(5.7)
0.1
1.4
(0.1)
$ (4.3)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Balance Sheet Information (Details 1)
Balance Sheet Information
(Details 1) (USD $) (in Millions except Per Share Data)
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
Change in estimated useful live of certain
equipment impact to company
Operating Income increase
Net earnings increase attributable to BorgWarner
Inc.
Earnings per share increase - Basic
Earnings per share increase - Diluted
$ 4.7
$ 3.6
$ 0.03
$ 0.03
$ 4.6
$ 3.6
$ 0.03
$ 0.03
$ 4.7
$ 3.6
$ 0.03
$ 0.03
$ 4.8
$ 3.7
$ 0.03
$ 0.03
$ 4.6
$ 3.5
$ 0.03
$ 0.03
$ 4.6
$ 3.5
$ 0.03
$ 0.03
$ 4.6
$ 3.5
$ 0.03
$ 0.03
$ 3.5
$ 0.03
$ 0.03
$ 18.8
$ 14.5
$ 0.13
$ 0.11
$ 18.4
$ 14
$ 0.12
$ 0.12
Source: BORGWARNER INC, 10-K, February 10, 2011
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Balance Sheet Information
(Details 2) (USD $) (in
Millions)
12 Months
Ended
11/30/2010
12 Months
Ended
11/30/2009
12 Months
Ended
11/30/2008
Balance Sheet Information (Details 2)
Balance sheets :
Cash and securities
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total equity
Statements of operations
Net sales
Gross profit
Net income
$ 109.1
310.2
174.9
151.4
41.9
291.8
634.7
131.9
$ 68.3
$ 83
279.1
182.6
137.9
45
278.8
494.5
89.2
$ 35.8
637.9
140
$ 67.6
Source: BORGWARNER INC, 10-K, February 10, 2011
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Balance Sheet Information (Details Textual)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Balance Sheet Information
(Details Textual) (USD $) (in Millions)
Balance Sheet Information (Textuals)
Interest costs capitalized
Accounts payable related to property, plant and equipment purchases
Assets pledged as collateral under long-term debt agreements
Depreciation expense reduced as the result of 2008 recorded impairment
charges
Interest in NSK-Warner joint venture
NSK-Warner interest in BorgWarner Transmission Systems Korea Inc
Dividends received from NSK-Warner
Purchases from NSK-Warner
$ 11.2
28.9
3.4
9
0.50
0.4
35.5
$ 14.6
$ 11.2
28.6
3.7
11
48
$ 16.5
40.8
$ 25.4
Source: BORGWARNER INC, 10-K, February 10, 2011
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Goodwill And Other Intangibles (Details)
Goodwill And Other Intangibles
(Details) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Changes in the carrying amount of
goodwill
Accumulated impairment losses
$ 156.8
Gross goodwill balance as of January 1
1,061.4
Balance as of December 31
$ 1,113.5
$ 1,061.4
Source: BORGWARNER INC, 10-K, February 10, 2011
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Goodwill And Other Intangibles
(Details 1) (USD $) (in Millions)
Other intangible assets
Goodwill And Other Intangibles (Details 1)
12/31/2010 12/31/2009 12/31/2008
Gross Carrying Amount - Amortized intangible Assets
$ 262.2
$ 227.7
Accumulated Amortization - Amortized intangible Assets
Net Carrying Amount - Amortized intangible Assets
Net Carrying Amount - Total intangible assets
Gross Carrying Amount - Intangible Assets Gross excluding Goodwill,
Total
138.2
124
168.8
$ 307
116.5
82.8
111.2
148.6
$ 265.1
$ 231.2
Source: BORGWARNER INC, 10-K, February 10, 2011
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Goodwill And Other Intangibles
(Details 2) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Goodwill And Other Intangibles (Details 2)
Intangible Assets Gross Roll
Forward
Beginning balance
Acquisitions
Translation adjustment
Ending balance
Accumulated amortization net
Beginning Balance
Provisions
Non-recurring charges (write-offs)
Translation adjustment
Ending Balance
$ 265.1
$ 231.2
55
(13.1)
307
116.5
28.4
(6.7)
$ 138.2
27.7
6.2
265.1
82.8
26.3
4.6
2.8
$ 116.5
Source: BORGWARNER INC, 10-K, February 10, 2011
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Goodwill And Other Intangibles
(Details Textuals) (USD $) (in Millions except Per Share Data)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2008
Goodwill And Other Intangibles (Details Textuals)
Acquisition of Dytech, percent
Discount Rate for Weighted Average Cost of Capital
Impairment Charge to Adjust Goodwill to its Fair Value
Per Share Value related to Dominant and Profit Transfer Agreement
Amortization of other intangible assets
Estimated life of amortized intangible assets, Minimum
Estimated life of amortized intangible assets, Maximum
Estimated future amortization expense to acquire intangible assets for
2011
Estimated future amortization expense to acquire intangible assets for
2012
Estimated future amortization expense to acquire intangible assets for
2013
Estimated future amortization expense to acquire intangible assets for
2014
Estimated future amortization expense to acquire intangible assets for
2015
$ 111.5
27.1
0.10
28.4
3
15
20.5
20.5
20.5
15.2
$ 10
Source: BORGWARNER INC, 10-K, February 10, 2011
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Product Warranty (Details)
Product Warranty
(Details) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Warranty accrual accounts
Beginning balance
$ 61.7
$ 82.1
Acquisition
Provisions
Payments
Translation adjustment
Ending balance
Product warranty liability
Accounts payable and accrued
expenses
Other non-current liabilities
Total product warranty liability
3
39.3
(35.5)
(1.7)
66.8
37
29.8
$ 66.8
46
(68.3)
1.9
61.7
32.5
29.2
$ 61.7
Source: BORGWARNER INC, 10-K, February 10, 2011
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Notes Payable and Long-Term Debt (Details)
Notes Payable and Long-Term Debt
(Details) (USD $) (in Millions)
12/31/2010 12/31/2009
Outstanding notes payable and long-term
debt
Short-term debt
Total Short-term debt
Long-term debt
Total long-term debt
Less: current portion
$ 122.4
$ 64
1,058
6.1
778.3
5.1
Long-term debt, net of current portion
$ 1,051.9
$ 773.2
Source: BORGWARNER INC, 10-K, February 10, 2011
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Notes Payable and Long-Term Debt (Details 1)
Notes Payable and Long-Term
Debt
(Details 1) (USD $) (in Millions)
Annual principal payments
12/31/2010
2011
2012
2013
2014
2015
After 2015
Total Payments
Less: Convertible Note
Accretion
$ 128.5
384.1
5
0.2
10
682.4
1,210.2
(25.3)
Less: Unamortized Discounts
(4.5)
Total
$ 1,180.4
Source: BORGWARNER INC, 10-K, February 10, 2011
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Notes Payable and Long-Term Debt (Details 2)
Notes Payable and Long-Term Debt
(Details 2) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Interest expense related to convertible
notes
Interest expense
Non-cash portion
$ 31.3
$ 18.3
$ 22.2
$ 12.7
Source: BORGWARNER INC, 10-K, February 10, 2011
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Notes Payable and Long-term Debt
(Detail Textuals) (USD $) (in Millions except Share Data)
3 Months Ended
03/31/2009
12 Months Ended
12/31/2010
04/09/2009
Notes Payable and Long-term Debt (Detail Textuals)
Interest on senior unsecured notes
Debt instrument maturity period
Amount available under SEC universal shelf registration
Weighted average interest rate on borrowings outstanding
Average rate on term loan due through 2015
Conversion of fixed rate notes to variable rates
Matured interest rate swap related to fixed rate debt
Termination of interest rate swap agreements relating to the 2016 fixed rate debt
Termination of interest rate swap agreements relating to the 2019 fixed rate debt
Gain remained on swap termination to be amortized
Unamortized portion of gain on swap termination
Increase in receivables due to adoption of ASC Topic 860
Increase in notes payable and other short-term debt due to adoption of ASC Topic
860
Multi-currency revolving credit facility at most
Outstanding letter of credit
Issue of convertible senior notes due on April 15, 2012
Carrying value of debt
Increase in capital in excess of par
Effective interest rate for interest expense associated with bond accretion
Semi-annually payment of interest for notes
Coupon rate for semi-annually payment of interest for notes
Converting of notes in multiples of principal amount
Per principal amount of notes for initial conversion rate
Initial Conversion Rate for Notes - Shares
Initial conversion price per share
Fair value higher than carrying value for convertible senior notes
Bond hedge overlay at a net pre-tax cost
Conversion Premium After Bond Hedge Overlay - Percentage
Conversion price per share after bond hedge overlay
Estimated fair value of senior unsecured notes
Fair value higher/lower than carrying value for senior unsecured notes
Interest payable semi-annually
2012-04-15
100
150
75
34.5
0.035
$ 750
0.064
0
27.8
80
80
26.5
348.5
36.5
6.5
0.001
450.2
373.8
0.09365
0.035
1,000
30.4706
32.82
25.2
0.5
$ 38.61
1,482.3
$ 483.7
Source: BORGWARNER INC, 10-K, February 10, 2011
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Fair Value Measurements (Details)
Fair Value Measurements
(Details) (USD $) (in
Millions)
Assets:
Engine segment fixed assets
Commodity contracts
Foreign exchange contracts
Total assets
Liabilities:
Commodity contracts
Foreign exchange contracts
Net investment hedge
contracts
12/31/2010 12/31/2009
$ 0
8.4
3.8
12.2
0.1
17.5
51.2
2.7
2.7
6.4
75.7
Total liabilities
$ 82.1
$ 68.8
Source: BORGWARNER INC, 10-K, February 10, 2011
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Fair Value Measurements (Details 1)
Fair Value Measurements
(Details 1) (USD $) (in Millions)
1 Months Ended
07/31/2008
3 Months Ended
06/30/2009
6 Months Ended
06/30/2009
Change in the fair value of net fixed assets
impaired
Fixed asset impairment charge
$ 72.9
$ 36.3
$ 36.3
Source: BORGWARNER INC, 10-K, February 10, 2011
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Fair Value
Measurements
(Details 2) (USD $)
Fair Value Measurements (Details 2)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial
Instruments
(Details) (USD $)
Financial Instruments (Details)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial Instruments (Details 1)
Financial
Instruments
(Details 1) (USD
$)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial Instruments (Details 2)
Financial
Instruments
(Details 2) (USD
$)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial Instruments (Details 3)
Financial
Instruments
(Details 3) (USD
$)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial Instruments (Details 4)
Financial Instruments
(Details 4) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Deferred losses reported in other comprehensive income (loss)
Gain/(Loss) in OCI
Gain/(Loss) Expected to be Reclassified to Income in One Year or
Less
$ (71.4)
$ (51.3)
$ 1
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial Instruments (Details 5)
Financial
Instruments
(Details 5) (USD
$)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial Instruments (Details 6)
Financial
Instruments
(Details 6) (USD
$)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Financial Instruments (Details Textuals)
Financial Instruments
(Details Textuals) (USD $) (in Millions)
3 Months Ended
03/31/2009
12 Months Ended
12/31/2009
Gain on termination of interest rate swap
agreements
Interest expense due to early termination
Net cash proceeds due to early termination
Fair market value of net investment hedge
Favorable adjustment for non-performance risk
$ 34.5
5.7
30
30
(51.2)
$ 5.1
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit Plans (Details)
Retirement Benefit Plans
(Details) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Expense for defined contribution and defined benefit pension plans and other post employment
defined benefit plans
Defined contribution expense
Defined benefit pension expense
Other post employment benefit expense
Total
$ 19.2
19.8
17.5
$ 56.5
$ 16.6
33.1
(48.4)
$ 1.3
$ 22.1
19.2
1.3
$ 42.6
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit Plans (Details 1)
Retirement Benefit Plans
(Details 1) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Amounts recognized in the Consolidated Balance Sheets consist
of:
Non-current liabilities
$ 438.1
$ 473.7
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit Plans (Details 2)
Retirement Benefit Plans
(Details 2) (USD $) (in Millions)
Funded status of pension plans with accumulated benefit obligations in excess of plan
assets
Accumulated benefit obligation
Plan assets
Deficiency
12/31/2010 12/31/2009
$ (634.9)
$ (630.5)
432.2
409.1
$ (202.7)
$ (221.4)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit
Plans
(Details 3) (USD $)
Retirement Benefit Plans (Details 3)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit
Plans
(Details 4) (USD $)
Retirement Benefit Plans (Details 4)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit Plans (Details 5)
Retirement Benefit Plans
(Details 5) (USD $)
Defined Benefit Plan Weighted Average Assumptions Used In Calculating Benefit Obligations
Discount rate
12/31/2010
0.0025
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit
Plans
(Details 6) (USD $)
Retirement Benefit Plans (Details 6)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit Plans
(Details 7) (USD $) (in Millions)
Assumed health care cost trend
Retirement Benefit Plans (Details 7)
12 Months Ended
12/31/2010
Effect on other post employment benefit obligation, Increase
Effect on other post employment benefit obligation, Decrease
Effect on total service and interest cost components, Increase
Effect on total service and interest cost components,
Decrease
$ 18
(16)
0.9
$ (0.8)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Retirement Benefit Plans
(Details Textuals) (USD $) (in
Millions)
1 Months
Ended
04/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2019
12 Months
Ended
12/31/2014
12 Months
Ended
12/31/2011
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
12/31/2012 12/23/2009
Retirement Benefit Plans (Details Textuals)
Income/expense recognized related to
defined contribution plans
Curtailment gain
Reduction to retirement-related
liabilities
Increase in accumulated other
comprehensive income
Increase in accounts payable and
accrued expenses
Age limit for company sponsored
retiree medical coverage after
retirement
Expense recognition related to
Muncie Shutdown
Reduction to retirement-related
liabilities due to changes in Muncie
retirees medical program
Increase in accumulated other
comprehensive income due to
changes in Muncie retirees medical
program
Initial cash contribution for Muncie
Plant's defined benefit pension plan
PBGC settlement agreement for cash
contribution to the Plan
PBGC letter of credit or other
security
PBGC credit balance valued waived
Estimated contributions to the
company's defined benefit pension
plans, minimum
Estimated contributions to the
company's defined benefit pension
plans, maximum
Cost to settle
Net pre-tax gain
Net settlements, curtailments and
other gain
Other post employment benefit
expense
Defined benefit plan discount rate
assumption nearest basis point
Weighted-average rate of increase in
per capita cost of covered health care
for pre-65 and post-65 participants
Weighted-average rate of decrease in
per capita cost of covered health care
for pre-65 and post-65 participants
3.7
3.5
41.9
47.2
27.2
34
14
22.2
22.2
$ 19.2
$ 16.6
$ 22.1
23
15
65
34
27.9
61.9
$ 13.5
35
8
15
30
40
0.0025
0.074
0.05
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans (Details)
Stock Incentive Plans
(Details) (USD $) (in Millions except Per Share Data)
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Stock option compensation expense
Earnings before income taxes and noncontrolling
interest
Net income
Per share - basic
$ 146.2
$ 115.7
$ 113.7
$ 102.3
$ 62.3
$ 21.5
$ (53)
$ (12.9)
$ 477.9
$ 17.9
$ 14
$ 115.6
$ 111.5
$ 87.7
$ 81.4
$ 56.6
$ 20
$ (33.9)
$ (6.3)
$ 396.2
$ 36.4
$ (19.3)
$ 1
$ 0.95
$ 0.72
$ 0.65
$ 0.45
$ 0.15
$ (0.31)[8]
$ (0.06)[8]
$ 3.31
$ 0.23
$ (0.31)[7]
Per share - diluted
[8] - The Company had a loss for the quarters ended March 31, 2009 and June 30, 2009. As a result, diluted loss per share is the same as basic loss per share in each
period, as any dilutive securities would reduce the loss per share.
$ 0.15
$ 0.45
$ 0.23
$ 0.89[9]
$ 0.87[9]
$ 0.68[9]
$ (0.31)[8]
$ (0.06)[8]
$ 3.07[9]
$ 0.63[9]
$ (0.31)[7]
[7] - The Company had a loss for the year ended December 31, 2008. As a result, diluted loss per share is the same as basic loss per share in the period, as any dilutive
securities would reduce the loss per share.
[9] - The Company's diluted earnings per share for each quarter during the year ended December 31, 2010 and the year ended December 31, 2010 includes the impact of
the Company's 3.50% convertible notes and associated warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings
calculation.
[10] - The Company's diluted earnings per share for the year ended December 31, 2010 includes the impact of the Company's 3.50% convertible notes and associated
warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings calculation.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans
(Details 1) (USD $) (in Millions and Share Data in Thousands) except Per Share Data
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Stock Incentive Plans (Details 1)
Summary of the plans' shares
Shares outstanding, Beginning Balance
Shares, Exercised
Shares, Forfeited
Shares outstanding, Ending Balance
5,177
(1,888)
(36)
3,253
5,798
(381)
(240)
5,177
6,331
(366)
(167)
5,798
Weighted average exercise price, Beginning Balance
$ 27.98
$ 27.86
$ 27.75
Weighted average exercise price, Exercised
Weighted average exercise price, Forfeited
Weighted average exercise price, Ending Balance
Weighted average remaining contractual life, outstanding (in years), Beginning
Balance
Weighted average remaining contractual life, outstanding (in years), Exercised
Weighted average remaining contractual life, outstanding (in years), Forfeited
Weighted average remaining contractual life, outstanding (in years), Ending
Balance
Aggregate intrinsic value, outstanding, Beginning Balance
Aggregate intrinsic value, Exercised
Aggregate intrinsic value, Forfeited
Aggregate intrinsic value, outstanding, Ending Balance
Share under option, option exercisable
Weighted average exercise price, options exercisable
Weighted average remaining contractual life option exercisable
$ 2.673E-05
$ 2.389E-05
$ 2.382E-05
3.395E-05
3.216E-05
3.258E-05
$ 28.64
$ 27.98
$ 27.86
5.8
6.7
7.7
0
0
4.9
29.7
50.3
0
$ 142.2
3,253
$ 28.64
4.9
5.8
6
3.4
6.7
130.8
8.3
$ 29.7
$ 6
Aggregate intrinsic value, option exercisable
142,200,000
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans (Details 2)
Stock Incentive Plans
(Details 2) (USD $)
12 Months Ended
12/31/2010
Summarize information about stock options
outstanding
Number of Outstanding Options
Number of Exercisable Options, Total
Weighted average exercise price, exercisable, Total
3253.181
3,253
$ 28.64
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans
(Details 3) (USD $) (in Millions)
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Stock Incentive Plans (Details 3)
Proceeds from stock option
exercises
Proceeds from stock options -
gross
Tax benefit (loss)
Proceeds from stock options -
net
$ 55.4
11.7
$ 67.1
$ 9.4
(0.7)
$ 8.7
$ 14.1
3
$ 17.1
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans (Details 4)
Stock Incentive Plans
(Details 4) (USD $) (in Millions except Per Share Data)
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Restricted stock compensation expense
Earnings before income taxes and noncontrolling
interest
Net income
Per share - basic
$ 146.2
$ 115.7
$ 113.7
$ 102.3
$ 62.3
$ 21.5
$ (53)
$ (12.9)
$ 477.9
$ 17.9
$ 14
$ 115.6
$ 111.5
$ 87.7
$ 81.4
$ 56.6
$ 20
$ (33.9)
$ (6.3)
$ 396.2
$ 36.4
$ (19.3)
$ 1
$ 0.95
$ 0.72
$ 0.65
$ 0.45
$ 0.15
$ (0.31)[8]
$ (0.06)[8]
$ 3.31
$ 0.23
$ (0.31)[7]
Per share - diluted
[8] - The Company had a loss for the quarters ended March 31, 2009 and June 30, 2009. As a result, diluted loss per share is the same as basic loss per share in each
period, as any dilutive securities would reduce the loss per share.
$ 0.45
$ 0.15
$ 0.23
$ 0.89[9]
$ 0.87[9]
$ 0.68[9]
$ 0.63[9]
$ (0.31)[8]
$ (0.06)[8]
$ 3.07[9]
$ (0.31)[7]
[7] - The Company had a loss for the year ended December 31, 2008. As a result, diluted loss per share is the same as basic loss per share in the period, as any dilutive
securities would reduce the loss per share.
[9] - The Company's diluted earnings per share for each quarter during the year ended December 31, 2010 and the year ended December 31, 2010 includes the impact of
the Company's 3.50% convertible notes and associated warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings
calculation.
[10] - The Company's diluted earnings per share for the year ended December 31, 2010 includes the impact of the Company's 3.50% convertible notes and associated
warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings calculation.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans
(Details 5) (USD $)
Status of nonvested restricted stock
Stock Incentive Plans (Details 5)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Nonvested shares subject to restriction, Beginning
Balance
1,547,100
661,500
280,900
Shares subject to restriction, Granted
603,000
1,044,000
Shares subject to restriction, Vested
Shares subject to restriction, Forfeited
Nonvested shares subject to restriction, Ending
Balance
Nonvested weighted average price, Beginning
Balance
Weighted average price, Granted
Weighted Average Price, Vested
Weighted average price, Forfeited
Nonvested weighted average price, Ending Balance
(188,400)
(91,100)
1,870,600
(23,500)
(134,900)
1,547,100
412,400
(14,600)
(17,200)
661,500
$ 29.9
$ 45.29
$ 42.9
$ 36.16
$ 44.8
$ 27.1
$ 30.55
$ 20.61
$ 51.03
$ 29.79
$ 29.9
$ 46.43
$ 30.14
$ 46.41
$ 45.29
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans (Details 6)
Stock Incentive Plans
(Details 6) (USD $) (in Millions except Share Data)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Amounts expenses under plan and share issuance - Performance Share
Plans
Expense
Number of shares
[18] - Shares are issued in February of the following year.
$ 23.9
$ 10.7
$ 4.3
104,205[18]
269,896[18]
287,816[18]
Source: BORGWARNER INC, 10-K, February 10, 2011
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Stock Incentive Plans (Details Textuals)
12 Months Ended
12/31/2010
Stock Incentive Plans
(Details Textuals) (USD $)
Options available for future grants
Number of shares authorized for grant
Shares available for future issuance
Outstanding options under the stock incentive plans
Vesting Period over which Restricted Shares and Units for employee will Vest
Restricted shares granted to employees
Restricted shares granted to non employees
Awarding of performance shares payable in cash
Awarding of performance shares payable in common stock
Compensation expense recognized in cash by Company over the performance period
Compensation expense recognized in common stock by Company over the
performance period
Fifty percent after two years and remainder after three years from the date of
grant
12,500,000
2,200,000
3,253,181
603,000
0.4
0.6
0.4
0.6
Source: BORGWARNER INC, 10-K, February 10, 2011
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Other Comprehensive Income (Loss) (Details)
Other Comprehensive Income
(Loss) (Details) (USD $) (in Millions)
12/31/2010 12/31/2009
The Components of Accumulated Other Comprehensive Income (loss), net of
tax
Foreign currency translation adjustments
Market value of hedge instruments
Defined benefit post employment plans
Unrealized gain on available-for-sale securities
Comprehensive loss attributable to the noncontrolling interest
Accumulated other comprehensive income (loss)
$ 147.1
$ 210.6
(44.8)
(31.2)
(158.1)
(165.9)
1.2
0.9
0
1
$ (53.7)
$ 14.5
Source: BORGWARNER INC, 10-K, February 10, 2011
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Other Comprehensive Income (Loss) (Details 1)
Other Comprehensive Income
(Loss) (Details 1) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Changes in Other Comprehensive income (loss) in Consolidated Statement of Shareholders'
Equity
Foreign currency translation adjustments
Market value change of hedge instruments
Income taxes
Net foreign currency translation and hedge instruments
Unrealized gain (loss) on available-for-sale securities
Defined benefit post employment plans
Income taxes
Net defined benefit post employment plans
Change in accumulated other comprehensive income (loss)
Net earnings (loss) attributable to BorgWarner Inc.
Comprehensive income (loss)
Comprehensive income (loss) attributable to noncontrolling interest
$ (63.5)
(20.5)
6.9
(77.1)
1.2
23.9
(16.1)
7.8
(68.1)
377.4
309.3
(0.1)[5]
$ 54.8
63.3
(18.2)
99.9
$ (88.6)
(56.8)
19.3
(126.1)
(1.4)
(13.1)
(104.5)
9.7
(3.4)
96.5
27
123.5
3.9[5]
29.8
(74.7)
(202.2)
(35.6)
(237.8)
(10.8)[5]
Comprehensive income (loss) attributable to BorgWarner Inc.
[5] - Refer to Note 1, "Summary of Significant Accounting Policies" for implementation of ASC Topic 810
$ 309.2
$ 127.4
$ (248.6)
Source: BORGWARNER INC, 10-K, February 10, 2011
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Contingencies (Details)
Contingencies
(Details) (USD $) (in Millions)
12/31/2010 12/31/2009
Assets:
Prepayments and other current
assets
$ 25.8
$ 24.9
Other non-current assets
24.8
25
Liabilities:
Accounts payable and accrued
expenses
Other non-current liabilities
25.8
$ 24.8
24.9
$ 25
Source: BORGWARNER INC, 10-K, February 10, 2011
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Contingencies
(Details Textuals) (USD $) (in Millions)
Charges resulting from court's decision
Contingencies (Details Textuals)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
Waste disposal sites with potential liability under the Comprehensive Environmental Response, Compensation and Liability
Act
Accrual for indicated environmental liabilities
Amount disbursement period related to site
Maximum Accrued amounts related to an individual site
Settlements resolved relating to environmental contamination, percentage
Number of unfiled claimants
Amount agreed to pay against settlement of unfiled claimants
Lawsuits filed against Kuhlman Electric and others
Plaintiffs
Number of Lawsuits dismissed
Number of lawsuits in which company entered into settlement
Number of installments in which settlements will be paid
First settlement payment made
Final settlement payment due
Final settlement payment due date
Number of ARO manufacturing locations
Fair value to remove and dispose material
Pending asbestos related product liability claims
Pending claims in three jurisdictions
Number of jurisdictions
Claims resolved
Number of claims with resulting in payment
Payment being made to a claimant by or on behalf of the company, percentage
Company paid in defense and indemnity in advance of insurers reimbursement
Cash received from insurers
Outstanding balance to be fully recovered
Outstanding balance expected to be recovered within one year
Net outstanding balance relating to past settlements and defense costs
Estimated liability for asserted claims future resolutions
Assets related to future resolutions on asserted claims
Expected percentage of insurance carrier reimbursement
3 to 5
2011-02-01
38
$ 28
3
28
1
2
14
45
1.2
17,000
8,000
3
7,700
245
0.032
153.1
32.5
120.6
43
120.6
50.6
$ 50.6
1
1.3
23,000
5,300
223
0.042
58.6
58.6
49.9
$ 49.9
Source: BORGWARNER INC, 10-K, February 10, 2011
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Leases and Commitments (Details)
Leases and Commitments
(Details) (USD $) (in Millions)
12 Months Ended
12/31/2010
Future minimum operating lease
payments
2011
2012
2013
2014
2015
After 2015
Total minimum lease payments
Total lease rent expense
Guaranteed residual value
$ 9.3
7.6
6.7
5.9
5.5
8
43
$ 25.6
Source: BORGWARNER INC, 10-K, February 10, 2011
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Weighted average shares of common stock outstanding
Basic earnings (loss) per share of common stock
Total anti-dilutive shares
Total anti-dilutive shares
Diluted earnings (loss) per share:
Earnings (Loss) Per Share (Details)
Earnings
(Loss) Per Share (Details) (USD $) (in Millions and Share Data in Thousands) except Per Share Data
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Basic earnings (loss) per share:
Net earnings (loss) attributable to BorgWarner Inc.
$ 111.7
$ 106.7[16]
$ 82.8[15]
$ 76.2[14]
$ 52.7[13]
$ 17.2
$ (35.9)[12]
$ (7)[11]
$ 377.4
$ 27
$ (35.6)
$ 1
$ 0.95
$ 0.72
$ 0.65
$ 0.45
$ 0.15
$ (0.31)[8]
$ (0.06)[8]
$ 3.31
$ 0.23
$ (0.31)[7]
114,155
116,522
116,007
Net earnings (loss) attributable to BorgWarner Inc.
111.7
106.7[16]
82.8[15]
76.2[14]
52.7[13]
17.2
(35.9)[12]
(7)[11]
Adjustment for net interest expense on convertible notes
Diluted Net earnings (loss) attributable to BorgWarner Inc.
Weighted average shares of common stock outstanding
Effect of 3.50% convertible notes
Effect of warrant
Effect of stock-based compensation
Total dilutive effect on weighted average shares of common stock outstanding
Weighted average shares of common stock outstanding including dilutive shares
Diluted earnings (loss) per share of common stock
[16] - The Company's third quarter 2010 results were impact by the following: $21.2 million foreign tax credit valuation allowance reversal.
$ 0.45
$ 0.15
$ 0.87[9]
$ 0.68[9]
$ 0.63[9]
$ (0.31)[8]
$ (0.06)[8]
$ 0.89[9]
2,836
14,134
1,578
377.4
20.4
27
(35.6)
$ 397.8
$ 27
$ (35.6)
114,155
116,522
116,007
11,389
1,464
2,567
15,420
417
417
129,575
116,939
116,007
$ 3.07[9]
$ 0.23
$ (0.31)[7]
[15] - The Company's second quarter 2010 results were impact by the following: $8.0 million BERU-Eichenauer Equity investment gain. $28.0 million Environmental
litigation settlement.
[14] - The Company's first quarter 2010 results were impact by the following: $2.5 million Medicare Part D tax adjustment.
[13] - The Company's fourth quarter 2009 results were impacted by the following: $3.1 million tax benefit related to an ASC Topic 740 adjustment.
[12] - The Company's second quarter 2009 results were impacted by the following: $50.3 million of restructuring expenses, including $9.0 million for employee
termination benefits,$36.3 million of asset impairment and $5.0 million of other charges. $6.6 million net gain from interest rate derivative agreement.
[11] - The Company's first quarter 2009 results were impacted by the following: $4.8 million charge related to the adoption of Topic 805. $27.9 million net gain related
to retiree obligations resulting from the closure of the Muncie, Indiana, Drivetrain facility. $11.4 million net loss from interest rate derivative agreements.
[8] - The Company had a loss for the quarters ended March 31, 2009 and June 30, 2009. As a result, diluted loss per share is the same as basic loss per share in each
period, as any dilutive securities would reduce the loss per share.
[7] - The Company had a loss for the year ended December 31, 2008. As a result, diluted loss per share is the same as basic loss per share in the period, as any dilutive
securities would reduce the loss per share.
[9] - The Company's diluted earnings per share for each quarter during the year ended December 31, 2010 and the year ended December 31, 2010 includes the impact of
the Company's 3.50% convertible notes and associated warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings
calculation.
[10] - The Company's diluted earnings per share for the year ended December 31, 2010 includes the impact of the Company's 3.50% convertible notes and associated
warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings calculation.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Earnings
(Loss) Per Share (Details Textuals) (USD $)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Earnings (Loss) Per Share (Details Textuals)
Anti-dilutive shares
Interest on senior unsecured notes
Debt instrument maturity period
Price at which warrants will be dilutive to Company's earnings
Price at which offsetting bond hedge will be dilutive to Company's
earnings
2,836
0.035
2012-04-15
$ 38.61
$ 32.82
14,134
1,578
Exercise price of warrant
38.62
Source: BORGWARNER INC, 10-K, February 10, 2011
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Restructuring (Details)
Restructuring
(Details) (USD $) (in Millions)
12 Months Ended
12/31/2010
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Rollforward of the employee related restructuring and other
accruals
Beginning Balance
Provision
Cash Payments
Translation adjustment
Ending Balance
$ 17.5
(12.1)
(0.8)
$ 4.6
$ 51
14
(48.2)
0.7
$ 17.5
$ 9.1
54.6
(11.1)
(1.6)
$ 51
Source: BORGWARNER INC, 10-K, February 10, 2011
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Restructuring (Details Textuals)
Restructuring
(Details Textuals) (USD $) (in Millions)
1 Months Ended
07/31/2008
3 Months Ended
06/30/2009
6 Months Ended
06/30/2009
12 Months Ended
12/31/2009
12 Months Ended
12/31/2008
Net restructuring expense for employee termination
benefits
Asset impairment cost
Other charges
Combined restructuring expenses
$ 54.6
72.9
$ 9
36.3
5
$ 50.3
36.3
5
$ 50.3
$ 50.3
$ 127.5
Source: BORGWARNER INC, 10-K, February 10, 2011
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Recent Transactions
(Details) (USD $) (in Millions)
05/01/2010 04/10/2010
Aggregate estimated fair values of the assets acquired and liabilities assumed at the date of acquisition consummated
Recent Transactions (Details)
Receivables, net
Inventories, net
Property, plant and equipment, net
Goodwill
Other intangible assets, net of tax
Accounts payable and accrued expenses
Other assets and liabilities, net
Assumed debt
Net cash consideration
Acquisition of Dytech, percent
Gross cost of acquisition
Increase in intangible assets after acquisition
Topic 805 gain on BERU-Eichenauer acquisition
Annual perpetual dividend paid
$ 54.3
44.7
45
74.1
31.1
(81.5)
(9.3)
(10.8)
147.6
1
147.7
17.6
$ 8
Source: BORGWARNER INC, 10-K, February 10, 2011
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Recent Transactions (Details 1)
Recent Transactions
(Details 1) (USD $) (in Millions)
12 Months Ended
12/31/2009
Activity Related To Companys DPT
Obligation
Beginning balance
Shares purchased
Share resolution
Translation adjustment
Ending balance
$ 44
(46.6)
0.9
1.7
$ 0
Source: BORGWARNER INC, 10-K, February 10, 2011
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Recent Transactions
(Details 2) (USD $) (in Millions)
Net cash paid related to Company's step
acquisition
Recent Transactions (Details 2)
12/31/2010 12/31/2009 12/31/2008 12/31/2007 12/31/2005
Percentage Acquired
1
0.044
0.134
0.128
0.694
$ 136.8[4]
Amount Paid
[4] - The Company's payments of $46.6 million, $136.8 million and $138.8 million have been reflected as a Financing activity in the Consolidated Statements of Cash
Flows for the year ended December 31, 2009, 2008 and 2007, respectively.
$ 477.2[3]
$ 138.8[4]
$ 46.6[4]
$ 799.4
[3] - The Company's payment of $477.2 million has been reflected as an Investing activity in the Consolidated Statements of Cash Flows for the year December 31,
2005.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Recent Transactions (Details Textuals)
Recent Transactions
(Details Textuals) (USD $) (in Millions)
Outstanding shares acquired by holding
companies
Purchase price of acquisition
Cash payment on acquisition
04/10/2010 10/31/2009
1
$ 147.7
147.6
Amount paid for outstanding shares
$ 33.5
Source: BORGWARNER INC, 10-K, February 10, 2011
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Reporting Segments and Related Information (Details)
Reporting Segments and Related
Information
(Details) (USD $) (in Millions)
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Segment Information
Customers
Net
Year-end assets
$ 5,652.8
$ 3,961.8
$ 5,263.9
5,652.8
3,961.8
5,263.9
4,508.2
3,916.9
4,277.1
Depreciation/Amortization
248
254.6
278
Long-lived asset expenditures
[17] - Long-lived asset expenditures include capital expenditures and tooling outlays.
$ 160.2[17]
$ 264.8[17]
$ 343.2[17]
Source: BORGWARNER INC, 10-K, February 10, 2011
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Reporting Segments and Related
Information
(Details 1) (USD $) (in Millions)
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Reporting Segments and Related Information (Details 1)
Segment Earnings (Loss) Before
Interest Income and Taxes
Segment earnings before interest and
income taxes ("Segment EBIT")
Muncie closure retiree obligation net
gain
Environmental litigation settlement
BERU-Eichenauer equity investment
gain
Corporate, including equity in affiliates'
earnings and stock-based
Restructuring expense
Goodwill impairment charge
Interest income
Interest expense and finance charges
Earnings before income taxes and
noncontrolling interest
(1)
22
(0.6)
18.4
(0.6)
14.2
(0.6)
14.2
146.2
115.7
113.7
102.3
Provision (benefit) for income taxes
30.6
4.2
Net earnings (loss)
115.6
111.5
Net earnings attributable to the
noncontrolling interest, net of tax
3.9
4.8
26
87.7
4.9
20.9
81.4
5.2
$ 674.9
$ 206.3
$ 390
(27.9)
28
(8)
111
111.3
60
(0.8)
16.1
62.3
5.7
56.6
3.9
(0.5)
13
21.5
1.5
20
2.8
50.3
(0.7)
9
(0.5)
19.1
(2.8)
68.8
(53)
(12.9)
477.9
50.3
(2.5)
57.2
17.9
127.5
156.8
(7.1)
38.8
14
(19.1)
(33.9)
2
(6.6)
(6.3)
0.7
81.7
(18.5)
33.3
396.2
18.8
36.4
9.4
(19.3)
16.3
Net earnings (loss) attributable to
BorgWarner Inc.
[16] - The Company's third quarter 2010 results were impact by the following: $21.2 million foreign tax credit valuation allowance reversal.
$ 377.4
$ 111.7
$ 17.2
$ 106.7[16]
$ 82.8[15]
$ 76.2[14]
$ (35.9)[12]
$ 52.7[13]
$ (7)[11]
$ 27
$ (35.6)
[15] - The Company's second quarter 2010 results were impact by the following: $8.0 million BERU-Eichenauer Equity investment gain. $28.0 million Environmental
litigation settlement.
[14] - The Company's first quarter 2010 results were impact by the following: $2.5 million Medicare Part D tax adjustment.
[13] - The Company's fourth quarter 2009 results were impacted by the following: $3.1 million tax benefit related to an ASC Topic 740 adjustment.
[12] - The Company's second quarter 2009 results were impacted by the following: $50.3 million of restructuring expenses, including $9.0 million for employee
termination benefits,$36.3 million of asset impairment and $5.0 million of other charges. $6.6 million net gain from interest rate derivative agreement.
[11] - The Company's first quarter 2009 results were impacted by the following: $4.8 million charge related to the adoption of Topic 805. $27.9 million net gain related
to retiree obligations resulting from the closure of the Muncie, Indiana, Drivetrain facility. $11.4 million net loss from interest rate derivative agreements.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Reporting Segments and Related Information (Details 2)
Reporting Segments and Related
Information
(Details 2) (USD $) (in Millions)
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Geographic Information - Sales
United States
Net sale
$ 1,451.1
$ 1,090.4
$ 1,499.6
$ 5,652.8
$ 3,961.8
$ 5,263.9
Source: BORGWARNER INC, 10-K, February 10, 2011
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Reporting Segments and Related Information (Details 3)
Reporting Segments and Related
Information
(Details 3) (USD $) (in Millions)
Geographic Information - Long-Lived
Assets
12/31/2010 12/31/2009 12/31/2008
United States
Long-lived assets
$ 466.6
$ 469.4
$ 529.3
$ 1,542.6
$ 1,490.3
$ 1,586.2
Source: BORGWARNER INC, 10-K, February 10, 2011
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Reporting Segments and Related Information
(Details 4) (USD $) (in Millions except Per Share Data)
3 Months
Ended
12/31/2010
3 Months
Ended
09/30/2010
3 Months
Ended
06/30/2010
3 Months
Ended
03/31/2010
3 Months
Ended
12/31/2009
3 Months
Ended
09/30/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
12 Months
Ended
12/31/2008
Reporting Segments and Related Information (Details 4)
Interim Financial Information
Net sales
Cost of sales
Gross profit
$ 1,533.4
$ 1,410.9
$ 1,421.7
$ 1,286.8
$ 1,198.3
$ 1,027.8
$ 916.2
$ 819.5
$ 5,652.8
$ 3,961.8
$ 5,263.9
1,227.3
1,137.6
1,146.3
1,048.3
985.1
876
800
739.9
4,559.5
3,401
4,425.4
560.8
459.8
50.3
(0.1)
50.8
838.5
542.9
127.5
4
7.3
(2.5)
57.2
17.9
(7.1)
38.8
14
Selling, general and administrative expenses
148.3
150.2
137.8
130.3
144.4
125.9
115.4
306.1
273.3
275.4
238.5
213.2
151.8
116.2
79.6
74.1
1,093.3
566.6
Restructuring expense
Other (income) expense
Operating income (loss)
0.4
157.4
0.1
123
20.3
1.6
117.3
106.6
1.5
67.3
(1.6)
22.4
27.5
(49.5)
5.5
504.3
50.3
(9.3)
(10.3)
(39.6)
(21.8)
(38.4)
Equity in affiliates' earnings, net of tax
(9.8)
(10.5)
Interest income
Interest expense and finance charges
(1)
22
(0.6)
18.4
(10)
(0.6)
14.2
(0.6)
14.2
Earnings before income taxes and noncontrolling
interest
146.2
115.7
113.7
102.3
Provision (benefit) for income taxes
30.6
4.2
Net earnings (loss)
Net earnings attributable to the noncontrolling
interest, net of tax
115.6
111.5
3.9
4.8
26
87.7
4.9
20.9
81.4
5.2
(0.8)
16.1
62.3
5.7
56.6
3.9
(6.5)
(0.5)
13
21.5
1.5
20
2.8
(4.8)
(0.7)
9
(0.2)
(0.5)
19.1
(2.8)
68.8
(53)
(12.9)
477.9
(19.1)
(33.9)
2
(6.6)
(6.3)
0.7
81.7
(18.5)
33.3
396.2
18.8
36.4
9.4
(19.3)
16.3
Net earnings (loss) attributable to BorgWarner Inc.
$ 111.7
$ 106.7[16]
$ 82.8[15]
$ 76.2[14]
$ 52.7[13]
$ 17.2
$ (35.9)[12]
$ (7)[11]
$ 377.4
$ 27
$ (35.6)
Earnings (loss) per share - basic
$ 1
$ 0.95
$ 0.72
$ 0.65
$ 0.45
$ 0.15
$ (0.31)[8]
$ (0.06)[8]
$ 3.31
$ 0.23
Earnings (loss) per share - diluted
[16] - The Company's third quarter 2010 results were impact by the following: $21.2 million foreign tax credit valuation allowance reversal.
$ 0.15
$ 0.45
$ 0.89[9]
$ 0.87[9]
$ 0.68[9]
$ 0.63[9]
$ (0.31)[8]
$ (0.06)[8]
$ 3.07[9]
$ 0.23
$ (0.31)[7]
$ (0.31)[7]
[15] - The Company's second quarter 2010 results were impact by the following: $8.0 million BERU-Eichenauer Equity investment gain. $28.0 million Environmental
litigation settlement.
[14] - The Company's first quarter 2010 results were impact by the following: $2.5 million Medicare Part D tax adjustment.
[13] - The Company's fourth quarter 2009 results were impacted by the following: $3.1 million tax benefit related to an ASC Topic 740 adjustment.
[12] - The Company's second quarter 2009 results were impacted by the following: $50.3 million of restructuring expenses, including $9.0 million for employee
termination benefits,$36.3 million of asset impairment and $5.0 million of other charges. $6.6 million net gain from interest rate derivative agreement.
[11] - The Company's first quarter 2009 results were impacted by the following: $4.8 million charge related to the adoption of Topic 805. $27.9 million net gain related
to retiree obligations resulting from the closure of the Muncie, Indiana, Drivetrain facility. $11.4 million net loss from interest rate derivative agreements.
[8] - The Company had a loss for the quarters ended March 31, 2009 and June 30, 2009. As a result, diluted loss per share is the same as basic loss per share in each
period, as any dilutive securities would reduce the loss per share.
[7] - The Company had a loss for the year ended December 31, 2008. As a result, diluted loss per share is the same as basic loss per share in the period, as any dilutive
securities would reduce the loss per share.
[9] - The Company's diluted earnings per share for each quarter during the year ended December 31, 2010 and the year ended December 31, 2010 includes the impact of
the Company's 3.50% convertible notes and associated warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings
calculation.
[10] - The Company's diluted earnings per share for the year ended December 31, 2010 includes the impact of the Company's 3.50% convertible notes and associated
warrants. Refer to Note 16, "Earnings (Loss) Per Share", for further information on our diluted earnings calculation.
Source: BORGWARNER INC, 10-K, February 10, 2011
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Reporting Segments and Related Information (Details Textuals)
Reporting Segments and Related
Information
(Details Textuals) (USD $) (in Millions)
3 Months
Ended
12/31/2009
3 Months
Ended
06/30/2009
3 Months
Ended
03/31/2009
6 Months
Ended
06/30/2010
6 Months
Ended
06/30/2009
12 Months
Ended
12/31/2010
12 Months
Ended
12/31/2009
$ 194.8
0.50
$ 205.2
$ 194.8
Equity investment in NSK Warner,
percent
Equity investment in NSK Warner,
value
Number of reporting segment
Maximum percentage in consolidated
sales of countries outside the US, other
than Germany, France, Hungary and
South Korea
Maximum percentage to consolidated
net sales of single product
Convertible notes and associated
warrants
Medicare Part D tax adjustment
BERU-Eichenauer equity investment
gain
Environmental litigation settlement, net
of cash paid
Foreign tax credit valuation allowance
reversal
Charge related to adoption of Topic 805
Net gain related to retiree obligations
resulting from the closure of the Muncie,
Indiana, Drivetrain facility
Net loss from interest rate derivative
agreements
Restructuring expense
Employee Related Costs
Asset Impairments
Other charges
Net gain from interest rate derivative
agreement
Tax benefit related to an ASC Topic 740
adjustment
$ 3.1
Percentage of convertible notes
2
0.05
0.10
0.035
2.9
8
14
0.035
50.3
8
(28)
50.3
9
36.3
5
6.6
4.8
27.9
11.4
50.3
36.3
5
Source: BORGWARNER INC, 10-K, February 10, 2011
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Source: BORGWARNER INC, 10-K, February 10, 2011
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