2011 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
openness, trust, and cooperation, in which
Passion for Excellence
BorgWarner chooses to be a leader —
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
a global company, we invite and embrace
the diversity of all our people.
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 fi nd personal
satisfaction while building a strong business
that comes from unity of purpose. True unity
is more than a melding of self-interests; it
results when goals and values are shared.
seek to improve our performance. We bring
urgency to every business challenge and
opportunity. We anticipate change and shape
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
ethical standards in all we do and say. We are
committed to doing what is right — in good
times and in bad. We are accountable for the
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.
D E A R S H A R E H O L D E R
The year 2011 was a very good year for BorgWarner.
Global automotive production grew a modest 3% in 2011
compared with 2010. During that same period, BorgWarner
sales grew 26%, outperforming the industry by a wide
margin. Our strategy to focus on improving fuel economy,
emissions and performance is clearly a winning approach.
Sales Growth
Billions of Dollars
1
.
7
$
3
.
5
$
3
.
5
$
7
.
5
$
0
.
4
$
6
.
4
$
3
.
4
$
5
.
3
$
Timothy M. Manganello
Chairman and Chief Executive Officer
The industry began the year with cautious optimism, but struggled to gain momentum.
In March, a natural disaster devastated parts of Japan and ground industrial activity to
a halt. At the time, it was known that vehicle production would be lost, the impact of
which was measurable, and, therefore, somewhat understood. However, the impact of
a crippled Japanese supply base, which supplies key components to the industry around
the world, was not well understood. The uncertainty caused worst case scenarios to be
contemplated and action plans to be developed. Despite our best efforts to contribute to
the recovery, most of us outside of Japan were relegated to watching and waiting. During
that period, I was inspired by the resilience of the Japanese people. Their resolve and
the speed of their recovery was remarkable. In the end, the ingenuity of the industry
prevailed. Alternative sources were found and product plans were adjusted to accommo-
'04 '05 '06 '07 '08 '09 '10 '11
date for scarce parts. The impact to BorgWarner was moderate.
China took measures to cool down their fast-growing economy in 2011. In addition to
measures taken on a broad scale, the automotive sector was directly impacted by
reduced government-sponsored incentives for vehicle sales in addition to limiting vehicle
registration in some of the major cities. Vehicle production slowed down as a result, but
the adoption of advanced powertrain technology did not. China was our fastest growing
market in 2011 and I expect this to continue going forward for many years to come.
During the second half of 2011, the industry was focused on Europe and the potential
impact of its sovereign debt crisis. Speculation was rampant and downside risk weighed
on the minds of investors. Europe is an important market for our company. At more than
50% of our total revenue, it is our largest market, and leads the world in advanced
powertrain development. Clearly, developments in the European economy and its
automotive industry are meaningful to us. However, despite the heightened concerns,
as I write this letter, the European automotive industry continues to grow and, more
importantly, continues to adopt advanced powertrain technology at a rapid pace, driving
above-market growth for BorgWarner.
5
4
.
4
$
2
0
.
3
$
Earnings
Performance*
Per Diluted Share
*Excludes special items.
4
4
.
2
$
7
0
.
2
$
7
1
.
2
3 $
8
.
1
$
4
0
.
2
$
0
4
0
$
.
'04 '05 '06 '07 '08 '09 '10 '11
The bright spot in the automotive industry
We continue to deliver industry-leading
AWD segment as the market continues
in 2011 was North America. Light
stockholder returns. In 2011, our share
to shift toward FWD-based AWD
vehicle production grew 9%, outpacing
price reached a new all-time high of
vehicles. The acquisition adds industry
the rest of the world. Another key develop-
$82.28, but eventually gave way to
leading FWD/AWD technologies, with a
ment in North America was the U.S.
market uncertainty surrounding Europe,
strong European customer base, to our
government’s bold step toward instituting
and ended the year at $63.74, down
existing Drivetrain portfolio. This enables
globally competitive fuel economy stan-
11% from 2010. A decline in share
BorgWarner to provide our global cus-
dards. It is expected that by 2025, auto-
price is a disappointing result for a
tomers a broader range of AWD solu-
makers will have to achieve average
year in which we achieved record op-
tions to meet their vehicle needs.
corporate fuel economy standards of
erating performance, but to put things
in perspective, our industry peers, on
“ We believe that the industry will remain focused on improved fuel
economy and lower emissions for many years to come, and that
our products, and the new technologies that we are developing
for the future, will play a crucial role in the industry’s evolution.”
54.5 miles per gallon for their fleets.
average, ended the year down 31%.
• We repurchased approximately 5 million
These new standards will set into motion a
Furthermore, total shareholder return
tremendous amount of development work
for BorgWarner stockholders over the
that will accelerate the adoption of ad-
last five years was 122%, compared
vanced powertrain technology. In fact, the
with 1% for our peer group and -1%
work has already begun. This should be
for the S&P 500, providing outstand-
a major growth catalyst for BorgWarner.
ing results for you, our stockholders.
shares in 2011, most of which are
intended to be used to settle our convert-
ible debt obligations in April of 2012.
All of this was done while maintaining
our investment grade credit rating, a clear
signal that our balance sheet remains
strong and provides opportunities for
Record-setting Performance
The Benefits of a Strong
the future.
Once again, it was a record setting year
Balance Sheet
for BorgWarner on a number of different
During the year, our strong balance
fronts. From an operational performance
sheet and cash flow enabled us to
standpoint, our revenue of $7.1 billion
execute two important initiatives:
and our earnings of $4.45 per diluted
share were new highs for the company.
It is also noteworthy that our operating
income margin, a key measure of profit-
ability, was 11.2% in 2011, also a
new record.
• We acquired Haldex Traction Systems,
a leader in advanced front-wheel drive
(“FWD”), all-wheel drive (“AWD”)
technology. The deal is expected to
product area.
accelerate our growth in the global
The growing importance of improved fuel
economy and reduced emissions is driving
significant growth and capital investment
for us around the globe. We are cur-
rently installing capacity in North America,
South America, Eastern Europe and Asia
to support our growth in every major
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 1
Accelerating Growth
Total Shareholder Return
In the fall, we announced our backlog of
$2.5 billion of net new business over the
next three years (2012-2014), another
record for our company. This backlog
encompasses some of the most promising
technologies and geographies in the auto
sector and is representative of how Borg-
Warner is leading the way in important
global powertrain developments. From a
product perspective, turbochargers, en-
gine timing systems, variable cam timing,
and dual-clutch transmission modules are
BorgWarner’s largest growth drivers. We
continue to generate important new busi-
ness in each of these product families.
Turbochargers for gasoline engines rep-
resent a significant share of the turbo-
charger backlog, which reflects the grow-
ing global trend toward downsized tur-
bocharged gasoline engines to address
fuel efficiency and emissions reductions.
For example, Ford selected BorgWarner’s
$100 invested on 12/31/06 in stock or index including reinvestment of dividends.
Fiscal year ending December 31.
BorgWarner Inc.
S&P 500
Peer Group
SIC 3714
$275
$220
$165
$110
$55
$0
12/06
12/07
12/08
12/09
12/10
12/11
new Mercedes-Benz 12.8-liter six-cylinder
with previous models, and meet U.S.
in-line BlueEFFICIENCY engine, the first in
Super Ultra Low Emissions Vehicle
its class to meet upcoming Euro 6 emis-
(SULEV) and Euro 5 emissions standards.
sions standards. The top twenty-five custom-
ers of our three-year net new business
include six commercial vehicle customers.
Another exciting development for
BorgWarner is our growing business
in China. The rapid adoption of leading
leading gasoline turbocharger technol-
Another important launch last year was
powertrain technologies in the world’s
ogy for its new four-cylinder EcoBoost
our variable cam timing technology on
fastest growing automotive market has
engine and for rear-wheel drive trucks
Subaru’s new 2.5- and 2.0-liter, Boxer
created a tremendous opportunity for
featuring its new six-cylinder EcoBoost
engines. The 2.5-liter engine features
BorgWarner. In addition to our success
engine. The six-cylinder EcoBoost engine
BorgWarner’s award-winning Cam
with Chinese-Western OEM joint ven-
has been a tremendous success for Ford
Torque Actuated technology (“CTA”),
tures, we have developed relationships
while the highly anticipated 2.0-liter Eco-
while the 2.0-liter engine introduces
with the leading domestic Chinese OEMs
Boost engine is launching on the 2012
BorgWarner’s CTA technology with a
that are now bringing new technologies
Ford Edge and 2012 Ford Explorer.
new mid position lock, an innovation
to China. For example, in 2011, Great
Diesel turbochargers for both on-road
and off-road commercial vehicles are
also an important part of our backlog.
Last year, we announced that we are
supplying our latest B-series generation
turbocharger to DEUTZ for its newly-
designed, 6.1-liter six-cylinder heavy-duty
diesel engine used in agricultural machin-
ery. And, more recently, we announced
that we are supplying turbochargers for the
named as a finalist in the 2011 Automo-
Wall Motor Company launched its first
tive News PACE Awards. Our innova-
self-designed diesel engine featuring a
tions in variable cam timing technology
BorgWarner variable turbine geometry
allow more precise control over intake
turbocharger. This is the first variable
and exhaust valve timing for better fuel
turbine geometry turbocharger available
economy and lower emissions. According
in China. In 2012, our dual-clutch trans-
to Subaru, the new four-cylinder 2.5- and
mission technology will make its Chinese
2.0-liter engines improve fuel economy
debut with Shanghai Automotive, also a
4 to 10 percent, respectively, compared
first for a Chinese automaker.
borgwarner.com
Additionally, our other product technolo-
continue, although we expect European
• Realize a QUALITY operating system
gies continue to grow around the world.
production to decline in 2012 compared
that focuses on zero defects
Fans and fan drives, emissions systems,
with 2011. Despite this, it should be
traditional transmission components
another record year for BorgWarner
and AWD devices are all meaningful
as we continue to outpace the industry.
• Continuously improve the STRUCTURAL
EFFICIENCY of BorgWarner
contributors to our backlog of net new
In 2012, BorgWarner expects to in-
• Ensure we have the right TALENT in the
business. Notably, we are supplying
crease sales in every major region of
right locations at the right time
transmission components, including fric-
the world, including Europe, due to
tion plates and roller one-way clutches,
our strategic focus on improving fuel
for Hyundai’s new 8-speed automatic
economy and lowering emissions.
We expect to post sales and earnings
records in 2012. Furthermore, we ex-
pect to reach a higher operating income
margin in 2012 than a year ago. Last
• Protect, nurture and sustain the unique
and successful CULTURE of BorgWarner
• Supplement organic growth with
MERGERS & ACQUISTIONS to
achieve our product, technology,
customer and geographic goals
rear-wheel drive transmission. We are
supplying our electronically controlled
Visctronic fans to Freightliner for its Casca-
dia trucks, a first for Class 8 commercial
trucks in North America, and our Torque-
On-Demand® transfer case drives the new
2.2-liter Tata Aria, the first four-wheel
drive cross-over vehicle in India. At the
same time, we are launching new transfer
cases for AWD Ram Trucks in 2011.
advanced technology adoption around
the world. Forty-five percent of the back-
log is in Europe which remains the
epicenter of advanced development for
internal combustion engines, fuel econo-
my and emissions improvements. Thirty-
five percent is in Asia, which continues
to expand in importance because of its
rapid growth and its demand for leading
edge technologies. Twenty percent of our
backlog is in North America, where we
see intensified customer focus on pro-
grams aimed at improved fuel economy
and lower emissions.
year, our full year operating income
These strategies have been the corner-
margin reached 11.2%. In 2012, we
stone of BorgWarner’s success for many
expect that margin to be 11.5% or
years, and continue to be energized
better. The expectation of improved
for the future.
margins can be attributed to restructur-
ing actions taken in 2008 and 2009
We spend a lot of time thinking about
the direction of our industry and our
role in it. We believe that the industry
will remain focused on improved fuel
As we consider the longer term, we
economy and lower emissions for
believe that understanding the foundation
many years to come, and that our
of our past success, and applying those
products, and the new technologies
principles to today’s strategic initiatives,
that we are developing for the future,
are the keys to our future success. On
will play a crucial role in the industry’s
that basis, our senior leadership has
evolution. Staying focused on the
validated eight Enterprise Strategies
future while executing operational
that will guide BorgWarner to 2020:
excellence today is a winning formula
Enterprise Strategies
• Accelerate the pace of INNOVATION
and product leadership into new technolo-
gies, markets and geographic regions
for achieving one of our ultimate
goals, which is to maximize your
total stockholder returns.
The regional mix of our backlog of net
combined with an ongoing focus on
new business is aligned with the pace of
operating efficiency.
The Road Ahead
• Consistently drive profitable sales
GROWTH at least 10 percentage points
Timothy M. Manganello
Chairman and Chief Executive Officer
Looking ahead, we expect 2012 to be
above the global industry growth rate
another great year for BorgWarner.
Global vehicle production growth will
• Be the supplier / strategic partner of
choice for our CUSTOMERS, while
meeting our company objectives
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Net New Business 2012 thru 2014
$2.5 Billion of Net New Business – By Product
5%
Thermal
Systems
6%
Emissions
Systems
12%
Engine Timing
and VCT
7%
Ignition
Systems
5%
Traditional
Transmission
Components
7%
All-Wheel Drive
7%
DCT Modules
22%
Gas
Turbochargers
29%
Diesel
Turbochargers
Engine – 80%
Drivetrain – 20%
Customer Diversity Worldwide
2012 Sales Outlook*
*Includes NSK-Warner
**Excludes NSK-Warner
15% VW/Audi
5% Daimler
Toyota 5%
Hyundai/Kia 4%
5% Ford
4% Renault
3% BMW
2% Fiat
1% GM
1% PSA
4%
Commercial
Vehicles
10% Other
Nissan 1%
Honda 1%
China 6%
Other 6%
Ford 7%
Chrysler 4%
GM 3%
Commercial
Vehicles 6%
Other 5%
Asian OEMs 1%
Asia 24%* (18%)**
Americas 26%* (28%)**
Europe 50%* (54%)**
ENGINE
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.
Engine
Group Sales
Millions of Dollars
M
6
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0
5
0
5
$
,
M
8
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0
6
0
4
$
,
M
5
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1
6
8
3
$
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M
3
1
6
7
,
3
$
M
2
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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 devices.
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 stability
for applications in various en-
gine and vehicle functions.
'07
'08
'09
'10
'11
Regulated
Two-Stage
Turbocharger
Cooling
Systems
Cam Torque
Actuated Variable
Cam Timing
Diesel
Cold-Start
Technology
Exhaust Gas
Recirculation
Engine
Timing
DRIVETRAIN
G R O U P
The Drivetrain Group harnesses a legacy of more than 100 years as an industry innovator intransmission
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.
Drivetrain
Group Sales
Millions of Dollars
M
5
.
4
8
0
,
2
$
M
8
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8
9
5
,
1
$
M
4
.
6
2
4
,
1
$
M
4
.
1
1
6
,
1
$
M
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 iTrac®
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
electro-hydraulic solenoids for
standard and high pressure
hydraulic systems, transmission
solenoid modules and dual clutch
control modules.
'07
'08
'09
'10
'11
DualTronic™
Transmission
Clutch Modules
iTrac ®
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 borgwarner.com.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
Í Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2011
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
Name of each exchange on
which registered
Common Stock, par value $0.01 per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New York Stock Exchange
Securities registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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 Í
Yes ‘
No ‘
No Í
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 Í
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 Í
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 Í
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 Í
Non-accelerated filer ‘ Smaller reporting company ‘
Accelerated filer ‘
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ‘
No Í
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, 2011 (the last business day of the
most recently completed second fiscal quarter) was approximately $8.9 billion.
As of February 8, 2012, the registrant had 109,144,544 shares of voting common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated.
Document
Portions of the BorgWarner Inc. Proxy Statement for the 2012 Annual Meeting of Stockholders . . . . . . . .
Part of Form 10-K
into which
incorporated
Part III
BORGWARNER INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2011
INDEX
PART I.
Page No.
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B.
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III.
Item 10.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . .
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Certain Relationships and Related Transactions and Director Independence . . . . .
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
15
20
21
22
22
22
25
26
49
49
101
101
101
102
102
102
102
102
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102
PART IV.
2
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
“could,”
“effect,”
“designed,”
“evaluates,”
“estimates,”
“continues,”
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,”
“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. Forward-looking statements are not
guarantees of performance and the Company’s actual results may differ materially from those
expressed, projected or implied in or by the forward-looking statements.
fluctuations in domestic or
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. Such risks and uncertainties
include:
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.
foreign vehicle production,
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
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.
the economic, competitive, governmental,
3
ITEM 1. BUSINESS
PART I
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”)
is a Delaware corporation
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 (“SUVs”), vans and light-trucks). The Company’s products are also sold to other OEMs of
commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles
(agricultural and construction machinery and marine applications). We also manufacture and sell our
products to certain Tier One vehicle systems suppliers and into the aftermarket for light, commercial
and off-highway 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,” to the Consolidated Financial
Statements in Item 8 of this report for financial information about the Company’s reporting segments.
Narrative Description of Reporting Segments
The Company reports its results under two reporting segments: Engine and Drivetrain. Net sales
by reporting segment for the years ended December 31, 2011, 2010 and 2009 are as follows:
(millions of dollars)
Year Ended December 31,
2011
2010
2009
Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Drivetrain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inter-segment eliminations . . . . . . . . . . . . . . . . . . . . . . . . .
$5,050.6
2,084.5
(20.4)
$4,060.8
1,611.4
(19.4)
$2,883.2
1,093.5
(14.9)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,114.7
$5,652.8
$3,961.8
The sales information presented above excludes the sales by the Company’s unconsolidated
joint ventures (See sub-heading “Joint Ventures”). Such unconsolidated sales totaled approximately
$817 million, $779 million and $599 million for the years ended December 31, 2011, 2010 and 2009,
respectively.
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, as well as
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, emissions systems, timing devices and chain
products, thermal systems, diesel cold start, gasoline ignition technology and cabin heaters.
The Engine Group provides turbochargers for light, commercial and off-highway applications for
diesel and gasoline engine manufacturers in the Americas, Europe 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
4
turbocharged gasoline engines. Benefits of turbochargers in light, commercial and off-highway
applications include increased power for a given engine size, improved fuel economy and reduced
emissions.
Sales of turbochargers for light-vehicles represented approximately 26% of total net sales for the
years ended December 31, 2011 and 2010, respectively, and 27% of total net sales for the year
ended December 31, 2009. The Company currently supplies light-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 Daimler, Navistar, Deutz
and MAN and off-highway turbochargers to Caterpillar and John Deere.
The Company’s newest turbocharger technologies are its regulated two-stage turbocharging
system, known as R2S®, variable turbine geometry (“VTG”) turbochargers and turbochargers for
gasoline direct injected engines, all of which may be found in numerous applications around the
world. For example, the Company supplies its award winning R2S® turbocharger technology to
Volkswagen’s 2.0 liter four-cylinder common-rail diesel engine featured in the Transporter T5 and
Amarok pickup. Also, the Company supplies VTG turbochargers to Renault’s 1.6 liter R9M diesel
engine featured in the Mégane Scénic and Ford selected BorgWarner’s leading gasoline turbocharger
technology for their new 1.6 liter and 2.0 liter four-cylinder EcoBoost engines, the latter launching in
the U.S. in the 2012 Explorer and 2012 Edge models, and in China in the Ford Mondeo.
The Engine Group also designs and manufactures products to control emissions and improve
fuel economy. These products include electric air pumps, turbo actuators using integrated electronics
to precisely control turbocharger speed and pressure ratio and exhaust gas recirculation (“EGR”)
coolers, tubes and valves for gasoline and diesel applications. In 2010, the Company acquired Dytech
Ensa S.L., a leading producer of EGR coolers, EGR tubes and integrated EGR modules including
valves for light, commercial and off-highway applications.
The Engine Group’s timing devices and chain 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 vehicles.
The Company is a leading manufacturer of timing chain systems to OEMs around the world.
BorgWarner timing chain systems are featured on Ford’s family of engines, including the Duratec,
Modular, and in-line four-cylinder engines, Chrysler’s 3.6 liter Pentastar engine, Volkswagen’s EA888
family, Hyundai’s Gamma, Nu and Theta families and numerous other applications around the world.
The Engine Group’s newest chain product 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. VCT with mid-position lock made its debut on Subaru’s Boxer® 2.0 liter engine. BorgWarner
is currently working with a number of other OEMs interested in implementing this technology.
The Company is a leading manufacturer of chain for FWD transmissions and 4WD transfer
cases. The Company’s 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 is a leading global provider of engine thermal solutions for truck, agricultural and
off-highway applications. The Engine Group designs, manufactures and markets viscous fan drives
5
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
loss. The Company has been awarded the “standard position” (the
parasitic horsepower
OEM-designated preferred supplier of component systems available to the end-customer) at several
major global heavy truck producers.
The Company is a leading global automotive supplier of diesel cold start technology (glow plugs
and instant starting systems), including its Pressure Sensor Glow Plug which monitors and enhances
the combustion process of a diesel engine, minimizing CO2 and NOx emissions. The Company also
designs and manufactures gasoline ignition technology (spark plugs and ignition coils) and electronic
control units and sensor technology (diesel cabin heaters and selected sensors).
In 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.
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 conventional automatic, new dual-clutch transmissions (“DCT”) and automated manual
transmissions. In conventional automatic transmissions, there has been a global market trend from
four and five speeds to six, seven and eight speed transmissions. Transmissions with more speeds
improve fuel economy and vehicle performance and offer growth opportunities.
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
is a leading
50%-owned joint venture in Japan, NSK-Warner Kabushiki Kaisha (“NSK-Warner”),
producer of friction plates and one-way clutches in Japan.
The Company has led the globalization of today’s DCT technology for over 10 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. The
6
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 shifting a single clutch
manual transmission. The result is a smooth shifting automatic transmission with the fuel efficiency
and great driving experience of a manual gearbox.
In 2008,
the Company entered into a joint venture agreement with China Automobile
Development United Investment Company, a company owned by 12 leading Chinese automakers, to
produce various dual clutch transmission modules. The joint venture’s operations are located in
Dalian, China and production is scheduled to begin in the first half of 2012. The Company owns 66%
of the joint venture.
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, SUVs, RWD based cross-over utility vehicles
(“CUVs”) 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 AWD market for FWD based vehicles 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.
On January 31, 2011, the Company acquired the Traction Systems division of Haldex Group, a
innovative AWD products for the global vehicle industry headquartered in
leading provider of
Stockholm, Sweden. This acquisition is expected to accelerate BorgWarner’s growth in the global
AWD market as it continues to shift toward FWD based vehicles. The acquisition will add industry
leading AWD technologies for FWD based vehicles, 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 AWD solutions to meet their vehicle
needs.
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® 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.
Joint Ventures
As of December 31, 2011, the Company had 10 joint ventures in which it had a less-than-100%
ownership interest. Results from the seven joint ventures in which the Company is the majority owner
are consolidated as part of the Company’s results. Results from the three joint ventures in which the
Company’s effective ownership interest is 50% or less, were reported by the Company using the
equity method of accounting.
7
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:
Joint venture
Products
Unconsolidated:
NSK-Warner . . . . . . . . . . Transmission components
Turbo Energy
Limited(b)
. . . . . . . . . . Turbochargers
Percentage
owned by
the
Company
Year
organized
Location of
operation Joint venture partner
Fiscal 2011
sales (millions
of dollars) (a)
1964
50% Japan/China NSK Ltd.
1987
32.6% India
Sundaram Finance Limited;
Brakes India Limited
Jayant Dave
$655.2
$156.0
$ 6.2
BERU Diesel Start
Glow Plugs
1996
49% India
Systems Pvt. Ltd. . . . .
Consolidated:
BorgWarner
Transmission Systems
Korea Ltd.(c) . . . . . . . .
Divgi-Warner Private
Limited . . . . . . . . . . . .
Borg-Warner Shenglong
. . . .
(Ningbo) Co. Ltd.
Transmission components
1987
60% Korea
NSK-Warner K.K.
$204.0
Transfer cases and
automatic locking hubs
Fans and fan drives
1999
70% China
1995
60% India
Divgi Metalwares, Ltd.
$ 20.4
BorgWarner
Transfer cases
2000
80% China
TorqTransfer Systems
Beijing Co. Ltd. . . . . . .
BorgWarner BERU
Ignition coils and pumps
2001
51% Korea
Systems Korea Co.
Ltd.
. . . . . . . . . . . . . . .
Ningbo Shenglong Group
Co., Ltd.
Beijing Automotive
Components Stock Co.
Ltd.
Mr. K.B. Mo and Mr. D.H.
Kim
$ 50.3
$ 76.2
$ 43.4
SeohanWarner Turbo
Turbochargers
2003
71% Korea
Korea Flange Company
$126.7
Systems Ltd. . . . . . . . .
BorgWarner United
Transmission components
2009
66% China
Transmission Systems
Co. Ltd. . . . . . . . . . . . .
China Automobile
Development United
Investment Co., Ltd.
$ —
(a) All sales figures are for the year ended December 31, 2011, except NSK-Warner and Turbo Energy
Limited. NSK-Warner’s sales are reported for the 12 months ended November 30, 2011. Turbo Energy
Limited’s sales are reported for the 12 months ended September 30, 2011.
(b) The Company made purchases from Turbo Energy Limited totaling $22.5 million, $22.9 million and
$24.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.
(c) BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner Transmission
Systems Korea Ltd. This gives the Company an additional indirect effective ownership percentage of
20%. This results in a total effective ownership interest of 80%.
8
Financial Information About Geographic Areas
During the year ended December 31, 2011, approximately 76% of the Company’s consolidated
net sales were outside the United States (“U.S.”), including exports. However, a portion of such sales
were to OEMs headquartered outside the U.S. that produce vehicles that are, in turn, exported to the
U.S.
Refer to Note 19, “Reporting Segments and Related Information,” to the Consolidated Financial
Statements in Item 8 of this report for financial information about geographic areas.
Product Lines and Customers
During the year ended December 31, 2011, approximately 78% of the Company’s net sales were
for
light vehicle applications; approximately 10% were for commercial vehicle applications;
approximately 6% were for off-highway vehicle applications; and approximately 6% were to
distributors of aftermarket replacement parts.
The Company’s worldwide net sales to the following customers (including their subsidiaries) were
approximately as follows:
Customer
Year Ended
December 31,
2011
2010
2009
Volkswagen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ford . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19% 19% 22%
12% 11% 12%
No other single customer accounted for more than 10% of our consolidated net sales in any of
the years 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 and Drivetrain reporting segments
the business units. The
the Company’s wet-clutch and control-system technology for a
often work together
development of DualTronic®,
new-concept automated transmission, is an example of a successful collaboration.
to explore cross-development opportunities for
9
Seasonality
Our operations are directly related to the automotive industry. Consequently, we may experience
seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer
months when many customer plants typically close for model year changeovers or vacations.
Historically, model changeovers or vacations have generally resulted in lower sales volume in the third
quarter.
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, including engineers 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.
The Company’s net R&D expenditures are included in selling, general and administrative
expenses of the Consolidated Statements of Operations. Customer reimbursements are netted
against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements
for prototypes are recorded net of prototype costs based on customer contracts, typically either when
the prototype is shipped or when it is accepted by the customer. Customer reimbursements for
engineering services are recorded when performance obligations are satisfied in accordance with the
contract and accepted by the customer. Financial risks and rewards transfer upon shipment,
acceptance of a prototype component by the customer or upon completion of the performance
obligation as stated in the respective customer agreement.
(millions of dollars)
Year Ended December 31,
2011
2010
2009
Gross R&D expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$294.7
(51.0)
$233.2
(48.2)
$219.0
(63.8)
Net R&D expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$243.7
$185.0
$155.2
Net R&D expenditures as a percentage of net sales were 3.4%, 3.3% and 3.9% in the years
ended December 31, 2011, 2010 and 2009, respectively. The Company has contracts with several
customers at the Company’s various R&D locations. No such contract exceeded 5% of net R&D
expenditures in any of the years presented.
Patents and Licenses
The Company has more than 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,
10
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 reporting segments compete worldwide with a number of other manufacturers
and distributors that 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:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Emissions systems:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Timing devices and chains:
. . . . . . . . . . . . . . . . . . . . . . . .
Thermal systems:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diesel cold start, gasoline ignition technology and cabin
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
heaters:
Names of Competitors
Honeywell
IHI
Mitsubishi Heavy Industries (MHI)
Behr
Pierburg
Modine
Valeo
Denso
Iwis
Schaeffler Group
Tsubaki Group
Behr
Horton/Sachs
Usui
Bosch
Denso
Eberspacher Catem
NGK
Sensata
Product Type: Drivetrain
Names of Competitors
Torque transfer: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GKN Driveline
Transmission:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
JTEKT
Magna Powertrain
Bosch
Dynax
Schaeffler Group
Unick
In addition, a number of the Company’s major OEM customers manufacture, for their own use
and for others, products that 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 is no assurance that the Company’s business will not be adversely affected by
increased competition in the markets in which it operates.
11
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, lower tax rates and, in
some cases, export subsidies and/or raw materials subsidies. Also, see Item 1A, “Risk Factors.”
Workforce
As of December 31, 2011, the Company had a salaried and hourly workforce of approximately
19,250 (as compared with approximately 17,500 at December 31, 2010), of which approximately
5,300 were in the U.S. Approximately 22% of the Company’s U.S. workforce is unionized. The
workforces at certain international facilities are also unionized. The Company believes the 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, nickel, 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.
Commodity prices rose in 2011 due to expanding global demand and cautious capacity recovery
which constrained supply. 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 2012 and beyond. Refer to Note
10, “Financial Instruments,” of the Consolidated Financial Statements in Item 8 of this report for
information related to the Company’s hedging activities.
For 2012, the Company believes that its supplies of raw materials are adequate and available
from multiple sources to support its manufacturing requirements.
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
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.
the Corporate Governance Committee Charter;
12
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 14, 2012.
Name
Age
Position with the Company
Timothy M. Manganello . .
Robin J. Adams . . . . . . . . .
John Sanderson . . . . . . . .
Jan A. Bertsch . . . . . . . . . .
Daniel CasaSanta . . . . . . .
Brady D. Ericson . . . . . . . .
Joseph F. Fadool
. . . . . . .
John J. Gasparovic . . . . . .
Ronald T. Hundzinski
. . . .
Robin Kendrick . . . . . . . . .
Pete B. Kohler . . . . . . . . . .
Frederic B. Lissalde . . . . .
Janice K. McAdams . . . . .
James R. Verrier . . . . . . . .
62
58
59
55
57
40
45
54
53
47
56
44
53
49
Chairman of the Board and Chief Executive Officer
Executive Vice President, Chief Financial Officer and
Chief Administrative Officer
Executive Vice President
Vice President and Controller
Vice President
Vice President
Vice President
Vice President, General Counsel and Secretary
Vice President and Treasurer
Vice President
Vice President
Vice President
Vice President, Human Resources
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.
Mr. Adams has been Executive Vice President, Chief Financial Officer and Chief Administrative
Officer of the Company since April 2004. Mr. Adams serves as a member of BorgWarner’s Board of
Directors. Mr. Adams is also 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 to January 2010,
he was Vice President of
the Company and President and General Manager of BorgWarner
Transmission Systems Inc. From October 1999 to June 2008, he was Chief Executive Officer,
Americas of Siemens VDO.
Ms. Bertsch has been Vice President and Controller of the Company since August 2011. From
the
November 2009 through mid-August 2011, she was the Vice President and Treasurer of
Company. 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.
Mr. CasaSanta has been Vice President of the Company and President and General Manager of
BorgWarner Thermal Systems Inc. since January 2010. He was General Manager of BorgWarner
Thermal Systems Inc. from June 2009 through December 2009. He was President and General
Manager of BorgWarner TorqTransfer Systems Inc. from June 2008 until June 2009. He was Vice
President and General Manager of Thermal Systems from January 2003 until June 2008.
13
Mr. Ericson has been Vice President of the Company and President and General Manager of
BorgWarner BERU Systems and Emissions Systems since September 2011. He was Vice President
and General Manager of BorgWarner Emissions Systems from April 2010 through August 2011. From
August 2009 through March 2010, he was Vice President, Global Manufacturing Strategies for
BorgWarner Turbo and Emissions Systems. From January 2008 through July 2009, he was Vice
President, Operations—China and Korea for BorgWarner Turbo and Emissions Systems. From April
2005 through December 2007, he was Managing Director, SeohanWarner Turbo Systems in Korea.
Mr. Fadool has been Vice President of the Company and President and General Manager of
BorgWarner TorqTransfer Systems Inc. since June 2011. He was Vice President and General Manager
of TorqTransfer Systems Inc. from July 2010 until June 2011. From May 2009 until July 2010, he was
Vice President for North American Operations for the Central Electronics Plants at Continental
Automotive Systems. From July 2007 until July 2010, he was Vice President, Huntsville Operations at
SiemensVDO. From September 2003 until July 2007, he was Vice President, North American
Powertrain Electronics at SiemensVDO.
Mr. Gasparovic has been Vice President, General Counsel and Secretary of the Company since
January 2007.
Mr. Hundzinski has been Vice President and Treasurer of the Company since August 2011. From
April 2010 until mid-August 2011, he was Vice President and Controller of the Company. From June
2005 until April 2010, he was Vice President of Finance of BorgWarner Turbo Systems.
Mr. Kendrick has been Vice President of the Company and President and General Manager of
BorgWarner Transmissions Systems Inc. since September 2011. From January 2011 until September
2011, he was President and Chief Executive Officer of Ruia Global Fasteners, a spin-off of Acument
Global Technologies. From September 2008 to January 2011, he was Vice President and General
Manager, Europe for Acument Global Technologies. From March 1999 until September 2008, he held
various positions at American Axle and Manufacturing including Vice President & General Manager of
Driveshafts & Halfshafts, Managing Director of AAM Europe, and Executive Director of Sales.
Mr. Kohler has been Vice President of the Company and President and General Manager of
BorgWarner Turbo Systems Commercial Diesel Products since May 2011. He was Acting President
and General Manager of BorgWarner Turbo Systems Commercial Diesel from March 2011 to May
2011. He was Vice President and General Manager for BorgWarner Turbo Systems Commercial
Vehicles from February 2006 to March 2011.
Mr. Lissalde has been Vice President of the Company and President and General Manager of
BorgWarner Turbo Systems Passenger Car Products since May 2011. He was Acting President and
General Manager of BorgWarner Turbo Systems Passenger Car Products from March 2011 until May
2011. He was Vice President and General Manager for Turbo Systems Passenger Car from January
2010 until March 2011. He was Vice President and General Manager, DualTronic and Clutch Systems,
BorgWarner Transmission Systems Inc.
from January 2008 to January 2010. He was the Vice
President of Global Sales of that entity from May 2007 to January 2008. He was General Manager at
BorgWarner Tulle SAS from July 2004 to May 2007.
Ms. McAdams has been Vice President, Human Resources since March 2010. She was Director
of Compensation and Benefits from May 2005 to March 2010.
Mr. Verrier has been Vice President of the Company and President and General Manager of
BorgWarner Morse TEC Inc. since January 2010. He was Vice President and General Manager,
Passenger Car of BorgWarner Turbo Systems Inc. from January 2006 to January 2010.
14
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.
Risks related to our industry
Conditions in the automotive industry may adversely affect our business.
Our financial performance depends on conditions in the global automotive industry. 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 affect on our sales to OEMs.
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 integrated units of our major OEM 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. Although OEMs have indicated that
they will continue to rely on outside suppliers, a number of our major OEM customers manufacture
products for their own uses that directly compete with our products. These OEMs could elect to
manufacture such products for their own uses in place of the products we currently supply. The
competitive environment has changed dramatically over the past few years as our traditional U.S.
faced with intense international competition, have expanded their worldwide
OEM customers,
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,
lower tax rates and, in some cases, export or raw materials subsidies. Increased competition could
adversely affect our business.
Risks related to our business
We are under substantial pressure from OEMs to reduce the prices of our products.
There is substantial and continuing pressure on OEMs to reduce costs,
including costs of
products we supply. Annual price reductions to OEM 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 OEM customers is limited, with
cost recovery often less than 100% and often on a delayed basis. Inability to reduce costs in an
amount equal to annual price reductions, increases in raw material costs, and increases in employee
wages and benefits could have an adverse effect on our business.
We continue to face highly volatile costs of commodities 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,
15
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 and 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 use important intellectual property in our business.
If we are unable to protect our
intellectual property or if a third party makes assertions against us or our customers relating to
intellectual property rights, our business could be adversely affected.
We own important intellectual property, including patents, trademarks, copyrights and trade
secrets, and are involved in numerous licensing arrangements. Our intellectual property plays an
important role in maintaining our competitive position in a number of the markets that we serve. Our
competitors may develop technologies that are similar or superior to our proprietary technologies or
design around the patents we own or license. Further, as we expand our operations in jurisdictions
where the protection of intellectual property rights is less robust, the risk of others duplicating our
proprietary technologies increases, despite efforts we undertake to protect them. Developments or
assertions by or against us relating to intellectual property rights, and any inability to protect these
rights, could materially adversely impact our business and our competitive position.
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.
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.
Part of our workforce is unionized which could subject us to work stoppages.
As of December 31, 2011, approximately 22% 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 workforce at certain of our international facilities is also
unionized. A prolonged dispute with our employees could have an adverse effect on our business.
We are impacted by the rising cost of providing retirement benefits and certain retirement
benefit plans we sponsor are currently unfunded or underfunded.
We sponsor certain retirement benefit plans worldwide that are unfunded or underfunded and will
require cash payments. If the performance of the assets in our funded pension plans do not meet our
expectations,
if medical costs continue to increase or actuarial assumptions are modified, our
required cash payments may be higher than we expect.
16
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. The operation of automotive parts manufacturing plants entails risks in these areas,
and we cannot assure you that we will not incur material costs or liabilities as a result. 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. Costs
associated with failure to comply with environmental regulations could have an adverse effect on our
business.
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.
We provide product warranties to our customers for some of our products. Under these product
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 product
warranties in our financial statements.
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, personal injury, environmental and employment claims. There is a possibility that such claims
may have an adverse impact on our business that is greater than we anticipate.
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, which are inherently uncertain. Negative or unexpected results from one or
more such tax audits or changes to tax laws governing the jurisdictions in which we operate could
adversely affect our business.
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 affectively. Failure to
execute our growth strategy could adversely affect our business.
17
We are subject to risks related to our international operations.
We have manufacturing and technical facilities in many regions including the Americas, Europe
and Asia. For 2011, approximately 76% of our sales were outside the U.S. Consequently, our results
could be affected by changes in trade, monetary and fiscal policies, trade restrictions or prohibitions,
import or other charges or taxes, fluctuations in foreign currency exchange rates, limitations on the
repatriation of funds, changing economic conditions, unreliable intellectual property protection and
legal systems,
instability and disputes, and
international terrorism. Compliance with multiple and potentially conflicting laws and regulations of
various countries is burdensome and expensive.
infrastructures, social unrest, political
insufficient
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.
We rely on sales to major customers.
Risks related to our customers
We rely on sales to OEMs around the world of varying credit quality. Supply to several of these
customers requires significant investment by the Company in working capital, plant and equipment.
in part, on commitments made by our customers. These
We base our growth projections,
commitments generally renew yearly during a program life cycle. If actual production orders from our
customers do not approximate such commitments due to any of a variety of factors including
non-renewal of purchase orders, the customer’s financial hardship or other unforeseen reasons, it
could adversely affect our business.
Furthermore, some of our sales are concentrated. Our worldwide sales in 2011 to Volkswagen
and Ford constituted approximately 19% and 12%, respectively, of our 2011 consolidated net sales.
We are sensitive to the affects 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 OEMs’ dependence on a single union, we are affected by labor
difficulties and work stoppages at OEMs’ 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 affect on our business.
Risks related to our suppliers
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
18
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.
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 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 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.
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.
Other risks
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, utilization 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; global excess capacity and vehicle platform
proliferation; and the impact of natural disasters.
19
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 2011 fiscal year that remain unresolved.
20
Item 2. Properties
As of December 31, 2011,
the Company had 60 manufacturing, assembly, and technical
locations worldwide. In addition to its 14 U.S. locations, the Company has eight locations in Germany;
six locations in each of China and South Korea; five locations in India; three locations in each of
Japan and Mexico; two locations in each of France, Hungary and Spain and one location in each of
Brazil, Ireland, Italy, Monaco, Poland, Portugal, Sweden, Thailand and the United Kingdom. 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 principal manufacturing, assembly, and
technical facilities operated by the Company, its subsidiaries, and affiliates.
ENGINE(a)
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
Marshall, Michigan
Ramos, Mexico
DRIVETRAIN(a)
Europe:
Asia:
Arcore, Italy
Bradford, England
Chazelles, France
Kirchheimbolanden, Germany
Ludwigsburg, Germany
Markdorf, Germany
Muggendorf, Germany
Neuhaus, Germany
Oroszlany, Hungary
Rzeszow, Poland
Tralee, Ireland
Valenca, Portugal(b)
Vigo, Spain
Vitoria, Spain
Aoyama, Japan
Changwon, South Korea(b)
Chennai, India
Chonburi, Thailand
Chungju-City, South Korea
Faridabad, India
Kakkalur, India
Nabari City, Japan
Ningbo, China(b)(c)
Pyongtaek, South Korea(b)(c)
Americas:
Europe:
Asia:
Addison, Illinois(b)
Auburn Hills, Michigan
Bellwood, Illinois
Frankfort, Illinois
Irapuato, Mexico
Livonia, Michigan
Longview, Texas(b)
Seneca, South Carolina
Water Valley, Mississippi
Arnstadt, Germany
Heidelberg, Germany
Ketsch, Germany
Landskrona, Sweden
Monte Carlo, Monaco
Szentlorinchata, Hungary
Tulle, France
Beijing, China(b)
Dalian, 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.
(c) City has 2 locations: a wholly owned subsidiary and a joint venture.
21
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. See Note 14, “Contingencies,” to
the Condensed Consolidated Financial Statements for a discussion of environmental, product liability
and other litigation, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
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 8, 2012, there were 2,332 holders of record of Common Stock.
Cash dividends declared and paid per share, adjusted for a stock split in 2007, were as follows:
Year Ended December 31,
2011
2010
2009
2008
2007
2006
Dividend amount . . . . . . . . . . . . . . . . . . . . .
$— $— $0.12
$0.44
$0.34
$0.32
On March 5, 2009, the Company announced the suspension of the Company’s quarterly dividend
of $0.12 per share. The dividend policy is subject to review and change at the discretion of the Board
of Directors.
High and low prices (as reported on the New York Stock Exchange composite tape) for the
Common Stock for each quarter in 2010 and 2011 were:
Quarter Ended
March 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$39.21
$44.55
$53.42
$73.43
$81.07
$82.28
$81.98
$77.70
$33.43
$33.93
$35.68
$51.06
$64.22
$65.78
$57.39
$54.59
22
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 our 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
BorgWarner Inc.
S&P 500
Peer Group
SIC 3714 Motor Vehicle Parts
$300
$250
$200
$150
$100
$50
$0
2006
2007
2008
2009
2010
2011
* $100 invested on 12/31/2006 in stock or index, including reinvestment of dividends. Fiscal year
ending December 31.
Copyright © 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)
2006
2007
2008
2009
2010
2011
100.00
165.41
100.00
105.49
100.00
122.85
100.00
106.60
75.32
66.46
60.78
43.72
115.70
252.01
221.99
84.05
90.69
80.29
96.71
98.75
141.37
128.04
135.53
101.18
(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., Gentex Corporation, Johnson
Controls, Inc., Lear Corporation (pre-2009 bankruptcy), Magna International Inc., Meritor, Inc.,
Modine Manufacturing Company, Tenneco Inc., TRW Automotive Holdings Corp. and Visteon
Corporation (pre-2009 bankruptcy)
Inc., Autoliv,
Repurchase of Equity Securities
The Company’s Board of Directors authorized the purchase of up to 19.8 million shares of the
Company’s common stock. As of December 31, 2011, the Company had repurchased 17,513,558
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
23
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 common stock held
in treasury and may subsequently be reissued for general corporate purposes.
The following table provides information about the Company’s purchases of its equity securities
the Exchange Act during the quarter ended
that are registered pursuant
to Section 12 of
December 31, 2011, at a total cost of $88.7 million:
ISSUER REPURCHASES OF EQUITY SECURITIES
Period
Total
number of
shares
repurchased
Average
price
per share
Total number
of shares
purchased as
part of publicly
announced
plans or programs
Maximum
number of
shares that may
yet be purchased
Month Ended December 31, 2011 . . . . . . . . . . . 1,400,800
$63.31
1,400,800
2,286,442
NOTE: All purchases made on the open market. No purchases were made in October or November
2011.
Equity Compensation Plan Information
As of December 31, 2011, the number of stock options and restricted common stock outstanding
under our equity compensation plans, the weighted average exercise price of outstanding stock
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)
Plan category
Equity compensation plans
approved by security holders . . . .
3,649,823
Equity compensation plans not
approved by security holders . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
3,649,823
$33.15
$ —
$33.15
2,263,861
—
2,263,861
24
Item 6. Selected Financial Data
(millions of dollars, except share and per share data)
2011(a)
2010(a)
2009(a)
2008(b)
2007
Year Ended December 31,
Operating results
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,114.7 $ 5,652.8 $ 3,961.8 $ 5,263.9 $ 5,328.6
Operating income (c)
7.3 $ 418.1
Net earnings (loss) attributable to
. . . . . . . . . . . . . . . . . . . $ 797.5 $ 504.3 $
50.8 $
BorgWarner Inc. (c) . . . . . . . . . . . . . . . . . . . $ 550.1 $ 377.4 $
3.31 $
3.07 $
(35.6) $ 288.5
2.49
(0.31) $
Earnings (loss) per share — basic . . . . . . . . . $
Earnings (loss) per share — diluted . . . . . . . $
2.45
(0.31) $
Net R&D expenditures . . . . . . . . . . . . . . . . . . $ 243.7 $ 185.0 $ 155.2 $ 205.7 $ 210.8
Capital expenditures, including tooling
27.0 $
0.23 $
0.23 $
5.04 $
4.45 $
outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 393.7 $ 276.6 $ 172.0 $ 369.7 $ 293.9
Depreciation and tooling amortization . . . . . $ 252.2 $ 224.5 $ 234.6 $ 259.7 $ 243.1
Number of employees . . . . . . . . . . . . . . . . . .
17,700
Financial position
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 359.6 $ 449.9 $ 357.4 $ 103.4 $ 188.5
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,958.6 $ 5,555.0 $ 4,811.4 $ 4,644.0 $ 4,958.5
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,329.1 $ 1,180.4 $ 842.3 $ 780.3 $ 636.3
Common share information
Cash dividend declared and paid per
12,500
13,800
17,500
19,250
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
0.12 $
0.44 $
0.34
Market prices
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82.28 $ 73.43 $ 36.78 $ 55.99 $ 53.00
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54.59 $ 33.43 $ 14.62 $ 15.00 $ 29.02
Weighted average shares outstanding
(thousands)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,229
128,468
114,155
129,575
116,522
116,939
116,007
116,007
116,002
117,840
(a) The Company’s diluted earnings per share for the years ended December 31, 2011 and 2010
include the impact of the Company’s 3.50% convertible senior notes and associated warrants.
For the year ending December 31, 2009, the impact of the Company’s 3.50% convertible senior
notes and associated warrants was not included in the calculation of diluted earnings per share
because including them, under the if-converted method, would increase earnings per share.
(b) The Company had a net 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.
(c) The Company’s operating income and net earnings attributable to BorgWarner Inc. for the year
ended December 31, 2009 includes $50.3 million of restructuring expense. The Company’s
operating income and net loss attributable to BorgWarner Inc. for the year ended December 31,
2008 includes $127.5 million of restructuring expense and a goodwill
impairment charge of
$156.8 million.
25
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 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 (“SUVs”), vans and light-trucks). The Company’s
products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks
and buses) and off-highway vehicles (agricultural and construction machinery and marine
applications). We also manufacture and sell our products to certain Tier One vehicle systems
suppliers and into the aftermarket for light, commercial and off-highway 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.
The Company’s products fall
into two reporting segments: Engine and Drivetrain. The Engine
segment’s products include turbochargers, timing devices and chain products, emissions systems,
thermal systems, diesel coldstart, gasoline ignition technology and cabin heaters. The Drivetrain
segment’s products include transmission components and systems and all-wheel drive torque
management systems.
RESULTS OF OPERATIONS
A summary of our operating results for the years ended December 31, 2011, 2010 and 2009 is as
follows:
(millions of dollars, except per share data)
Year Ended December 31,
2011
2010
2009
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,114.7
5,704.3
$5,652.8
4,559.5
$3,961.8
3,401.0
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,410.4
621.0
—
(8.1)
1,093.3
566.6
—
22.4
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest,
797.5
(38.2)
(4.8)
74.6
765.9
195.3
570.6
504.3
(39.6)
(2.8)
68.8
477.9
81.7
396.2
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.5
18.8
Net earnings attributable to BorgWarner Inc.
. . . . . . . .
$ 550.1
$ 377.4
Earnings per share — diluted . . . . . . . . . . . . . . . . . . . . . . .
$
4.45
$
3.07
560.8
459.8
50.3
(0.1)
50.8
(21.8)
(2.5)
57.2
17.9
(18.5)
36.4
9.4
27.0
0.23
$
$
26
The Company’s earnings per diluted share were $4.45, $3.07 and $0.23 for the years ended
December 31, 2011, 2010 and 2009, respectively. The Company believes the following table is useful
in highlighting non-comparable items that impacted its earnings per diluted share:
Year Ended December 31,
2011
2010
2009
Non-comparable items:
Loss from disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patent infringement settlement, net of legal costs incurred . . .
Tax adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in retiree obligation related to Muncie closure . . . . . . .
Adjustments to tax accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(0.19)
0.14
0.05
—
—
—
—
—
—
—
—
—
$ — $ —
—
—
—
—
—
—
(0.29)
(0.03)
(0.03)
0.15
0.03
—
—
(0.14)
(0.02)
0.17
0.04
—
—
—
—
—
Total impact to earnings per share — diluted: . . . . . . . . . . . . . .
$ — $ 0.05
$(0.17)
A summary of non-comparable items impacting the Company’s net earnings for the years ended
December 31, 2011, 2010 and 2009 is as follows:
Year ended December 31, 2011:
(cid:129) The Company incurred $21.5 million in expense associated with the loss on sale of the tire
pressure monitoring business, including costs related to the divestiture, and a write-down of a
portion of the ignitor and electronic business. In addition, the Company recorded $1.4 million
of tax benefit associated with the disposals and $4.1 million of tax expense related to an
intercompany disposal transaction.
(cid:129) The Company recorded a $29.1 million patent infringement settlement gain, net of legal costs
incurred, which was partially offset by $11.0 million of additional tax expense.
(cid:129) The Company recorded a $6.2 million benefit related to tax adjustments resulting from a
change in state corporate income tax legislation as well as an adjustment of the Company’s tax
accounts as a result of the closure of certain tax audits.
Year ended December 31, 2010:
(cid:129) The Company recorded a $28.0 million charge for alleged personal
injury relating to
environmental contamination.
(cid:129) The Company recorded $2.5 million in expense associated with the Medicare Part D tax
adjustment.
(cid:129) The Company reversed $21.2 million of the valuation allowance on U.S. based foreign tax
credit carryforwards.
(cid:129) The Company recorded an $8.0 million gain on the acquisition of BERU-Eichenauer GmbH
related to adjusting the Company’s 50% investment to fair value under ASC Topic 805.
Year ended December 31, 2009:
(cid:129) The Company recorded restructuring expenses of $50.3 million, which included $9.0 million
relating to employee termination benefits, $36.3 million of asset impairment charges and $5.0
million related to the North American and European restructuring.
27
(cid:129) The Company terminated its interest rate derivative agreements, resulting in a $3.0 million net
loss.
(cid:129) The Company recorded a $4.8 million charge upon the adoption of the amendment to ASC
Topic 805, “Business Combinations.”
(cid:129) The Company recorded a $27.9 million net pre-tax gain related to retiree obligations resulting
from the closure of the Muncie, Indiana, Drivetrain facility.
(cid:129) The Company established a $7.7 million valuation allowance for
foreign tax credit
carryforwards.
The Company’s effective tax rate, after giving tax effect to the non-comparable items shown
above, was 24.8%, 21.7% and (12.0)% for the years ended December 31, 2011, 2010 and 2009,
respectively.
Net Sales
The table below summarizes the overall worldwide light vehicle production year over year
percentage increases/(decreases) for the years ended December 31, 2011 and 2010:
North America* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Worldwide* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BorgWarner year over year net sales change . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BorgWarner year over year net sales change, excluding the impact of foreign
currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* Data provided by CSM Worldwide.
Years Ended
December 31,
2011
2010
9.1% 38.8%
5.1% 13.7%
(0.3)% 26.5%
2.8% 23.5%
25.9% 42.7%
21.7% 45.0%
The year over year net sales increase of 25.9% for the year ended December 31, 2011 was better
than the estimated worldwide market production increase of 2.8%. Excluding the impact of
strengthening foreign currencies, primarily the Euro, the second quarter 2010 purchase of Dytech
Ensa S.L. and the first quarter 2011 purchase of Haldex Traction AB, net sales increased by
approximately 17% during the year ended December 31, 2011. The above-market growth for the
Company was driven by the industry’s focus on fuel economy and lower emissions.
The year over year net sales increase of 42.7% for the year ended December 31, 2010 was better
than the estimated worldwide market production increase of 23.5%. Excluding, the impact of
weakening foreign currencies, primarily the Euro, and the second quarter 2010 purchase of Dytech
Ensa S.L., net sales increased by approximately 41% during the year ended December 31, 2010.
Consolidated net sales to Volkswagen were approximately 19% for
the years ended
December 31, 2011 and 2010 and 22% for the year ended December 31, 2009; and to Ford of
approximately 12%, 11% and 12% for the years ended December 31, 2011, 2010 and 2009,
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 net sales in any of the years presented.
28
The following table details our results of operations as a percentage of net sales:
(percentage of net sales)
Year Ended December 31,
2011
2010
2009
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0%100.0%100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80.2
80.7
85.8
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest, net of tax . . . . . . . . . . .
19.8
8.7
—
(0.1)
11.2
(0.5)
(0.1)
1.0
10.8
2.8
8.0
0.3
19.3
10.0
—
0.4
8.9
(0.7 )
—
1.2
8.4
1.4
7.0
0.3
14.2
11.6
1.3
—
1.3
(0.6 )
—
1.4
0.5
(0.4 )
0.9
0.2
Net earnings attributable to BorgWarner Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.7% 6.7% 0.7%
Cost of sales as a percentage of net sales was 80.2%, 80.7% and 85.8% in the years ended
December 31, 2011, 2010 and 2009, respectively. The Company’s material cost of sales was
approximately 50% of net sales in the years ended December 31, 2011, 2010 and 2009. The
Company’s remaining cost to convert raw material to finished product, which includes direct labor
and manufacturing overhead, has continued to improve during the years ended December 31, 2011
and December 31, 2010 compared to December 31, 2009 as a result of increased net sales and
successful cost reduction actions. Gross profit as a percentage of net sales was 19.8%, 19.3% and
14.2% in the years ended December 31, 2011, 2010 and 2009, respectively.
Selling, general and administrative expenses (“SG&A”) as a percentage of net sales were
8.7%, 10.0% and 11.6% in the years ended December 31, 2011, 2010 and 2009, respectively. SG&A
expenses increased $54.4 million, or 9.6%, compared to the year ended December 31, 2010. The
increase was primarily due to the $58.7 million, or 31.7%, increase in research and development
(“R&D”) costs, which are included in SG&A expenses. SG&A as a percentage of net sales has
continued to improve during the years ended December 31, 2011 and December 31, 2010 compared
to December 31, 2009 primarily as a result of significant year over year increases in net sales.
R&D costs, net of customer reimbursements, was $243.7 million, or 3.4% of net sales, in the year
ended December 31, 2011, compared to $185.0 million, or 3.3% of net sales, and $155.2 million, or
3.9% of net sales, in the years ended December 31, 2010 and 2009, respectively. We will 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% of net sales.
Restructuring expense of $50.3 million for the year ended December 31, 2009, included $9.0
million relating to employee termination benefits, $36.3 million of asset impairment charges and $5.0
million of other charges. The Company’s restructuring actions 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%. Refer to Note 17, “Restructuring,” to the
Consolidated Financial Statements in Item 8 of this report for further discussion.
29
Equity in affiliates’ earnings, net of tax was $38.2 million, $39.6 million and $21.8 million in the
years ended December 31, 2011, 2010 and 2009, 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 decrease in equity in affiliates’ earnings for the year ended
December 31, 2011 compared to the year ended December 31, 2010 is primarily due to lower
production volumes in Japan as a result of natural disasters. The significant increase in equity in
affiliates’ earnings for the year ended December 31, 2010 compared to the year ended December 31,
2009 is primarily due to higher vehicle production in Asia. Refer to Note 5 to the Consolidated
Financial Statements in Item 8 of this report for further discussion of NSK-Warner.
Interest expense and finance charges were $74.6 million, $68.8 million and $57.2 million in the
years ended December 31, 2011, 2010 and 2009, respectively. Interest expense and finance charges
have increased for the years ended December 31, 2011 and December 31, 2010 compared to the
year ended December 31, 2009 primarily due to higher debt levels.
Provision (benefit) for income taxes The provision (benefit) for income taxes resulted in an
effective tax rate of 25.5% for the year ended December 31, 2011, compared with rates of 17.1% and
(103.4)% for the years ended December 31, 2010 and 2009, respectively.
The effective tax rate of 25.5% for the year ended December 31, 2011 includes $11.0 million of
additional tax expense associated with the Company’s patent infringement settlement, $2.7 million of
additional tax expense associated with the loss on disposals and tax benefit of $6.2 million resulting
from other tax adjustments. These other tax adjustments related to a change in state corporate
income tax legislation as well as an adjustment of the Company’s tax accounts as a result of the
closure of certain tax audits. 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. Excluding the impact of the patent infringement settlement, loss
on disposals and the other tax adjustments mentioned above, the Company’s annual effective tax
rate associated with ongoing operations for 2011 was 24.8%.
The effective tax rate of 17.1% for the year ended December 31, 2010 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 the year ended December 31, 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.
Net earnings attributable to the noncontrolling interest, net of tax of $20.5 million for the year
ended December 31, 2011 increased by $1.7 million and $11.1 million from the years ended
December 31, 2010 and 2009, respectively. The increases during the year ended December 31, 2011
and December 31, 2010 compared to the year ended December 31, 2009 are primarily related to
higher sales and earnings by the Company’s joint ventures.
30
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.
(“ROIC”) of
The Company allocates resources to each segment based upon the projected after-tax return on
invested capital
its business initiatives. ROIC is comprised of Adjusted EBIT after
deducting notional taxes compared to the projected average capital investment required. Adjusted
EBIT is comprised of 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 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 segment information, including sales and Adjusted EBIT, for the
years ended December 31, 2011, 2010 and 2009:
Net Sales
(millions of dollars)
Year Ended December 31,
2011
2010
2009
Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Drivetrain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inter-segment eliminations . . . . . . . . . . . . . . . . . . . . . . . . .
$5,050.6
2,084.5
(20.4)
$4,060.8
1,611.4
(19.4)
$2,883.2
1,093.5
(14.9)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,114.7
$5,652.8
$3,961.8
Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest (“Adjusted EBIT”)
(millions of dollars)
Year Ended December 31,
2011
2010
2009
Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Drivetrain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$774.3
161.2
$537.9
137.0
$219.8
(13.5)
Adjusted EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
935.5
674.9
206.3
Patent infringement settlement gain, net of legal costs
incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental litigation settlement
. . . . . . . . . . . . . . . . . . . . . . .
BERU-Eichenauer equity investment gain . . . . . . . . . . . . . . . . . .
Muncie closure retiree obligation net gain . . . . . . . . . . . . . . . . .
Corporate, including equity in affiliates’ earnings and stock-
based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense and finance charges . . . . . . . . . . . . . . . . . . . . .
. .
Earnings before income taxes and noncontrolling interest
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest, net of
(29.1)
21.5
—
—
—
107.4
—
(4.8)
74.6
765.9
195.3
570.6
—
—
28.0
(8.0)
—
111.0
—
(2.8)
68.8
477.9
81.7
396.2
—
—
—
—
(27.9)
111.3
50.3
(2.5)
57.2
17.9
(18.5)
36.4
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.5
18.8
9.4
Net earnings attributable to BorgWarner Inc. . . . . . . . . . . . . .
$550.1
$377.4
$ 27.0
31
The Engine segment’s net sales for the year ended December 31, 2011 increased $989.8 million,
or 24.4%, and segment EBIT increased $236.4 million, or 43.9%, from the year ended December 31,
2010. Excluding the impact of strengthening foreign currencies, primarily the Euro, and the second
quarter 2010 acquisition of Dytech ENSA S.L., net sales increased approximately 18%. The Segment
EBIT margin was 15.3% for the year ended December 31, 2011, up from 13.2% in the year ended
December 31, 2010. The net sales and Segment EBIT increases were primarily driven by strong global
growth in all major product groups and continued cost management.
The Engine segment’s net sales for the year ended December 31, 2010 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 weakening foreign currencies, primarily the Euro, and
the purchase of Dytech Ensa S.L., net sales increased approximately 38%. The net sales increase
was primarily driven by strong global growth in all major product groups. The Segment EBIT margin
was 13.2% for the year ended December 31, 2010, up from 7.6% in the year ended December 31,
2009, due to a significant increase in customer production schedules in the U.S. and European
markets and continued cost management.
The Drivetrain segment’s net sales for the year ended December 31, 2011 increased $473.1
million, or 29.4%, and segment EBIT increased $24.2 million from the year ended December 31, 2010.
Excluding the impact of strengthening foreign currencies, primarily the Euro, and the first quarter 2011
acquisition of Haldex Traction AB, net sales increased approximately 14%. The net sales increase
was a result of strong four-wheel drive system and traditional transmission component sales in South
Korea and higher dual clutch transmission module sales in Europe. The Segment EBIT margin was
7.7% in the year ended December 31, 2011, down from 8.5% in the year ended December 31, 2010,
primarily due to operational inefficiencies in its European operations and Traction Systems acquisition
related expenses.
The Drivetrain segment’s net sales for the year ended December 31, 2010 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, net sales increased
approximately 49%. The net sales increase was primarily driven by strong growth of transmission
components and torque management devices in Europe, Asia and the U.S. The Segment EBIT margin
was 8.5% in the year ended December 31, 2010, up from (1.2)% in the year ended December 31,
2009, primarily due to higher global production of light trucks and sport utility vehicles equipped with
its torque transfer products and continued cost management.
Corporate represents headquarters’ expenses not directly attributable to the individual
segments, expenses associated with divested operations and equity in affiliates’ earnings. This net
expense was $107.4 million, $111.0 million and $111.3 million for the years ended December 31,
2011, 2010 and 2009, respectively.
Outlook
Our overall outlook for 2012 is positive. The Company expects global production volumes to be
higher in 2012 compared with 2011. In Europe, we expect production volumes to decline in 2012
compared with 2011. However, 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 2012.
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
the increased adoption of
growth of direct
automated transmissions in Europe and Asia-Pacific, and the move to variable cam and chain engine
timing systems in both Europe and Asia-Pacific.
injection diesel and gasoline engines worldwide,
32
LIQUIDITY AND CAPITAL RESOURCES
The Company had $359.6 million of cash on hand at December 31, 2011. On June 30, 2011, the
Company amended and extended its $550 million multi-currency revolving credit facility (which
included a feature that allowed the Company’s borrowings to be increased to $600 million) to a $650
million multi-currency revolving credit facility (which includes a feature that allows the Company’s
borrowings to be increased to $1 billion). The facility provides for borrowings through June 30, 2016
and is guaranteed by the Company’s material domestic subsidiaries. The Company has two key
financial covenants as part of the credit agreement. These covenants are 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, 2011 and expects to remain
compliant in future periods. At December 31, 2011, the Company had $70.0 million of outstanding
this facility at
borrowings under
December 31, 2010.
this facility. There were no outstanding borrowings under
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.
On April 9, 2009, the Company issued $373.8 million in convertible senior notes due April 15,
2012. In accordance with the original terms of the agreement, the Company has an option to settle
the convertible senior notes through delivering cash, shares of its common stock or a combination
thereof. On December 13, 2011, the Company announced its intention to settle the convertible senior
notes through delivering shares of its common stock, currently held in treasury stock.
On February 11, 2011, the Company filed a new universal shelf registration with the Securities
and Exchange Commission, under which an unlimited amount of various debt and equity instruments
could be issued.
From a credit quality perspective, the Company has a credit rating of BBB from both Standard &
Poor’s and Fitch Ratings. On October 11, 2011, Moody’s upgraded the Company’s credit rating from
Baa3 to Baa2. On May 27, 2011, Fitch upgraded the Company’s outlook to positive. The current
outlook from Standard & Poor’s and Moody’s Ratings is stable. None of the Company’s debt
agreements require accelerated repayment in the event of a downgrade in credit ratings.
Capitalization
(millions of dollars)
Notes payable and short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt, net of cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
196.3
381.5
751.3
1,329.1
359.6
969.5
2,453.0
$
122.4
6.1
1,051.9
1,180.4
449.9
730.5
2,309.8
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,422.5
$ 3,040.3
Total debt, net of cash, to capital ratio . . . . . . . . . . . . . . . . . . . .
28.3%
24.0%
Balance sheet debt increased by $148.7 million and cash on hand decreased by $90.3 million
compared to December 31, 2010, primarily due to the acquisition of the Haldex Traction AB and
treasury share repurchases.
33
Total equity increased by $143.2 million in the year ended December 31, 2011 as follows:
(millions of dollars)
Balance, January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital contribution from noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation and hedged instruments, net of tax . . . . . . . . . . . . . . . . . . .
Defined benefit post employment plans, net of tax, including acquisition . . . . . .
BorgWarner Vikas Emissions India Private Limited acquisition . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other, net
$2,309.8
550.1
60.5
19.5
(357.6)
(67.2)
(29.1)
(29.4)
(3.6)
Balance, December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,453.0
The currency translation component of other comprehensive income decreased during the year
ended December 31, 2011 primarily due to the strengthening foreign currencies, primarily the Euro.
Operating Activities
Net cash provided by operating activities was $708.2 million, $538.9 million and $351.0 million in
the years ended December 31, 2011, 2010 and 2009, respectively. The increase in the year ended
December 31, 2011 compared to the year ended December 31, 2010 primarily reflects higher
earnings. The increase in the year ended December 31, 2010 compared to the year ended
December 31, 2009 primarily reflects higher earnings, offset by higher working capital needs.
Investing Activities
Net cash used in investing activities was $564.5 million, $429.5 million and $154.8 million in the
years ended December 31, 2011, 2010 and 2009, respectively. This increases in the years ended
December 31, 2011 and December 31, 2010 compared to the year ended December 31, 2009 are
primarily due to increased capital spending and higher payments for businesses acquired, net of cash
acquired. Year over year capital spending increases of $117.1 million and $104.6 million during the
years ended December 31, 2011 and December 31, 2010, respectively, were primarily due to higher
spending levels required to meet increased level of program launches worldwide.
Financing Activities
Net cash used in financing activities was $219.7 million and $13.2 million for the years ended
December 31, 2011 and 2010, respectively. Net cash provided by financing activities was $44.8
million for the year ended December 31, 2009. The $206.5 million increase in cash used in financing
activities during the year ended December 31, 2011 compared to the year ended December 31, 2010
reflects lower net borrowings of $133.2 million, an increase in the Company’s purchases of treasury
stock of $31.9 million and the purchase of the noncontrolling interest’s 40% share of BorgWarner
Vikas Emissions Systems India Private Limited of $29.4 million.
The $58.0 million increase in cash used in financing activities during the year ended
December 31, 2010 compared to the year ended December 31, 2009 reflects the Company’s
purchase of treasury stock of $325.7 million, which was partially offset by increased proceeds from
including tax benefit of $58.4 million and net borrowings of $153.9 million and
stock options,
payments made for noncontrolling interest acquired of $48.5 million and dividends paid to
BorgWarner shareholders of $13.8 million during the year ended December 31, 2009.
34
The Company’s significant contractual obligation payments at December 31, 2011 are as follows:
(millions of dollars)
Total
2012
2013-2014
2015-2016
After 2016
Other post employment benefits, excluding
pensions(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 372.7 $ 24.9
21.5
583.0
46.6
16.7
48.9
14.1
141.8
3.4
Defined benefit pension plans(b) . . . . . . . . . . . . . .
. . . . . . . . . .
Notes payable and long-term debt(c)
Projected interest payments(d)
. . . . . . . . . . . . . . .
Non-cancelable operating leases . . . . . . . . . . . . .
Capital spending obligations . . . . . . . . . . . . . . . . .
Inventory purchase obligations . . . . . . . . . . . . . . .
Income tax payments(e) . . . . . . . . . . . . . . . . . . . . .
Environmental(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118.8
1,338.5
385.7
72.8
48.9
15.1
141.8
11.5
$ 47.5
30.1
76.8
81.6
26.1
—
1.0
—
2.5
$ 44.3
17.8
150.0
80.0
20.1
—
—
—
0.8
$ 256.0
49.4
528.7
177.5
9.9
—
—
—
4.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,505.8 $900.9
$265.6
$313.0
$1,026.3
(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 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 settlement agreement with the Pension Benefit Guaranty Corporation (“PBGC”) to
make payments of $15 million in both 2012 and 2013. Amount contained in “After 2016” column
is for unfunded plans and includes estimated payments through 2021. See Note 11 to the
Consolidated Financial Statements for disclosures related to the Company’s pension benefits.
(c) The Company’s 3.50% convertible senior notes due April 15, 2012, with a face value of $373.8
million, will be settled in common stock currently held in treasury.
(d) 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 5.5% for
this purpose. Projection is also based upon debt being redeemed upon maturity.
(e) See Note 4 to the Consolidated Financial Statements for disclosures related to the Company’s
income taxes.
(f) See Note 14 to the Consolidated Financial Statements for disclosures related to the Company’s
environmental contingencies.
We believe that the combination of cash from operations, cash balances, available credit facilities
and the remaining 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.
Off Balance Sheet Arrangements
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 operating lease obligations at December 31, 2011 is $72.8
million. See Note 15 to the Consolidated Financial Statements for more information on operating
leases, including future minimum payments.
35
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,
2011, all legal funding requirements had been met. The Company contributed $37.0 million, $25.1
million and $39.3 million to its defined benefit pension plans in the years ended December 31, 2011,
2010 and 2009, respectively. The Company expects to contribute a total of $30 million to $40 million
into its defined benefit pension plans during 2012, including $15 million related to the Company’s
the $30 million to $40 million in projected 2012
settlement agreement with the PBGC. Of
contributions, $21.5 million are contractual obligations, while the remaining payments are
discretionary.
The funded status of all pension plans was a net unfunded position of $236.4 million and $210.4
million at December 31, 2011 and 2010, respectively. Of these amounts, $128.7 million and $128.0
million at December 31, 2011 and 2010, 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 to make contributions as benefit payments become due.
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 $251.0
million and $261.9 million at December 31, 2011 and 2010, respectively.
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.
OTHER MATTERS
Contingencies
In the normal course of business, the Company is party 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 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, 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
36
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 reasonably 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
remedial activities at 39 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 cost of clean-up and other
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 of $10.4 million at
December 31, 2011. The accrued amounts 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, financial
position or cash flows. The Company expects to pay out substantially all of the amounts accrued for
environmental liability over the next 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. In 2007 and 2008, lawsuits were filed against Kuhlman Electric and others, including
the Company, on behalf of approximately 340 plaintiffs, alleging personal injury relating to alleged
environmental contamination at its Crystal Springs, Mississippi plant. The Company entered into a
the plaintiffs and those of
settlement
in July 2010 regarding the personal
injury claims of
37
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. The Company paid $13.9 million in November 2010 and
made the final payment of $13.9 million in February 2011. Litigation concerning indemnification is
pending and the Company may in the future become subject to further legal proceedings.
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, 2011 and December 31, 2010, the Company had
approximately 16,000 and 17,000 pending asbestos-related product liability claims, respectively. Of
the approximately 16,000 outstanding claims at December 31, 2011, approximately half were pending
in jurisdictions that have undergone significant tort and judicial reform activities subsequent to the
filing of these claims.
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 2011, of the approximately 1,800 claims resolved, 288 (16%) resulted in any payment
being made to a claimant by or on behalf of the Company.
In the full year of 2010, of the
approximately 7,700 claims resolved, 245 (3%) 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 paid by the
Company’s primary layer insurance carriers under a series of funding arrangements. In addition to the
primary insurance available for asbestos-related claims,
the Company has substantial excess
insurance coverage available for potential future asbestos-related product claims. In June 2004,
primary layer insurance carriers notified the Company of the alleged exhaustion of their policy limits.
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. The court has issued a number of interim rulings
and discovery is continuing. CNA and the Company have entered into a settlement agreement
resolving their coverage disputes, pursuant to which CNA will pay amounts over the next four years to
the Company. The Company is vigorously pursuing the litigation against the remaining insurers.
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 experience 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, financial position or cash flows.
To date, the Company has paid and accrued $190.9 million in defense and indemnity in advance of
insurers’ reimbursement and has received $81.1 million in cash and notes from insurers, including CNA.
The net balance of $109.8 million, is expected to be fully recovered, of which approximately $33 million
38
is estimated to be recovered within one year. Timing of recovery is dependent on final resolution of the
declaratory judgment action referred to above or additional negotiated settlements. At December 31,
2010, insurers owed $120.6 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 $109.8 million net balance relating to past settlements and defense costs, the
Company has estimated a liability of $61.7 million for claims asserted, but not yet resolved and their
related defense costs at December 31, 2011. The Company also has a related asset of $61.7 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 above. At December 31, 2010, the comparable value of
the insurance asset and accrued liability was $50.6 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:
December 31,
2011
2010
Prepayments and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28.8
32.9
$25.8
24.8
Total insurance assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61.7
$50.6
Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28.8
32.9
$25.8
24.8
Total accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61.7
$50.6
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. Some
of 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.
39
Use of estimates The preparation of financial statements in conformity with 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 as of the
date of the financial statements and the accompanying notes, as well as, the amounts of revenues
and expenses reported during the periods covered by these financial statements and accompanying
notes. Actual results could differ from those estimates.
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.
Cost of sales The Company includes materials, direct labor and manufacturing overhead within
indirect labor, factory
cost of sales. Manufacturing overhead is comprised of indirect materials,
operating costs and other such costs associated with manufacturing products for sale.
Impairment of long-lived assets, including definite-lived intangible assets The Company
reviews the carrying value of its long-lived assets, whether held for use or disposal, including other
amortizable intangible assets, when events and circumstances warrant such a review under
Accounting Standards Codification (“ASC”) Topic 360. A recoverability review is performed using the
If the undiscounted cash flow test for
undiscounted cash flows if there is a triggering event.
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 valuations.
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; (ii) undiscounted future cash flows generated by the
asset; and (iii) fair value of the asset.
The Company recognized $36.3 million of asset impairment charges during the year ended
December 31, 2009 within restructuring expense in the Consolidated Statement of Operations.
See Note 17, “Restructuring,” to the Consolidated Financial Statements for more information
long-lived assets and a discussion of market-based
regarding the Company’s impairment of
measurements.
Goodwill and other indefinite-lived intangible assets During the fourth quarter of each year or
upon a triggering event, the Company reviews the goodwill assigned to each of its reporting units to
identify those units with a fair value more-likely-than-not less than its carrying value. With the
exception of two reporting units that had recent acquisition or divestiture activity, a qualitative
assessment was completed. This assessment evaluated various events and circumstances, such as
macro economic conditions,
industry and market conditions, cost factors, relevant events and
financial trends, that may impact a reporting unit’s fair value. After completing this assessment, the
Company determined it was more-likely-than-not the fair value exceeded the carrying value of the
reporting units qualitatively reviewed. A quantitative, “step one,” impairment analysis, therefore, was
not required.
40
For the two reporting units with recent acquisition or divestiture activity, the Company performed
a quantitative, “step one,” goodwill
impairment analysis, which 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 this goodwill
impairment analysis is the Company’s annual
budget and long-range plan (“LRP”). The annual budget and LRP includes a five year projection of
future cash flows based on actual new products and customer commitments and assumes the last
year of the LRP data is a fair indication of the future performance. Because the LRP is estimated over
a significant future period of time, those estimates and assumptions are subject to a high degree of
uncertainty. Further, the market valuation models and other financial ratios used by the Company
require certain assumptions and estimates regarding the applicability of
those models to the
Company’s facts and circumstances. The Company believes the assumptions and estimates used to
determine its estimated fair value are reasonable. Different assumptions could materially affect the
estimated fair value.
The primary assumptions affecting the Company’s December 31, 2011 goodwill quantitative,
“step one,” impairment review are as follows:
(cid:129) 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.
(cid:129) Operating income margin: The Company used historical and expected operating income
margins, which may vary based on the projections of each reporting unit being evaluated.
In addition to the above primary assumptions, the Company notes the following risk to volume
and operating income assumptions that could have an impact on the discounted cash flow model:
(cid:129) The automotive industry is cyclical and the Company’s results of operations would be
adversely affected by industry downturns.
(cid:129) The Company is dependent on market segments that use our key products and would be
affected by decreasing demand in those segments.
(cid:129) The Company is subject to risks related to international operations.
Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter
of 2011 indicated the Company’s goodwill assigned to the two reporting units that were quantitatively
assessed was not impaired. Additionally, a sensitivity analysis was completed indicating a 1%
increase in the discount rate or a 1% decrease in the operating margin assumptions would not result
in the carrying value exceeding the fair value of either of the reporting units quantitatively assessed.
See Note 6 to the Consolidated Financial Statements for more information regarding goodwill.
Product warranties The Company provides warranties on some, but not all, 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
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:
the warranty accrual
(millions of dollars)
Year Ended December 31,
2011
2010
2009
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision as a percentage of net sales . . . . . . .
$7,114.7
47.5
$
0.7 %
$5,652.8
39.3
$
0.7 %
$3,961.8
46.0
$
1.2 %
41
The following table illustrates the sensitivity of a 25 basis point change (as a percentage of net
sales) in the assumed warranty trend on the Company’s accrued warranty liability:
(millions of dollars)
December 31,
2011
2010
2009
25 basis point decrease (income)/expense . . . . . . . . . . . . . . . . . . .
25 basis point increase (income)/expense . . . . . . . . . . . . . . . . . . . .
$(17.8)
$ 17.8
$(14.1)
$ 14.1
$(9.9)
$ 9.9
is
At December 31, 2011, the total accrued warranty liability was $72.7 million. The accrual
represented as $38.6 million in current liabilities and $34.1 million in non-current liabilities on our
Consolidated Balance Sheet.
See Note 7 to the Consolidated Financial Statements for more information regarding 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 the recorded accrued liabilities for loss or asset valuation
allowances.
Environmental contingencies The Company works 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 2011 is between approximately $8
million and $23 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
December 31, 2011, our total accrued environmental liability was $11.5 million, which includes our
conditional asset retirement obligation under ASC Topic 410 of $1.1 million.
See Note 14 to the Consolidated Financial Statements for more information regarding
environmental accrual.
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.
The Company’s defined benefit pension and non-pension postretirement employee benefit plans
in accordance with ASC Topic 715. Disability, early retirement and other
are accounted for
postemployment 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 assumptions, including the expected long-term rate of
return on plan assets, discount rate, rates of increase in compensation and health care costs trends
are described in Note 11, “Retirement Benefit Plans,” to the Consolidated Financial Statements. The
effects of any modification to those assumptions are either recognized immediately or amortized over
future periods in accordance with GAAP.
42
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, 2011 are as
follows:
(cid:129) 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, including historical returns for the different asset classes held by the Company’s
trusts and its asset allocation, as well as inputs from internal and external sources regarding
expected capital market 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 the year ended December 31, 2011, the Company used long-term rates of return on plan
assets ranging from 1.75% to 9.00% outside of the U.S. and 7.50% in the U.S.
Actual returns on U.S. pension assets were 3.7%, 14.6% and 25.3% for the years ended
December 31, 2011, 2010 and 2009, respectively, compared to the expected rate of return
assumption of 7.50% for the years ended December 31, 2011, 2010 and 2009, respectively.
Actual returns on U.K. pension assets were 3.3%, 13.3% and 15.1% for the years ended
December 31, 2011, 2010 and 2009, respectively, compared to the expected rate of return
assumption of 7.50% for the years ended December 31, 2011, 2010 and 2009, respectively.
(cid:129) 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 8.00% to determine its pension and other benefit obligations as of December 31, 2011,
including weighted average discount rates of 4.42% in the U.S., 5.13% outside of the U.S., and
4.25% 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.
(cid:129) 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, 2011, the
Company used health care cost trend rates of 7.10%, 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.
43
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 2012 pre-tax pension expense:
(millions of dollars)
Impact on
U.S. 2012
pre-tax pension
(expense)/income
Impact on
Non-U.S. 2012
pre-tax pension
(expense)/income
1 percentage point decrease in discount rate . . . . . . . . . . .
1 percentage point increase in discount rate . . . . . . . . . . .
1 percentage point decrease in expected return on
$ —*
$ —*
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2.8)
1 percentage point increase in expected return on
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.8
$(3.2)
$ 3.2
$(1.4)
$ 1.4
* A 1 percentage point increase or decrease in the discount rate would have a negligible impact on
the Company’s U.S. 2012 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)
Impact on 2012
pre-tax OPEB
interest
(expense)/income
1 percentage point decrease in discount rate . . . . . . . . . . . . . . . . . . . . . . . . . .
1 percentage point increase in discount rate . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1.6)
$ 1.6
The sensitivity to a change in the discount rate assumption related to the Company’s total 2012
U.S. OPEB expense is expected to be negligible, as any increase in interest expense will be offset by
net actuarial gains.
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)
One Percentage Point
Increase
Decrease
Effect on other post employment benefit obligation . . . . . . . . . . . . . . . . .
Effect on total service and interest cost components . . . . . . . . . . . . . . . .
$18.3
$ 0.8
$(16.1)
$ (0.7)
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 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.
44
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
if any, which may be proposed by the taxing authorities. At
December 31, 2011, 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.
to pay assessments,
See Note 4 to the Consolidated Financial Statements for more information regarding income
taxes.
New Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) amended ASC Topic
210, “Balance Sheet,” requiring companies to disclose both gross and net
information about
instruments and transactions eligible for offset in the statement of financial position as well as
instruments and transactions subject to an agreement similar to a master netting arrangement. This
guidance is effective retrospectively for interim and annual periods beginning on or after January 1,
2013. The Company anticipates the adoption of this guidance will not have a material impact on the
Consolidated Financial Statements.
In September 2011, the FASB amended ASC Topic 350, “Intangibles—Goodwill and Other,”
allowing companies to first assess qualitative factors to determine whether it is more-likely-than-not
the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is
necessary to perform the two-step goodwill
impairment test described in ASC Topic 350. This
guidance is effective for fiscal years beginning after December 15, 2011, with early adoption
permitted. The Company adopted this standard for the year ended December 31, 2011. The adoption
of this guidance did not have a material impact on the Consolidated Financial Statements.
In June 2011, the FASB amended ASC Topic 220, “Comprehensive Income,” which requires the
presentation of the components of net income and comprehensive income in one continuous
statement or
two consecutive statements and requires companies to separately disclose
reclassifications from other comprehensive income into net income on the face of the financial
statements. This guidance requires retrospective application and is effective for interim and annual
periods beginning after December 15, 2011. The Company will reflect the change in presentation in all
periods presented in future filings beginning with the period ending March 31, 2012. In December
45
2011, the FASB indefinitely deferred the requirement to separately disclose reclassifications from
other comprehensive income into net income on the face of the Statement of Operations.
In May 2011, the FASB amended ASC Topic 820, “Fair Value Measurements and Disclosures,”
which clarifies the application of existing fair value measurement guidance and amends the guidance
to include increased transparency around valuation inputs and investment categorization. This
guidance is effective for interim and annual periods beginning after December 15, 2011. The
Company anticipates the adoption of this guidance will not have a material impact on its Consolidated
Financial Statements.
In October 2009, the FASB amended ASC Topic 605, “Revenue Recognition,” which amends the
criteria for separating consideration in multiple-deliverable arrangements and expands the disclosure
the Company adopted this
requirements related to these arrangements. On January 1, 2011,
amendment to ASC Topic 605. The adoption of this guidance did not have a material impact on the
Consolidated Financial Statements.
QUANTITATIVE AND QUALITATIVE 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
for
Instruments,” to the Consolidated Financial Statements in Item 8 of
information with respect to interest rate risk and foreign currency exchange rate risk.
this report
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
December 31, 2011, the amount of debt with fixed interest rates was 62.4% 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 $1.8 million, $1.6 million and $1.5
million in the years ended December 31, 2011, 2010 and 2009, respectively.
The Company also measures 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% increase in interest rates as of December 31,
2011, the net fair value of these instruments would increase by approximately $24 million. Assuming a
hypothetical instantaneous 10% decrease in interest rates as of December 31, 2011, the net fair value
of these instruments would decrease by approximately $23 million. Our interest rate sensitivity
46
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, 2011, measured in a similar manner, was slightly less than at
December 31, 2010.
Foreign Currency Exchange Rate Risk
Foreign currency exchange rate 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, the Swedish Krona and the
South Korean Won. We mitigate our foreign currency exchange rate risk 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 $280.4 million and $299.0 million as of December 31, 2011 and 2010,
respectively. 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, 2011,
the Company was holding foreign exchange derivatives with positive and negative fair market values
of $2.7 million and $(2.9) million, respectively, of which $2.6 million in gains and $(2.4) million in losses
mature in less than one year.
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, 2011,
the Company had no forward and option commodity contracts
outstanding.
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.
47
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
In fulfilling this management responsibility, we make informed judgments and estimates
Company.
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:
(cid:129) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(cid:129) 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
(cid:129) 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, 2011. 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, 2011, 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, 2011 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 14, 2012
48
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative information regarding market risk, please refer to the discussion in
Item 7 of this report under the caption “Quantitative and Qualitative Disclosure about Market Risk.”
For information regarding interest rate risk and foreign currency exchange risk, refer to Note 10,
“Financial
Instruments,” to the Consolidated Financial Statements in Item 8 of this report. For
information regarding the levels of indebtedness subject to interest rate fluctuation, refer to Note 8,
“Notes Payable and Long-Term Debt,” to the Consolidated Financial Statements in Item 8 of this
report. For information regarding the level of business outside the United States, which is subject to
foreign currency exchange rate market risk, refer to Note 19, “Reporting Segments and Related
Information,” to the Consolidated Financial Statements in Item 8 of this report.
Item 8.
Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data
Page No.
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Equity and Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
51
52
53
54
55
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of BorgWarner, Inc.
Auburn Hills, Michigan
financial
in all material
in all material respects, the financial position of BorgWarner,
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly,
Inc. and its subsidiaries at
December 31, 2011 and December 31, 2010, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2011 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company
maintained,
reporting as of
respects, effective internal control over
December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued
the Treadway Commission (COSO). The
by the Committee of Sponsoring Organizations of
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.
financial reporting includes those policies and procedures that
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
(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.
PricewaterhouseCoopers LLP
Detroit, Michigan
February 14, 2012
50
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Year Ended December 31,
2011
2010
2009
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,114.7 $ 5,652.8 $ 3,961.8
3,401.0
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,704.3
4,559.5
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,410.4
621.0
—
(8.1)
1,093.3
566.6
—
22.4
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest, net of
797.5
(38.2)
(4.8)
74.6
765.9
195.3
570.6
504.3
(39.6 )
(2.8)
68.8
477.9
81.7
396.2
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.5
18.8
Net earnings attributable to BorgWarner Inc.
. . . . . . . . . . . . . . . . . $ 550.1 $ 377.4 $
Earnings per share — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.04 $
3.31 $
Earnings per share — diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4.45* $
3.07 * $
560.8
459.8
50.3
(0.1)
50.8
(21.8)
(2.5)
57.2
17.9
(18.5)
36.4
9.4
27.0
0.23
0.23
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109.229
128.468
114.155
129.575
116.522
116.939
* The Company’s diluted earnings per share for
the years ended December 31, 2011 and
December 31, 2010 includes the impact of the Company’s 3.50% convertible senior notes and
associated warrants. Refer to Note 16, “Earnings Per Share,” for further information on the diluted
earnings per share calculation.
See Accompanying Notes to Consolidated Financial Statements.
51
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(millions of dollars)
December 31,
2011
2010
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 359.6 $ 449.9
1,023.9
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
430.6
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75.8
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79.7
Prepayments and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,183.0
454.3
58.5
82.4
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,137.8
1,664.3
345.3
1,186.2
625.0
2,059.9
1,542.6
307.9
1,113.5
531.1
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,958.6 $5,555.0
LIABILITIES AND EQUITY
Notes payable and other short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 196.3 $ 122.4
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.1
1,224.1
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.7
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
381.5
1,297.8
29.8
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities:
Retirement-related liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Total other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,905.4
751.3
1,392.3
1,051.9
457.0
391.9
848.9
438.1
362.9
801.0
Capital stock:
Preferred stock, $0.01 par value; authorized shares: 5,000,000; none issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, $0.01 par value; authorized shares: 390,000,000; issued
shares: (2011-121,315,705; 2010-120,086,206); outstanding shares: (2011-
108,514,462; 2010-112,316,444) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock held in treasury, at cost: (2011-12,801,243 shares; 2010-
1.2
1.2
—
1,134.3
2,110.3
(150.8)
—
1,100.4
1,560.2
(53.7)
7,769,762 shares)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(707.1)
(349.5)
Total BorgWarner Inc. stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,387.9
65.1
2,258.6
51.2
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,453.0
2,309.8
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,958.6 $5,555.0
See Accompanying Notes to Consolidated Financial Statements.
52
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
OPERATING
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net earnings to net cash flows from operations:
Non-cash charges (credits) to operations:
Depreciation and tooling amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental litigation settlement, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2011
2010
2009
$ 570.6
$ 396.2
$ 36.4
252.2
30.8
21.5
—
—
21.8
(1.1)
20.3
—
(7.8)
908.3
(150.6)
(38.6)
(2.4)
53.0
(15.4)
(46.1)
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
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)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
708.2
538.9
351.0
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(393.7)
7.9
(203.7)
25.0
(276.6)
6.8
(164.7)
5.0
(172.0)
23.1
(7.5)
1.6
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(564.5)
(429.5)
(154.8)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment for purchase of bond hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from warrant issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in accounts receivable securitization facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from accounts receivable securitization facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from interest rate swap termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock options exercised, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes paid on restricted stock award vestings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to BorgWarner stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of noncontrolling interest
Capital contribution from noncontrolling interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to noncontrolling stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year
67.6
364.6
(309.1)
—
—
—
—
(357.6)
—
53.0
(14.4)
—
(29.4)
19.5
(13.9)
(219.7)
(14.3)
(90.3)
449.9
(29.8)
372.2
(116.1)
—
—
—
30.0
(325.7)
—
67.1
—
—
—
—
(10.9)
(13.2)
(3.7)
92.5
357.4
(114.7)
381.6
(164.5)
(56.4)
31.2
(50.0)
50.0
—
30.0
8.7
—
(13.8)
(48.5)
—
(8.8)
44.8
13.0
254.0
103.4
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 359.6
$ 449.9
$ 357.4
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 68.5
175.5
$ 53.4
83.1
$ 68.8
60.3
Non-cash investing transactions:
Liabilities assumed from business acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash financing transactions:
Debt assumed from business acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock performance plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted common stock, issued to employees and non-employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.3
5.9
6.8
15.1
—
—
3.8
18.9
—
—
6.0
14.8
See Accompanying Notes to Consolidated Financial Statements.
53
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND
COMPREHENSIVE INCOME
Number of shares
BorgWarner stockholder’s equity
(millions of dollars, except share data)
Issued
common
stock
Common
stock in
treasury
Issued
common
stock
Capital in
excess of
par value
Treasury
stock
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Equity
attributable to
noncontrolling
interests
Comprehensive
income
Balance, January 1, 2009 . . . . . . . . . . . . . . . 117,699,542 (2,167,170) $1.2
—
—
—
—
Dividends declared . . . . . . . . . . . . . . . . . .
Stock option expense . . . . . . . . . . . . . . . .
Stock incentive plans . . . . . . . . . . . . . . . . .
Executive stock plan . . . . . . . . . . . . . . . . .
Net issuance of restricted stock, less
—
—
380,499
287,816
—
—
—
—
$ 977.6 $ (87.4) $1,200.5
(13.8)
—
(7.0)
(13.3)
—
—
16.2
13.3
—
7.2
(0.7)
6.0
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 of tax . . . . . . . . . . . . . .
Comprehensive income attributable to
636,868
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14.8
34.7
(36.7)
31.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
36.4
(9.4)
—
—
the noncontrolling interest . . . . . . . . . . .
Dalian joint venture . . . . . . . . . . . . . . . . . .
—
—
Balance, December 31, 2009 . . . . . . . . . . . . 118,336,410 (1,498,855) $1.2
—
—
—
—
—
—
—
—
$1,034.1 $ (57.9) $1,193.4
—
—
Dividends declared . . . . . . . . . . . . . . . . . .
Stock option expense . . . . . . . . . . . . . . . .
Stock incentive plans . . . . . . . . . . . . . . . . .
Executive stock plan . . . . . . . . . . . . . . . . .
Net issuance of restricted stock, less
amortization . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the
noncontrolling interest, net of tax . . . . .
Defined benefit post employment plans,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on available-for-sale
securities . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation and hedge
instruments, net of tax . . . . . . . . . . . . . .
Comprehensive loss attributable to the
—
—
—
—
—
—
525,297
269,896
—
—
—
—
—
0.1
43.5
3.8
—
—
22.6
11.5
—
—
(10.6)
—
1,749,796
—
—
— (7,066,100) —
—
—
—
18.9
—
— (325.7)
—
—
—
— 396.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(18.8)
—
—
—
noncontrolling interest . . . . . . . . . . . . . .
Dytech Ensa, S.L. acquisition . . . . . . . . . .
—
—
Balance, December 31, 2010 . . . . . . . . . . . . 120,086,206 (7,769,762) $1.2
—
—
—
—
—
—
—
—
$1,100.4 $(349.5) $1,560.2
—
—
Dividends declared . . . . . . . . . . . . . . . . . .
Stock incentive plans . . . . . . . . . . . . . . . . .
Executive stock plan . . . . . . . . . . . . . . . . .
Net issuance of restricted stock, less
amortization . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the
noncontrolling interest, net of tax . . . . .
Defined benefit post employment plans,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on available-for-sale
securities . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation and hedge
instruments, net of tax . . . . . . . . . . . . . .
Comprehensive loss attributable to the
noncontrolling interest . . . . . . . . . . . . . .
Capital contribution from noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . .
Haldex Traction AB acquisition . . . . . . . . .
BorgWarner Vikas Emissions India
—
1,020,375
104,205
—
—
—
—
—
—
—
38.7
6.8
—
—
—
—
—
—
104,919
—
—
— (5,031,481) —
—
—
—
15.0
—
— (357.6)
—
—
—
— 570.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(20.5)
—
—
—
—
—
—
Private Limited acquisition . . . . . . . . . .
—
Balance, December 31, 2011 . . . . . . . . . . . . 121,315,705 (12,801,243) $1.2
—
—
(26.6)
—
$1,134.3 $(707.1) $2,110.3
—
$ (85.9)
—
—
—
—
$ 31.5
(8.8)
—
—
—
—
—
—
—
—
—
(3.4)
99.9
3.9
—
$ 14.5
—
—
—
—
—
—
—
—
7.8
1.2
(77.1)
(0.1)
—
$ (53.7)
—
—
—
—
—
—
—
(27.6)
(0.1)
(65.9)
(2.0)
—
(1.5)
—
—
—
—
9.4
—
—
1.9
—
3.4
$ 37.4
(9.5)
—
—
—
—
—
18.8
—
—
—
2.5
—
2.0
$ 51.2
(22.0)
—
—
—
—
20.5
—
—
—
(1.3)
—
19.5
—
$ —
—
—
—
—
—
—
—
36.4
(9.4)
(3.4)
99.9
3.9
—
$127.4
$ —
—
—
—
—
—
396.2
(18.8)
7.8
1.2
(77.1)
(0.1)
—
$309.2
$ —
—
—
—
—
570.6
(20.5)
(27.6)
(0.1)
(65.9)
(2.0)
—
(1.5)
—
$(150.8)
(2.8)
$ 65.1
—
$453.0
See Accompanying Notes to Consolidated Financial Statements.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a leading global supplier of
highly engineered systems and components primarily for powertrain applications, which help to
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 (“SUVs”), vans and light-trucks). The Company’s
products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks
and buses) and off-highway vehicles (agricultural and construction machinery and marine
applications). We also manufacture and sell our products to certain Tier One vehicle systems
suppliers and into the aftermarket for light, commercial and off-highway 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. 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.
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 as of the date of the financial
statements and the accompanying notes, as well as, the amounts of revenues and expenses reported
during the periods covered by these financial statements and accompanying notes. 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 OEM customers. 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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cost of sales The Company includes materials, direct labor and manufacturing overhead within
indirect labor, factory
cost of sales. Manufacturing overhead is comprised of indirect materials,
operating costs and other such costs associated with manufacturing products for sale.
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.
Receivables, net 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, which was amended on September 8, 2010 to increase the facility
from $50 million to $80 million. This facility matures on December 21, 2012.
Inventories, net Inventories are valued at the lower of cost or market. Cost of U.S. inventories is
determined using 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 $100.6 million and
$100.1 million at December 31, 2011 and 2010, respectively. Such inventories, if valued at current
cost instead of LIFO, would have been greater by $15.3 million and $13.2 million at December 31,
2011 and 2010, respectively.
See Note 5 to the Consolidated Financial Statements for more information on inventories, net.
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 and 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, net Property, plant and equipment is 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 generally computed on a straight-line basis over the estimated useful
lives of the
lives for machinery and
assets. Useful
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 is held for use at December 31,
2011 and 2010.
lives for buildings range from 15 to 40 years and useful
See Note 5 to the Consolidated Financial Statements for more information on property, plant and
equipment, net.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impairment of long-lived assets, including definite-lived intangible 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
Accounting Standards Codification (“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 valuations.
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; (ii) undiscounted future cash flows generated by the
asset; and (iii) fair valuation of the asset.
See Note 17 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 During the fourth quarter of each year or
upon a triggering event, the Company reviews the goodwill assigned to each of its reporting units to
identify those units with a fair value more-likely-than-not less than its carrying value. With the
exception of two reporting units that had recent acquisition or divestiture activity, a qualitative
assessment was completed. This assessment evaluated various events and circumstances, such as
macro economic conditions,
industry and market conditions, cost factors, relevant events and
financial trends, that may impact a reporting unit’s fair value. After completing this assessment, the
Company determined it was more-likely-than-not the fair value exceeded the carrying value of the
reporting units qualitatively reviewed. A quantitative, “step one,” impairment analysis, therefore, was
not required.
For the two reporting units with recent acquisition or divestiture activity, the Company performed
a quantitative, “step one,” goodwill
impairment analysis, which 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 this goodwill
impairment analysis is the Company’s annual
budget and long-range plan (“LRP”). The annual budget and LRP includes a five year projection of
future cash flows based on actual new products and customer commitments and assumes the last
year of the LRP data is a fair indication of the future performance. Because the LRP is estimated over
a significant future period of time, those estimates and assumptions are subject to a high degree of
uncertainty. Further, the market valuation models and other financial ratios used by the Company
those models to the
require certain assumptions and estimates regarding the applicability of
Company’s facts and circumstances.
A considerable amount of management judgment and assumptions are required in performing
the impairment tests. While no impairment existed during the year ended December 31, 2011,
different assumptions and estimates could materially change the estimated fair values.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See Note 6 to the Consolidated Financial Statements for more information on goodwill and other
indefinite-lived intangible assets.
Product warranties The Company provides warranties on some, but not all, 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
is appropriate;
however, actual claims incurred could differ from the original estimates, requiring adjustments to the
accrual. The product warranty accrual
is allocated to current and non-current liabilities in the
Consolidated Balance Sheets.
the warranty accrual
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 the 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 commodity
costs and 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 of
the Company’s foreign subsidiaries. Translation adjustments for foreign
subsidiaries are recorded as a component of accumulated other comprehensive income (loss) in
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 accumulated
other comprehensive income (loss).
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 accounts
payable and accrued expenses and other non-current 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 post employment 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 pension and other postretirement employee defined benefit plans.
Income taxes In accordance with ASC Topic 740, the Company’s income tax expense is
calculated based on expected income and statutory tax rates in the various jurisdictions in which the
Company operates and requires the use of management’s estimates and judgments.
See Note 4 to the Consolidated Financial Statements for more information regarding income
taxes.
New Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) amended ASC Topic
information about
210, “Balance Sheet,” requiring companies to disclose both gross and net
instruments and transactions eligible for offset in the statement of financial position as well as
instruments and transactions subject to an agreement similar to a master netting arrangement. This
guidance is effective retrospectively for interim and annual periods beginning on or after January 1,
2013. The Company anticipates the adoption of this guidance will not have a material impact on the
Consolidated Financial Statements.
In September 2011, the FASB amended ASC Topic 350, “Intangibles—Goodwill and Other,”
allowing companies to first assess qualitative factors to determine whether it is more-likely-than-not
the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is
necessary to perform the two-step goodwill
impairment test described in ASC Topic 350. This
guidance is effective for fiscal years beginning after December 15, 2011, with early adoption
permitted. The Company adopted this standard for the year ended December 31, 2011. The adoption
of this guidance did not have a material impact on the Consolidated Financial Statements.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2011, the FASB amended ASC Topic 220, “Comprehensive Income,” which requires the
presentation of the components of net income and comprehensive income in one continuous
statement or
two consecutive statements and requires companies to separately disclose
reclassifications from other comprehensive income into net income on the face of the financial
statements. This guidance requires retrospective application and is effective for interim and annual
periods beginning after December 15, 2011. The Company will reflect the change in presentation in all
periods presented in future filings beginning with the period ending March 31, 2012. In December
2011, the FASB indefinitely deferred the requirement to separately disclose reclassifications from
other comprehensive income into net income on the face of the Statement of Operations.
In May 2011, the FASB amended ASC Topic 820, “Fair Value Measurements and Disclosures,”
which clarifies the application of existing fair value measurement guidance and amends the guidance
to include increased transparency around valuation inputs and investment categorization. This
guidance is effective for interim and annual periods beginning after December 15, 2011. The
Company anticipates the adoption of this guidance will not have a material impact on its Consolidated
Financial Statements.
In October 2009, the FASB amended ASC Topic 605, “Revenue Recognition,” which amends the
criteria for separating consideration in multiple-deliverable arrangements and expands the disclosure
requirements related to these arrangements. On January 1, 2011,
the Company adopted this
amendment to ASC Topic 605. The adoption of this guidance did not have a material impact on the
Consolidated Financial Statements.
NOTE 2 RESEARCH AND DEVELOPMENT COSTS
The Company’s net Research & Development (“R&D”) expenditures are included in selling,
the Consolidated Statements of Operations. Customer
general and administrative expenses of
reimbursements are netted against gross R&D expenditures as they are considered a recovery of
cost. Customer reimbursements for prototypes are recorded net of prototype costs based on
customer contracts, typically either when the prototype is shipped or when it is accepted by the
customer. Customer reimbursements for engineering services are recorded when performance
obligations are satisfied in accordance with the contract and accepted by the customer. Financial
risks and rewards transfer upon shipment, acceptance of a prototype component by the customer or
upon completion of the performance obligation as stated in the respective customer agreement.
The following table presents the Company’s gross and net expenditures on R&D activities:
(millions of dollars)
Year Ended December 31,
2011
2010
2009
Gross R&D expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$294.7
(51.0)
$233.2
(48.2)
$219.0
(63.8)
Net R&D expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$243.7
$185.0
$155.2
Net R&D expenditures as a percentage of net sales were 3.4%, 3.3% and 3.9% in the years
ended December 31, 2011, 2010 and 2009, respectively. The Company has contracts with several
customers at the Company’s various R&D locations. No such contract exceeded 5% of net R&D
expenditures in any of the years presented.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 OTHER (INCOME) EXPENSE
The following table presents items included in other (income) expense:
(millions of dollars)
Year Ended December 31,
2011
2010
2009
Loss from disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patent infringement settlement, net of legal costs incurred . . . . . . .
Environmental litigation settlement
. . . . . . . . . . . . . . . . . . . . . . . . . .
BERU—Eichenauer equity investment gain . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 21.5
(29.1)
—
—
(0.5)
$ — $ —
—
—
—
(0.1)
—
28.0
(8.0)
2.4
Total other (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (8.1)
$22.4
$(0.1)
During the fourth quarter of 2011, the Company incurred $21.5 million in expense associated with
the loss on sale of the tire pressure monitoring business, including costs related to the divestiture, and
a write-down of a portion of the ignitor and electronic business. See Note 18 to the Consolidated
Financial Statements for further information.
On May 16, 2011, BorgWarner and Honeywell settled a lawsuit resolving BorgWarner’s patent
infringement claims. As a result of the settlement, Honeywell paid $32.5 million for a paid up license to
use the asserted BorgWarner patents. During 2011, the Company incurred $3.4 million in legal costs
related to this lawsuit and after deducting these costs, the Company recorded a net gain of $29.1
million.
See Notes 14 and 18 to the Consolidated Financial Statements for more information regarding
litigation settlement and BERU—Eichenauer equity investment
the Company’s 2010 environmental
gain.
NOTE 4 INCOME TAXES
Earnings (loss) before income taxes and the provision for income taxes are presented in the
following table.
(millions of dollars)
Earnings (loss) before income
2011
Non-U.S.
U.S.
Total
U.S.
2010
Non-U.S.
Total
U.S.
2009
Non-U.S.
Total
Year Ended December 31,
taxes . . . . . . . . . . . . . . . . . . . .
$119.2
$646.7
$765.9
$ (26.7)
$504.6
$477.9
$(138.5)
$156.4
$ 17.9
Provision for income taxes:
Current:
Federal/foreign . . . . . . . . . .
State . . . . . . . . . . . . . . . . . .
Total current . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . .
Total provision for income
31.8
1.7
33.5
17.4
162.9
—
162.9
(18.5)
194.7
1.7
196.4
(1.1)
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)
taxes . . . . . . . . . . . . . . . .
$ 50.9
$144.4
$195.3
$ (32.7)
$114.4
$ 81.7
$ (52.8)
$ 34.3
$ (18.5)
Effective tax rate . . . . . . . .
42.7% 22.3% 25.5% (122.5)% 22.7% 17.1% (38.1)% 21.9% (103.4)%
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for income taxes resulted in an effective tax rate of 25.5%, 17.1% and (103.4)% for
the years ended December 31, 2011, 2010 and 2009, respectively. An analysis of the differences
between the effective tax rate and the U.S. statutory rate for the years ended December 31, 2011,
2010 and 2009 is presented below.
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Affiliates’ earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . .
Business tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual adjustment and settlement of prior year tax
matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax credit valuation allowance . . . . . . . . . . . . . . . . . . .
Non-temporary differences and other . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2011
2010
2009
$268.1
$167.3
$ 6.2
(74.8)
(13.4)
1.1
11.5
(1.0)
0.1
—
3.7
(55.8)
(13.8)
1.4
0.2
0.4
2.9
(21.2)
0.3
(17.1)
(7.5)
4.7
(1.9)
(6.3)
1.7
7.7
(6.0)
Provision for income taxes, as reported . . . . . . . . . . . . . . . . . . . .
$195.3
$ 81.7
$(18.5)
The Company’s provision for income taxes for the year ended December 31, 2011 includes $11.0
million of additional tax expense associated with the Company’s patent infringement settlement, $2.7
million of additional tax expense associated with the loss from disposal activities and a tax benefit of
$6.2 million resulting from other tax adjustments. These other tax adjustments related to a change in
state corporate income tax legislation as well as an adjustment of the Company’s tax accounts as a
result of the closure of certain tax audits. During 2011, several countries enacted changes to their
respective statutory income tax rates. None of
impact on the
Company’s effective tax rate.
these changes had a material
The Company’s provision for income taxes for the year ended December 31, 2010 includes a
favorable impact of $21.2 million related to the reversal of the Company’s valuation allowance on U.S.
based foreign tax credit carryforwards, the impact of the change in tax legislation related to Medicare
Part D subsidies of $2.9 million, additional tax expense of $2.3 million associated with the BERU—
Eichenauer equity investment gain and the tax benefit of $9.8 million associated with the Company’s
environmental litigation settlement.
A rollforward of the Company’s total gross unrecognized tax benefits for the years ended
is presented below. Of the total $26.2 million of
December 31, 2011 and 2010, respectively,
unrecognized tax benefits as of December 31, 2011, approximately $22.6 million of
the total
represents the amount, 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)
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to current year . . . . . . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for closure of tax audits and settlements . . . . . . . . . . . . . . . . .
Reductions for lapse in statute of limitations . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
$27.6
0.5
3.9
(4.3)
(0.8)
(0.7)
$34.8
1.1
0.3
(6.6)
(1.3)
(0.7)
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$26.2
$27.6
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognizes interest and penalties related to unrecognized tax benefits in income
tax expense. The amount recognized in income tax expense for 2011 and 2010 is $1.7 million and
$2.5 million, respectively. The Company has an accrual of approximately $7.8 million and $6.3 million
for the payment of interest and penalties at December 31, 2011 and 2010, respectively. During the
year ended December 31, 2011, the Company closed/settled certain open years for the U.S federal
and certain foreign jurisdictions resulting in no cash payments. Possible changes within the next 12
months related to other examinations cannot be reasonably estimated at this time.
The Company and/or one of its subsidiaries files income tax returns in the U.S. federal, various
state jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have
more than one taxpayer. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years no longer
subject to audit
2008 and prior
2004 and prior
2007 and prior
2004 and prior
2008 and prior
2006 and prior
2009 and prior
2005 and prior
2006 and prior
2009 and prior
* In Germany, the open tax years for the Company’s BERU subsidiary are from 2003 and forward.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The gross components of deferred tax assets and liabilities as of December 31, 2011 and 2010
consist of the following:
(millions of dollars)
Current deferred tax assets:
December 31,
2011
2010
Employee related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation & environmental
Customer claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 28.0
4.3
14.5
4.5
0.9
2.2
0.6
5.7
$ 26.2
9.8
8.6
6.3
5.8
2.0
1.2
6.8
Total current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current deferred tax liabilities:
$ 60.7
$ 66.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (3.7)
$ (7.6)
Total current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current deferred tax assets:
$ (3.7)
$ (7.6)
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
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current deferred tax liabilities:
Goodwill & intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 158.2
116.7
76.7
33.9
22.9
35.1
3.0
4.7
2.0
5.1
$ 183.4
98.0
49.3
44.6
20.0
15.0
6.3
4.4
2.6
8.1
$ 458.3
$ 431.7
$(155.5)
(79.7)
(1.3)
(2.9)
(6.6)
$(246.0)
$ 269.3
(23.6)
$(130.3)
(84.8)
(2.8)
(3.0)
(7.7)
$(228.6)
$ 262.2
(13.0)
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 245.7
$ 249.2
* Net operating loss carryforwards are shown gross with the corresponding valuation allowances
located at the end of the table.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The deferred tax assets and liabilities recognized in the Company’s Consolidated Balance Sheets
are as follows:
(millions of dollars)
December 31,
2011
2010
Deferred income taxes — current assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes — current liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 58.5
(6.5)
313.9
(120.2)
$ 75.8
(18.4)
305.5
(113.7)
Net deferred tax asset (current and non-current) . . . . . . . . . . . . . . . . . .
$ 245.7
$ 249.2
* Other non-current assets and liabilities have been netted within their respective taxing jurisdictions
due to consolidation (primarily U.S. and Germany).
Deferred income taxes — current assets are primarily comprised of amounts from the U.S.,
France, Italy, Japan, Spain and South Korea. Deferred income taxes — current liabilities are primarily
comprised of amounts from Germany. Other non-current assets are primarily comprised of amounts
from the U.S. Other non-current liabilities are primarily comprised of amounts from Germany, Italy,
Spain, Sweden and the U.K.
At December 31, 2011, certain non-U.S. subsidiaries have net operating loss carryforwards
totaling $64.1 million available to offset future taxable income. Of the total $64.1 million, $35.4 million
expire at various dates from 2012 through 2031 and the remaining $28.7 million have no expiration
date. The Company has a valuation allowance of $1.5 million recorded on $5.5 million of non-U.S net
operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards
totaling $537.4 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, which reduced tax expense approximately $21.8 million in 2011. All the existing tax holidays
remain in effect during 2012 and the tax holiday in Poland is scheduled to expire in 2013. The U.S.
has foreign tax credit carryforwards of $158.2 million, which expire at various dates from 2015
through 2020.
The Company has not recorded deferred income taxes on the difference between the book and
tax basis of investments in foreign subsidiaries or foreign equity affiliates totaling approximately $1.8
billion in 2011, as these amounts are essentially permanent in nature. The difference 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 difference because the actual tax liability, if
any, is dependent on circumstances existing when the repatriation occurs.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 5 BALANCE SHEET INFORMATION
Detailed balance sheet data is as follows:
(millions of dollars)
Receivables, net:
December 31,
2011
2010
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,037.4
149.9
$ 859.5
168.4
Gross receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt allowance(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,187.3
(4.3)
1,027.9
(4.0)
Total receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,183.0
$ 1,023.9
Inventories, net:
Raw material and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 254.4
90.9
124.3
$ 244.0
88.1
111.7
FIFO inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIFO reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
469.6
(15.3)
443.8
(13.2)
Total inventories, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 454.3
$ 430.6
Prepayments and other current assets:
Prepaid tooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product liability insurance asset . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total prepayments and other current assets . . . . . . . . . . . . . . . .
Property, plant and equipment, net:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, gross . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant & equipment, net, excluding tooling . . . . . . . . . .
Tooling, net of amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
23.5
28.8
2.7
0.8
26.6
82.4
71.2
616.7
2,006.9
2.3
206.8
$
$
$
21.8
25.8
2.7
5.8
23.6
79.7
67.9
601.4
1,961.2
2.3
128.2
2,903.9
(1,343.9)
1,560.0
104.3
2,761.0
(1,308.0)
1,453.0
89.6
Property, plant & equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,664.3
$ 1,542.6
Investments and advances:
Investment in equity affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments and advances . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 217.4
127.9
$ 205.2
102.7
Total investments and advances . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 345.3
$ 307.9
Other non-current assets:
Product liability insurance asset . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
32.9
313.9
243.3
34.9
$
24.8
305.5
168.8
32.0
Total other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 625.0
$ 531.1
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(millions of dollars)
Accounts payable and accrued expenses:
Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade payables for capital expenditures . . . . . . . . . . . . . . . . . . . . . .
Payroll and employee related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable to noncontrolling shareholders . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
$ 820.7
48.9
201.9
38.6
30.9
29.9
28.8
14.2
11.7
10.5
6.8
6.5
5.6
3.4
2.4
37.0
$ 737.7
28.9
190.2
37.0
34.7
32.5
25.8
14.3
4.2
11.9
8.6
18.4
4.6
21.0
3.3
51.0
Total accounts payable and accrued expenses . . . . . . . . . . . . . . .
$1,297.8
$1,224.1
Other non-current liabilities:
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cross currency swaps and derivatives . . . . . . . . . . . . . . . . . . . . . . . .
Product warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 120.2
85.5
34.1
32.9
26.0
8.1
85.1
$ 113.7
78.8
29.8
24.8
23.4
8.2
84.2
Total other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 391.9
$ 362.9
(a) Bad debt allowance:
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment and other
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
2009
$(4.0)
(1.4)
1.0
0.1
$(4.3)
$(4.3)
(1.1)
2.5
(1.1)
$(4.0)
$(5.7)
0.1
1.4
(0.1)
$(4.3)
As of December 31, 2011 and December 31, 2010, accounts payable of $48.9 million and $28.9
million, respectively, were related to property, plant and equipment purchases.
As of December 31, 2011, the Company had no assets pledged as collateral under its long-term
debt agreements. As of December 31, 2010, specific assets of $3.4 million were pledged as collateral
under certain of the Company’s long-term debt agreements.
As of December 31, 2011 and December 31, 2010, the Company’s conditional asset retirement
obligation relating to 47 of its manufacturing locations was $1.1 million and $1.2 million, respectively.
This obligation represents the Company’s liability to remove hazardous building materials from certain
facilities.
Interest costs capitalized for the years ended December 31, 2011 and 2010 were $15.0 million
and $11.2 million, respectively.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 reported by
NSK-Warner is accounted for using the equity method of accounting. 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 $33.4 million, $35.5
million and $48.0 million in calendar years ended December 31, 2011, 2010 and 2009, respectively.
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. Following is summarized financial data
for NSK-Warner, translated using the ending or periodic rates, as of and for the years ended
November 30, 2011, 2010 and 2009 (unaudited):
(millions of dollars)
Balance sheets:
November 30,
2011
2010
Cash and securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets, including cash and securities . . . . . . . . . . . . . . . . . . . . .
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$119.4
344.1
182.0
172.1
45.3
308.7
$109.1
310.2
174.9
151.4
41.9
291.8
(millions of dollars)
Statements of operations:
Year Ended November 30,
2011
2010
2009
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$655.2
128.5
61.6
$634.7
131.9
68.3
$494.5
89.2
35.8
NSK-Warner had no debt outstanding as of November 30, 2011 and 2010. Purchases by the
Company from NSK-Warner were $16.6 million, $14.6 million and $16.5 million for the years ended
December 31, 2011, 2010 and 2009, respectively.
NOTE 6 GOODWILL AND OTHER INTANGIBLES
During the fourth quarter of each year or upon a triggering event, the Company reviews the
goodwill assigned to each of its reporting units to identify those units with a fair value more-likely-
than-not less than its carrying value. With the exception of two reporting units that had recent
acquisition or divestiture activity, a qualitative assessment was completed. This assessment
evaluated various events and circumstances, such as macro economic conditions, industry and
market conditions, cost factors, relevant events and financial trends, that may impact a reporting
unit’s fair value. After completing this assessment, the Company determined it was more-likely-
than-not the fair value exceeded the carrying value of the reporting units qualitatively reviewed. A
quantitative, “step one,” impairment analysis, therefore, was not required.
For the two reporting units with recent acquisition or divestiture activity, the Company performed
impairment analysis, which requires the Company to make
a quantitative, “step one,” goodwill
significant assumptions and estimates about the extent and timing of future cash flows, discount
impairment analysis is the Company’s annual
rates and growth rates. The basis of this goodwill
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
budget and long-range plan (“LRP”). The annual budget and LRP includes a five year projection of
future cash flows based on actual new products and customer commitments and assumes the last
year of the LRP data is a fair indication of the future performance. Because the LRP is estimated over
a significant future period of time, those estimates and assumptions are subject to a high degree of
uncertainty. Further, the market valuation models and other financial ratios used by the Company
require certain assumptions and estimates regarding the applicability of
those models to the
Company’s facts and circumstances. The Company believes the assumptions and estimates used to
determine its estimated fair value are reasonable. Different assumptions could materially affect the
estimated fair value. The primary assumptions affecting the Company’s December 31, 2011 goodwill
quantitative, “step one,” impairment review are as follows:
(cid:129) 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.
(cid:129) Operating income margin: The Company used historical and expected operating income
margins, which may vary based on the projections of each reporting unit being evaluated.
In addition to the above primary assumptions, the Company notes the following risk to volume
and operating income assumptions that could have an impact on the discounted cash flow model:
(cid:129) The automotive industry is cyclical and the Company’s results of operations would be
adversely affected by industry downturns.
(cid:129) The Company is dependent on market segments that use our key products and would be
affected by decreasing demand in those segments.
(cid:129) The Company is subject to risks related to international operations.
Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter
of 2011 indicated the Company’s goodwill assigned to the two reporting units that were quantitatively
assessed was not impaired. Additionally, a sensitivity analysis was completed indicating a 1%
increase in the discount rate or a 1% decrease in the operating margin assumptions would not result
in the carrying value exceeding the fair value of either of the reporting units quantitatively assessed.
The changes in the carrying amount of goodwill for the years ended December 31, 2011 and
2010 are as follows:
(millions of dollars)
2011
2010
Engine
Drivetrain
Engine
Drivetrain
Gross goodwill balance, January 1 . . . . . . . . . .
Accumulated impairment losses, January 1 . . .
$1,351.9
(501.8)
$263.6
(0.2)
$1,297.8
(501.8)
$265.6
(0.2)
Net goodwill balance, January 1 . . . . . . . .
$ 850.1
$263.4
$ 796.0
$265.4
Goodwill during the year:
Acquired* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . .
$
— $ 96.2
—
(6.3)
(7.9)
(9.3)
$
74.1
(1.4)
(18.6)
$ —
—
(2.0)
Ending balance, December 31 . . . . . . . . . .
$ 832.9
$353.3
$ 850.1
$263.4
* Goodwill acquired relates to the 2011 purchase of Haldex Traction AB and the 2010 purchase of
Dytech ENSA S.L.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s other intangible assets, primarily from acquisitions, consist of the following:
(millions of dollars)
Amortized intangible assets:
Patented and unpatented
December 31, 2011
December 31, 2010
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
technology . . . . . . . . . . . . . . . . . . . . $ 78.9
213.4
49.3
17.5
Customer relationships . . . . . . . . . . . .
Distribution network . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . .
Total amortized intangible assets . . . . . .
In-process R&D . . . . . . . . . . . . . . . .
Unamortized trade names . . . . . . . .
359.1
13.1
30.7
$ 20.4
76.7
49.3
13.2
159.6
—
—
$ 58.5 $ 69.4
127.3
50.8
14.7
136.7
—
4.3
199.5
13.1
30.7
262.2
13.1
31.7
$ 18.0
57.5
50.8
11.9
138.2
—
—
$ 51.4
69.8
—
2.8
124.0
13.1
31.7
Total other intangible assets . . . . . . . . . . $402.9
$159.6
$243.3 $307.0
$138.2
$168.8
Amortization of other intangible assets was $30.8 million, $28.4 million and $26.3 million for the
lives of the
years ended December 31, 2011, 2010 and 2009, respectively. The estimated useful
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: $29.7
million in 2012, $28.4 million in 2013, $24.1 million in 2014, $9.1 million in 2015 and $8.6 million in
2016.
A roll-forward of the gross carrying amounts of the Company’s other intangible assets is
presented below:
(millions of dollars)
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
$307.0
117.2
(5.6)
(15.7)
$265.1
55.0
—
(13.1)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$402.9
$307.0
A roll-forward of the accumulated amortization associated with the Company’s other intangible
assets is presented below:
(millions of dollars)
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
$138.2
30.8
(3.8)
(5.6)
$116.5
28.4
—
(6.7)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$159.6
$138.2
On January 31, 2011, the Company acquired 100% of the stock of Haldex Traction AB. In
connection with the acquisition, the Company utilized the multi-period excess earnings method under
the income approach, to determine the value of the customer relationships capitalized, $96.7 million.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, the Company capitalized $17.5 million for patented and unpatented technology and $3.0
million for trade names. Customer relationships, patented and unpatented technology and trade
names will be amortized over 12, 11 and 2 year useful lives, respectively.
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 of intangible assets related to
adjusting the Company’s 50% investment to fair value under ASC Topic 805.
On April 10, 2010, the Company acquired 100% of Dytech ENSA S.L. 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 lives, respectively. Trade names will not be amortized.
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
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.
NOTE 7 PRODUCT WARRANTY
The changes in the carrying amount of the Company’s total product warranty liability for the years
ended December 31, 2011 and 2010 were as follows:
(millions of dollars)
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
$ 66.8
4.5
47.5
(43.5)
(2.6)
$ 61.7
3.0
39.3
(35.5)
(1.7)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 72.7
$ 66.8
The product warranty liability is classified in the Consolidated Balance Sheets as follows:
(millions of dollars)
December 31,
2011
2010
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$38.6
34.1
$37.0
29.8
Total product warranty liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$72.7
$66.8
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 8 NOTES PAYABLE AND LONG-TERM DEBT
As of December 31, 2011 and 2010,
the Company had short-term and long-term debt
outstanding as follows:
(millions of dollars)
December 31,
2011
2010
Short-term debt
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables securitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 116.3
80.0
$
42.4
80.0
Total short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 196.3
$ 122.4
Long-term debt
3.50% Convertible senior notes due 04/15/12 . . . . . . . . . . . . . . . . . . .
. . . . . . . . .
5.75% Senior notes due 11/01/16 ($150 million par value)
. . . . . . . . .
8.00% Senior notes due 10/01/19 ($134 million par value)
. . . . . . . .
4.625% Senior notes due 09/15/20 ($250 million par value)
7.125% Senior notes due 02/15/29 ($121 million par value)
. . . . . . . .
Multi-currency revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term loan facilities & other
Unamortized portion of debt derivatives . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 368.5
149.5
133.9
247.7
119.3
70.0
19.8
24.1
$1,132.8
381.5
$ 348.5
149.4
133.9
247.5
119.3
—
31.6
27.8
$1,058.0
6.1
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . .
$ 751.3
$1,051.9
The weighted average interest rate on all borrowings outstanding as of December 31, 2011 and
2010 was 5.9% and 6.4%, respectively.
Annual principal payments required as of December 31, 2011 are as follows :
(millions of dollars)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: convertible note accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: unamortized discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 583.0
76.5
0.3
—
150.0
528.7
$1,338.5
(5.2)
(4.2)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,329.1
The Company’s long-term debt includes various financial covenants, none of which are expected
to restrict future operations.
On June 30, 2011, the Company amended and extended its $550 million multi-currency revolving
credit facility (which included a feature that allowed the Company’s borrowings to be increased to
$600 million) to a $650 million multi-currency revolving credit facility (which includes a feature that
allows the Company’s borrowings to be increased to $1 billion). The facility provides for borrowings
through June 30, 2016 and is guaranteed by the Company’s material domestic subsidiaries. The
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company has two key financial covenants as part of the credit agreement. These covenants are 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, 2011
and expects to remain compliant in future periods. At December 31, 2011, the Company had
outstanding borrowings of $70 million under this facility. There were no outstanding borrowings under
this facility at December 31, 2010.
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.
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 accounted for
the
convertible senior notes by bifurcating the instruments between its liability and equity components.
The value of the debt component was based on the fair value of issuing a similar nonconvertible debt
security. The value of the equity component was calculated by deducting the value of the liability from
the proceeds received at issuance. The Company’s December 31, 2011 Consolidated Balance Sheet
includes current debt of $368.5 million due April 15, 2012 and capital in excess of par value 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 senior notes in the Company’s
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 was as
follows:
(millions of dollars)
Year Ended
December 31,
2011
2010
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33.1
20.0
$31.3
18.3
The notes 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, the
if-converted value was approximately $352.1 million and $450.2 million higher than the face value of
the convertible senior notes at December 31, 2011 and December 31, 2010, 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. In accordance with the original terms of the agreement, the Company has an option to
settle the convertible senior notes through delivering cash, shares of
its common stock or a
combination thereof. On December 13, 2011, the Company announced its intention to settle the
convertible senior notes through delivering shares of its common stock, currently held in treasury
stock.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2011 and 2010, the estimated fair values of the Company’s senior unsecured
notes totaled $1,454.4 million and $1,482.3 million, respectively. The estimated fair values were
$435.5 million and $483.7 million higher at December 31, 2011 and 2010, 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 of $50.0 million and $26.5 million at December 31,
2011 and 2010, respectively. The letters of credit typically act as guarantees of payment to certain
third parties in accordance with specified terms and conditions.
NOTE 9 FAIR VALUE MEASUREMENTS
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:
Level 3:
Inputs, other than quoted prices in active markets, that are observable either
directly or indirectly; and
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).
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table classifies the assets and liabilities measured at fair value on a recurring basis
as of December 31, 2011:
Basis of fair value measurements
Quoted
prices in
active
markets for
identical
items
(Level 1)
Balance at
December 31,
2011
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Valuation
technique
$ 2.7
$—
$ 2.7
$—
$21.3
$—
$21.3
$ 2.9
$85.0
$—
$—
$ 2.9
$85.0
$—
$—
$—
A
C
A
A
(millions of dollars)
Assets:
Foreign currency contracts . . . . . . . .
Other non-current assets (insurance
settlement agreement note
receivable) . . . . . . . . . . . . . . . . . . . .
Liabilities:
Foreign currency contracts . . . . . . . .
Net investment hedge contracts . . . .
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
active
markets for
identical
items
(Level 1)
Balance at
December 31,
2010
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Valuation
technique
$ 2.7
$—
$ 2.7
$—
$ 6.4
$75.7
$—
$—
$ 6.4
$75.7
$—
$—
A
A
A
(millions of dollars)
Assets:
Foreign currency contracts . . . . . . . .
Liabilities:
Foreign currency contracts . . . . . . . .
Net investment hedge contracts . . . .
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables classify the Company’s defined benefit plan assets measured at fair value on
a recurring basis as of December 31, 2011:
(millions of dollars)
U.S. Plans:
Fixed income securities . . . .
Equity securities . . . . . . . . . .
. . . . .
Real estate and other
Non-U.S. Plans:
Fixed income securities . . . .
Equity securities . . . . . . . . . .
. . . . .
Real estate and other
Basis of fair value measurements
Quoted
prices in
active
markets for
identical
items
(Level 1)
Balance at
December 31,
2011
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Valuation
technique
$158.2
101.5
30.7
$290.4
$ 63.5
78.3
13.1
$154.9
$ —
49.6
—
$49.6
$ —
—
—
$ —
$158.2
51.9
30.7
$240.8
$ 63.5
78.3
13.1
$154.9
$—
—
—
$—
$—
—
—
$—
A
A
A
A
A
A
The following tables classify the Company’s defined benefit plan assets measured at fair value on
a recurring basis as of December 31, 2010:
(millions of dollars)
U.S. Plans:
Fixed income securities . . . .
Equity securities . . . . . . . . . .
. . . . .
Real estate and other
Non-U.S. Plans:
Fixed income securities . . . .
Equity securities . . . . . . . . . .
. . . . .
Real estate and other
Basis of fair value measurements
Quoted
prices in
active
markets for
identical
items
(Level 1)
Balance at
December 31,
2010
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Valuation
technique
$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
Refer to Note 11, “Retirement Benefit Plans,” for more detail surrounding the defined plan’s asset
investment policies and strategies, target allocation percentages and expected return on plan asset
assumptions.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 10 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 cross-currency swaps, commodity
derivative contracts, and foreign currency derivatives. 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, 2011 and 2010, 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
investment hedges). At
associated with our net
December 31, 2011 and 2010, the following cross-currency swaps were outstanding:
in certain foreign operations (net
investment
(millions of dollars)
Floating $ to Floating € . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floating $ to Floating ¥ . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cross-currency swaps
Notional
in USD
$ 75.0
$150.0
Notional in
local
currency
€
58.5
¥17,581.5
Duration
Oct - 19
Nov - 16
The Company uses certain commodity derivative contracts 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, 2011 and
2010, the following commodity derivative contracts were outstanding:
Commodity
Commodity derivative contracts
Volume
hedged
December 31,
2011
Volume
hedged
December 31,
2010
Units of
measure
Duration
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . .
—
258,900
MMBtu
Dec - 11
The Company uses foreign currency forward and option contracts to protect against exchange
rate movements for forecasted cash flows,
including purchases, operating expenses or sales
transactions designated in currencies other than the functional currency of the operating unit. Foreign
currency derivative contracts require the Company, at a future date, to either buy or sell foreign
currency in exchange for the operating units’ local currency.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2011 and 2010, the following foreign currency derivative contracts were outstanding:
Functional
currency
British pound . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . . . . . . .
Indian rupee . . . . . . . . . . . . .
Japanese yen . . . . . . . . . . . .
Korean won . . . . . . . . . . . . . .
Korean won . . . . . . . . . . . . . .
Mexican peso . . . . . . . . . . . .
Mexican peso . . . . . . . . . . . .
Swedish krona . . . . . . . . . . .
US dollar . . . . . . . . . . . . . . . .
US dollar . . . . . . . . . . . . . . . .
US dollar . . . . . . . . . . . . . . . .
Foreign currency derivatives (in millions)
Traded
currency
Notional in
traded currency
December 31, 2011
Notional in
traded currency
December 31, 2010
Euro
British pound
Hungarian forint
Polish zloty
US dollar
US dollar
US dollar
Euro
US dollar
Euro
US dollar
Euro
Indian rupee
Euro
Japanese yen
64.8
7.0
5,400.0
24.5
16.1
—
7.4
34.5
2.4
9.2
40.7
6.1
—
3.0
3,000.0
107.3
—
—
—
20.2
1.9
—
45.7
—
13.5
—
—
141.5
1.7
—
Duration
Dec - 13
Dec - 12
Dec - 12
Dec - 12
Jan - 13
Dec - 11
Dec - 12
Dec - 13
Dec - 12
Mar - 12
Dec - 12
Dec - 12
Dec - 11
Dec - 12
Mar - 12
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, 2011 and 2010, there were no outstanding fixed to floating interest rate swap agreements.
At December 31, 2011 and 2010, the following amounts were recorded in the Consolidated Balance
Sheets as being payable to or receivable from counterparties under ASC Topic 815:
(millions of dollars)
Foreign currency
contracts
Net investment hedge
contracts
Assets
Liabilities
Location
December 31,
2011
December 31,
2010
Location
December 31,
2011
December 31,
2010
Prepayments and other
current assets
$2.6
Other non-current assets
$0.1
Other non-current assets
$ —
$2.7
$ —
$ —
Accounts payable and
accrued expenses
Other non-current
liabilities
Other non-current
liabilities
$ 2.4
0.5
85.0
3.3
3.1
75.7
Effectiveness for cash flow 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 accumulated
other comprehensive income (loss) (“AOCI”). 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.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below shows deferred gains and losses at the end of the period reported in AOCI and
amounts expected to be reclassified to income within the one year or less. The gain or loss expected
to be reclassified to income in one year or less assumes no change in the current relationship of the
hedged item at December 31, 2011 market rates.
(millions of dollars)
Contract type
Deferred gain (loss) in AOCI at
December 31, 2011
December 31, 2010
Gain (loss) expected to
be reclassified to income
in one year or less
Foreign currency . . . . . . . . . . . .
Commodity . . . . . . . . . . . . . . . .
Net investment hedges . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
$ (0.6)
—
(78.9)
$(79.5)
$ (3.7)
1.6
(69.3)
$(71.4)
$(0.2)
—
—
$(0.2)
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 AOCI 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 AOCI. Net investment hedges, designated under ASC Topic 815, held during the period resulted in
the following gains or losses recorded in income:
Gain (loss) reclassified
from AOCI to income
(effective portion)
Gain (loss)
recognized in income
(ineffective portion)
(millions of dollars)
Contract type
Location
Cross-currency swap . . . Interest expense
Year Ended December 31,
Year Ended December 31,
2011
$—
2010
$—
Location
Interest expense
2011
$0.5
2010
$(2.5)
Cash flow hedges are derivative contracts entered into to hedge against fluctuations in foreign
exchange rates and commodity prices. 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 statement of operations. Ineffectiveness resulting from imperfect matches between
the underlying transaction are
changes in value of hedge contracts and changes in value of
immediately recognized in income. Cash flow hedges, designated under ASC Topic 815, held during
the period resulted in the following gains and losses recorded in income:
(millions of dollars)
Contract type
Location
Foreign currency . . . . . . Sales
Foreign currency . . . . . . Cost of goods sold
Foreign currency . . . . . . SG&A expense
Commodity . . . . . . . . . . Cost of goods sold
Gain (loss) reclassified
from AOCI to Income
(effective portion)
Gain (loss)
recognized in income
(ineffective portion)
Year Ended December 31,
Year Ended December 31,
2011
$(1.4)
$(0.6)
$ 0.5
$ —
2010
Location
$(0.2) SG&A expense
$(1.2) SG&A expense
$(0.6) SG&A expense
$ 8.2
Cost of goods sold
2011
$—
$—
$—
$—
2010
$ 0.9
$ —
$ —
$(0.2)
At December 31, 2011, derivative instruments that were not designated as 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
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $18.9 million, $19.2 million and $16.6 million in the years
ended December 31, 2011, 2010 and 2009, 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, Mexico and Sweden. 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.
Indiana automotive component plant
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,
(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 during the first quarter of 2009. The Plant
Shutdown Agreement also included a settlement of a portion of the UAW retiree health care
obligation, which resulted in a settlement loss of $14.0 million during the first quarter of 2009. The
combined pre-tax impact of these actions was a net gain of $27.9 million.
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, the Company made a cash
contribution to the Plan of $15 million during the year ended December 31, 2011. The Company will
make a cash contribution to the Plan of $15 million in both 2012 and 2013, 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. In the second quarter of 2011, the Company replaced the original surety bond with $35 million
in letters of credit.
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)
Year Ended December 31,
2011
2010
2009
Defined contribution expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other post employment benefit expense . . . . . . . . . . . . . . . . . . . . .
$18.9
17.5
13.5
$19.2
19.8
17.5
$ 16.6
33.1
(48.4)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$49.9
$56.5
$ 1.3
80
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
2011
2010
Pension benefits
Year Ended December 31,
Other post
employment benefits
2011
2010
Year Ended December 31,
Change in projected benefit obligation:
Projected benefit obligation, January 1 . . . $326.2 $ 326.0 $316.5 $ 326.5
7.4
Service cost . . . . . . . . . . . . . . . . . . . . . . . . .
17.6
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . .
0.5
Plan participants’ contributions . . . . . . . . .
1.2
Plan amendments . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . .
(0.4)
(12.2)
Currency translation . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.1
(14.7)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . .
—
17.5
—
—
19.2
—
1.1
(28.1)
—
16.1
—
—
21.8
—
—
(26.7)
9.1
17.8
0.3
(0.5)
11.9
(5.8)
0.9
(15.4)
$ 261.9
0.7
11.8
—
3.9
(6.8)
—
—
(20.5)
$ 278.5
0.8
14.5
—
—
(7.2)
—
—
(24.7)
Projected benefit obligation,
December 31 . . . . . . . . . . . . . . . . . . . . . . $337.4 $ 344.3 $326.2 $ 326.0
$ 251.0
$ 261.9
Change in plan assets:
Fair value of plan assets, January 1 . . . . . . $287.2 $ 154.6 $269.1 $ 144.0
14.2
Actual return on plan assets . . . . . . . . . . . .
14.5
Employer contribution . . . . . . . . . . . . . . . . .
0.5
Plan participants’ contribution . . . . . . . . . .
(3.9)
Currency translation . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(14.7)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . .
35.6
10.6
—
—
—
(28.1)
5.0
16.0
0.3
(0.7)
(4.9)
(15.4)
8.9
21.0
—
—
—
(26.7)
Fair value of plan assets, December 31 . . $290.4 $ 154.9 $287.2 $ 154.6
Funded status . . . . . . . . . . . . . . . . . . . . . . $ (47.0) $(189.4) $ (39.0) $(171.4)
$(251.0)
$(261.9)
Amounts recognized in the Consolidated
Balance Sheets consist of:
Non-current assets . . . . . . . . . . . . . . . . . . . $ — $
Current liabilities . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . .
(0.1)
(46.9)
0.5 $ — $
(6.5)
(183.4)
(0.1)
(38.9)
0.5
(8.1)
(163.8)
$ — $ —
(26.5)
(235.4)
(24.3)
(226.7)
Net amount recognized . . . . . . . . . . . . . . . $ (47.0) $(189.4) $ (39.0) $(171.4)
$(251.0)
$(261.9)
Amounts recognized in accumulated
other comprehensive loss consist of:
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . $172.8 $ 54.4 $145.7 $ 37.4
1.4
Net prior service cost (credit) . . . . . . . . . . .
(11.3)
(12.1)
0.8
$ 106.3
(48.7)
$ 120.0
(59.5)
Net amount recognized* . . . . . . . . . . . . . . . $161.5 $ 55.2 $133.6 $ 38.8
$ 57.6
$ 60.5
Total accumulated benefit obligation
for all plans . . . . . . . . . . . . . . . . . . . . . . . $337.4 $ 327.9 $326.2 $ 316.8
* AOCI shown above does not include our equity investee, NSK-Warner. NSK-Warner had an AOCI
loss of $6.9 million and $6.1 million at December 31, 2011 and 2010, respectively.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The funded status of pension plans with accumulated benefit obligations in excess of plan assets
at December 31 is as follows:
(millions of dollars)
December 31,
2011
2010
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(656.9)
435.5
$(634.9)
432.2
Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(221.4)
$(202.7)
Pension deficiency by country:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (47.0)
(13.4)
(128.7)
(32.3)
$ (39.0)
(7.5)
(128.0)
(28.2)
Total pension deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(221.4)
$(202.7)
The weighted average asset allocations of the Company’s funded pension plans and target
allocations by asset category are as follows:
U.S. Plans:
Real estate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. Plans:
Real estate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
Target
Allocation
11% 11% 5%-15%
54% 40% 45%-65%
35% 49% 25%-45%
100% 100%
8% 9% 5%-10%
41% 36% 35%-45%
51% 55% 50%-60%
100% 100%
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, 2011 and 2010. 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 2012, including $15 million related to the Company’s settlement agreement with
the PBGC discussed above. Of the $30 million to $40 million in projected 2012 contributions, $21.5
million 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 plans’ assets at December 31, 2011 and 2010.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See the table below for a breakout net periodic benefit cost between U.S. and non-U.S. pension
plans:
(millions of dollars)
US
Non-US
US
Non-US
US
Non-US
2011
2010
2009
Pension benefits
Year Ended December 31,
Other post
employment benefits
2011
2010
2009
Year Ended December 31,
Service cost . . . . . . . . . . . . $ — $ 9.1 $ — $ 7.4
Interest cost
17.6
Expected return on plan
. . . . . . . . . . .
17.5
16.1
17.8
$ 0.3
20.7
$ 9.9
16.5
$ 0.7 $ 0.8 $ 0.8
18.6
14.5
11.8
assets . . . . . . . . . . . . . . .
Settlements, curtailments
and other . . . . . . . . . . . .
Amortization of
unrecognized prior
service benefit . . . . . . . .
Amortization of
(20.8)
(11.2)
(19.7)
(9.7)
(16.2)
(9.6)
—
(0.1)
—
—
3.3
0.6
—
—
—
—
— (61.9)*
(0.7)
—
(0.7)
—
(0.5)
—
(6.9)
(6.9)
(13.2)
unrecognized loss . . . . .
6.5
0.8
6.6
0.8
7.3
0.8
7.9
9.1
7.3
Net periodic benefit cost
(benefit)
. . . . . . . . . . . . . $ 1.1 $ 16.4 $ 3.7
$16.1
$ 14.9
$18.2
$13.5 $17.5 $(48.4)
* 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 $9.3 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 $6.9 million and $(6.4) 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, 2011 and 2010 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
4.42
N/A
4.25
N/A
5.13
2.78
5.17
3.50
4.75
N/A
5.37
2.80
83
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 years ended
December 31, 2011, 2010 and 2009 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2011
2010
2009
5.17
N/A
7.50
4.75
N/A
N/A
5.37
2.80
7.07
5.75
3.50
7.50
5.50
N/A
N/A
5.47
2.75
7.12
7.09
3.50
7.50
7.00
N/A
N/A
5.72
2.77
7.10
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 estimated future benefit payments for the pension and other post employment benefits are
as follows:
(millions of dollars)
Year
Pension benefits
Other post employment benefits
U.S.
Non-U.S.
w/o Medicare
Part D
reimbursements
with Medicare
Part D
reimbursements
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017-2021 . . . . . . . . . . . . . . . . . . . . . . . .
$ 25.1
25.1
24.6
23.7
23.6
110.5
$ 14.6
16.0
17.2
19.3
18.5
103.7
$25.8
25.0
24.2
23.5
22.5
99.7
$24.9
24.1
23.4
22.6
21.7
96.1
The weighted-average rate of increase in the per capita cost of covered health care benefits is
projected to be 7.10% in 2012 for pre-65 and post-65 participants, decreasing to 5.0% by the year
2019. A one-percentage point change in the assumed health care cost trend would have the following
effects:
(millions of dollars)
One Percentage Point
Increase
Decrease
Effect on other post employment benefit obligation . . . . . . . . . . . . . . . . .
Effect on total service and interest cost components . . . . . . . . . . . . . . . .
$18.3
$ 0.8
$(16.1)
$ (0.7)
84
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”), 12.5 million shares
are authorized for grant, of which approximately 2.2 million shares are available for future issuance.
Stock Options The Company recognized no stock compensation expense and negligible stock
option compensation expense during the years ended December 31, 2011 and 2010, respectively.
During the year ended December 31, 2009, the Company’s stock option compensation expense
reduced earnings before income and noncontrolling interest by $6.6 million, net earnings by $5.1
million and basic and diluted earnings per share by $0.04, respectively.
A summary of the plans’ shares under option at December 31, 2011, 2010 and 2009 is as follows:
Outstanding at January 1, 2009 . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2009 . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2010 . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2011 . . . . . . .
Options exercisable at December 31,
Shares
(thousands)
5,798
(381)
(240)
5,177
(1,888)
(36)
3,253
(1,033)
2,220
Weighted
average
exercise
price
$27.86
$23.89
$32.16
$27.98
$26.73
$33.95
$28.64
$27.15
$29.36
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,220
$29.36
Weighted
average
remaining
contractual
life (in years)
6.7
5.8
4.9
4.1
4.1
Aggregate
intrinsic
value
(in millions)
$ 6.0
$ 3.4
$ 29.7
$ 50.3
$142.2
$ 48.4
$ 76.3
$ 76.3
The following table summarizes information about the stock options outstanding and exercisable
at December 31, 2011:
Range of Exercise Prices
$12.07 - $16.52 . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22.15 - $34.95 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding and exercisable
Number
outstanding
and exercisable
(thousands)
Weighted average
remaining
contractual life
(years)
155
2,065
2,220
1.1
4.3
4.1
Weighted
average
exercise
price
$14.55
$30.46
$29.36
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Proceeds from stock option exercises for the years ended December 31, 2011, 2010 and 2009
were as follows:
(millions of dollars)
Proceeds from stock options exercised — gross . . . . . . . . . . . . . . .
Tax benefit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock options exercised, net of tax . . . . . . . . . . . . . .
Year Ended December 31,
2011
$28.6
24.4
$53.0
2010
$55.4
11.7
$67.1
2009
$ 9.4
(0.7)
$ 8.7
Restricted Stock At
its November 2007 meeting,
the Company’s Compensation Committee
decided that restricted common stock awards and stock units (“restricted stock”) would be awarded in
place of stock options for long-term incentive award grants to employees. Restricted stock granted to
employees vest 50% after two years and the remainder after three years from the date of grant.
Restricted stock granted to non-employee directors generally vests on the anniversary date of the grant.
The value of restricted stock is determined by the market value of the Company’s common stock
at the date of grant. In February 2011, restricted stock in the amount of 270,144 was granted to
employees under the 2004 Stock Incentive Plan. In April 2011, restricted stock in the amount of 3,288
was 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 equity and is amortized
as compensation expense over the restriction periods.
Restricted stock compensation expense reduced earnings before income taxes and
noncontrolling interest, net earnings and earnings per share for the years ended December 31, 2011,
2010 and 2009 by:
(millions of dollars, except per share data)
Earnings before income taxes and noncontrolling interest
. . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share — diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2011
$15.1
$11.4
$0.10
$0.09
2010
$18.9
$14.7
$0.13
$0.11
2009
$14.8
$11.4
$0.10
$0.10
A summary of the status of the Company’s nonvested restricted stock for employees and
non-employee directors at December 31, 2011, 2010 and 2009 is as follows:
Nonvested at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86
Shares
subject to
restriction
(thousands)
662
1,044
(24)
(135)
1,547
603
(188)
(91)
1,871
274
(609)
(106)
1,430
Weighted
average
price
$45.29
$20.61
$51.03
$29.79
$29.90
$36.16
$44.80
$27.10
$30.55
$70.57
$27.39
$38.05
$39.02
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
ratably over
the performance period. Compensation expense for
The Company recognizes compensation expense for the 40% cash component and 60% stock
component
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,
2011, 2010 and 2009 were as follows:
(millions of dollars, except share data)
Year Ended December 31,
2011
2010
2009
Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of shares* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
26.3
538,180
$
23.9
104,205
$
10.7
269,896
*Shares are issued in February of the following year.
NOTE 13 OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive 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 income (loss) attributable to the noncontrolling
December 31,
2011
2010
$ 86.9
(50.5)
(187.2)
1.1
$ 147.1
(44.8)
(158.1)
1.2
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.1)
0.9
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . .
$(150.8)
$ (53.7)
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amounts presented as changes in accumulated other comprehensive income (loss), net of
related taxes, are added to (deducted from) net earnings resulting in comprehensive income (loss).
The following table summarizes the components of comprehensive income (loss) on an after-tax basis
for the years ended December 31, 2011, 2010 and 2009.
(millions of dollars)
Year Ended December 31,
2011
2010
2009
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . .
Market value change of hedge instruments . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (60.2)
(7.7)
2.0
$ (63.5)
(20.5)
6.9
$ 54.8
63.3
(18.2)
Net foreign currency translation and hedge instruments . . . .
Unrealized (loss) gain 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 attributable to BorgWarner Inc. . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive (loss) income attributable to noncontrolling
(65.9)
(0.1)
(39.7)
10.6
(29.1)
(95.1)
550.1
455.0
(77.1)
1.2
23.9
(16.1)
7.8
(68.1)
377.4
309.3
99.9
—
(13.1)
9.7
(3.4)
96.5
27.0
123.5
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.0)
(0.1)
3.9
Comprehensive income attributable to BorgWarner Inc. . . . .
$453.0
$309.2
$127.4
NOTE 14 CONTINGENCIES
In the normal course of business, the Company is party 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 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, 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 untimely. In 2008, the Company recorded
a charge of $4.0 million as a result of the Court’s decision.
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 reasonably 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
the Comprehensive Environmental
(“PRPs”) at various hazardous waste disposal sites under
Response, Compensation and Liability Act (“Superfund”) and equivalent state laws and, as such, may
presently be liable for
remedial activities at 39 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 cost of clean-up and other
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
liabilities with a balance of $10.4 million at
Company has an accrual for indicated environmental
December 31, 2011. The accrued amounts 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, financial
position or cash flows. The Company expects to pay out substantially all of the amounts accrued for
environmental liability over the next 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. In 2007 and 2008, lawsuits were filed against Kuhlman Electric and others, including
the Company, on behalf of approximately 340 plaintiffs, alleging personal injury relating to alleged
environmental contamination at its Crystal Springs, Mississippi plant. The Company entered into a
settlement
the plaintiffs and those of
approximately 2,700 unfiled claimants represented by those plaintiffs’ attorneys. In exchange for,
in July 2010 regarding the personal
injury claims of
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. The Company paid $13.9 million in November 2010 and
made the final payment of $13.9 million in February 2011. Litigation concerning indemnification is
pending and the Company may in the future become subject to further legal proceedings.
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
injury actions. We believe that the Company’s involvement is limited
asbestos-related personal
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, 2011 and December 31, 2010, the Company had
approximately 16,000 and 17,000 pending asbestos-related product liability claims, respectively. Of
the approximately 16,000 outstanding claims at December 31, 2011, approximately half were pending
in jurisdictions that have undergone significant tort and judicial reform activities subsequent to the
filing of these claims.
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 2011, of the approximately 1,800 claims resolved, 288 (16%) resulted in any payment
being made to a claimant by or on behalf of the Company.
In the full year of 2010, of the
approximately 7,700 claims resolved, 245 (3%) 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 paid by the
Company’s primary layer insurance carriers under a series of funding arrangements. In addition to the
the Company has substantial excess
primary insurance available for asbestos-related claims,
insurance coverage available for potential future asbestos-related product claims. In June 2004,
primary layer insurance carriers notified the Company of the alleged exhaustion of their policy limits.
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. The court has issued a number of interim rulings
and discovery is continuing. CNA and the Company have entered into a settlement agreement
resolving their coverage disputes, pursuant to which CNA will pay amounts over the next four years to
the Company. The Company is vigorously pursuing the litigation against the remaining insurers.
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 experience 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, financial position or cash flows.
To date, the Company has paid and accrued $190.9 million in defense and indemnity in advance
of insurers’ reimbursement and has received $81.1 million in cash and notes from insurers, including
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CNA. The net balance of $109.8 million, is expected to be fully recovered, of which approximately $33
million is estimated to be recovered within one year. Timing of recovery is dependent on final
resolution of the declaratory judgment action referred to above or additional negotiated settlements.
At December 31, 2010, insurers owed $120.6 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 $109.8 million net balance relating to past settlements and defense costs, the
Company has estimated a liability of $61.7 million for claims asserted, but not yet resolved and their
related defense costs at December 31, 2011. The Company also has a related asset of $61.7 million
to recognize proceeds from the insurance carriers.
Insurance carrier reimbursement of 100%
expected based on the Company’s experience, its insurance contracts and decisions received to date
in the declaratory judgment action referred to above. At December 31, 2010, the comparable value of
the insurance asset and accrued liability was $50.6 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:
December 31,
2011
2010
Prepayments and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28.8
32.9
$25.8
24.8
Total insurance assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61.7
$50.6
Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28.8
32.9
$25.8
24.8
Total accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61.7
$50.6
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 $30.7 million, $25.6 million and $28.5 million in the years ended
December 31, 2011, 2010 and 2009, respectively. The Company does not have any material capital
leases.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On September 30, 2010, the Company paid $6.0 million for certain machinery and equipment it
had previously leased, which was recorded as a capital expenditure within the investing activities
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, 2011 were as follows:
(millions of dollars)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16.7
14.0
12.1
10.9
9.2
9.9
$72.8
NOTE 16 EARNINGS 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 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 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 price 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/(shortfall) tax benefits that would be credited/(debited) to capital in excess of par value when
the award generates a tax deduction. Options are only dilutive when the average market price of the
underlying common stock exceeds the exercise price of the options.
The potential common shares associated with the Company’s 3.50% convertible senior notes
due April 15, 2012 are reflected in diluted EPS 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 EPS. In addition, if dilutive, interest expense, net of tax, related to the
convertible notes is added back to the numerator in calculating diluted EPS.
Separately and concurrently with the issuance of the Company’s 3.50% convertible senior 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,
the warrants will be dilutive to the
Company’s earnings. If the Company’s weighted average share price exceeds $32.82 per share, the
offsetting bond hedge will be anti-dilutive.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reconciles the numerators and denominators used to calculate basic and
diluted earnings per share of common stock:
(in millions except per share amounts)
Basic earnings per share:
Year Ended December 31,
2011
2010
2009
Net earnings attributable to BorgWarner Inc. . . . . . . .
$ 550.1
$ 377.4
$
27.0
Weighted average shares of common stock
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109.229
114.155
116.522
Basic earnings per share of common stock . . . . . . . .
$
5.04
$
3.31
Diluted earnings per share:
Net earnings attributable to BorgWarner Inc. . . . . . . .
Adjusted for net interest expense on convertible
$ 550.1
$ 377.4
notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.5
20.4
$
$
0.23
27.0
—
Diluted net earnings attributable to BorgWarner
Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 571.6
$ 397.8
$
27.0
Weighted average shares of common stock
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of 3.50% convertible senior notes . . . . . . . . . .
Effect of warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock-based compensation . . . . . . . . . . . . .
Total dilutive effect on weighted average shares of
109.229
11.389
5.215
2.635
114.155
11.389
1.464
2.567
116.522
—
—
0.417
common stock outstanding . . . . . . . . . . . . . . . . . . .
19.239
15.420
0.417
Weighted average shares of common stock
outstanding including dilutive shares . . . . . . . . . . .
128.468
129.575
116.939
Diluted earnings per share of common stock . . . . . . .
$
4.45
$
3.07
$
0.23
Anti-dilutive shares:
3.50% convertible senior notes . . . . . . . . . . . . . . . . . .
Bond hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . .
Total anti-dilutive shares . . . . . . . . . . . . . . . . . . . . . . . . .
—
6.141
—
6.141
—
2.836
—
2.836
11.389
0.034
2.711
14.134
NOTE 17 RESTRUCTURING
During the second quarter of 2009, the Company recorded restructuring expenses of $50.3
million, which included $9.0 million relating to employee termination benefits, $36.3 million of asset
impairment charges and $5.0 million related to the North American and European restructuring. 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%. Included in the asset impairment charges was a $22.3 million charge related to one of the
Company’s European locations, which resulted from the Company’s evaluations of the long range
outlook of the location using an undiscounted and discounted cash flow model, both of which
indicated that assets were impaired. In determining the amount of the asset impairment charge, the
Company used a replacement cost technique to determine the fair value of the assets.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 18 RECENT TRANSACTIONS
Tire pressure monitoring business
During the fourth quarter of 2011, the Company incurred $21.5 million in expense associated with
the loss on sale of the tire pressure monitoring business, including costs related to the divestiture, and
a write-down of a portion of the ignitor and electronic business. The Company received $22.9 million
in cash, classified as an investing activity within the Consolidated Statement of Cash Flows, from the
sale of its tire pressure monitoring business, including the manufacturing facility in Bretten, Germany,
to Huf Electronics GmbH. The sale of the tire pressure monitoring business will allow the Company to
focus on its powertrain technologies.
BorgWarner Vikas Emissions Systems India Private Limited
On August 2, 2011,
the Company purchased the noncontrolling interest’s 40% share of
BorgWarner Vikas Emissions Systems India Private Limited for $29.4 million in cash, which has been
classified as a financing activity within the Consolidated Statement of Cash Flows. In accordance with
ASC Topic 810, the Company reduced its noncontrolling interest balance by $2.8 million and reduced
capital in excess of par value by $26.6 million. As a result of this transaction, the Company owns
100% of BorgWarner Vikas Emissions Systems India Private Limited.
Traction Systems division of Haldex Group
On January 31, 2011, the Company acquired 100% of the stock of Haldex Traction Holding AB
(“Haldex Traction Systems”). Haldex Traction Systems has operations in Sweden, Hungary and
Mexico. The consideration for the acquisition, net of cash acquired, was $214.9 million (1.38 billion
Swedish Krona).
The acquisition is expected to accelerate the Company’s growth in the global all-wheel drive
(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 the
Company’s existing portfolio of front and rear-wheel drive based products. This enables the Company
to provide global customers a broader range of AWD solutions to meet their vehicle needs.
The operating results are reported within the Company’s Drivetrain reporting segment as of the
date of acquisition. The Company paid $203.7 million, which is recorded as an investing activity in the
Consolidated Statement of Cash Flows. Additionally, the Company assumed retirement-related
liabilities of $5.3 million and assumed debt of $5.9 million, which are reflected as non-cash
transactions in the Consolidated Statement of Cash Flows.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the aggregated estimated fair value of the assets acquired and
liabilities assumed on January 31, 2011, the date of acquisition:
(millions of dollars)
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consideration, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Assumed retirement-related liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Assumed debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 31.8
10.4
26.4
96.2
86.4
3.8
(40.1)
214.9
5.3
5.9
Cash paid, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$203.7
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 50% 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 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,
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 Consolidated
Statement of Cash Flows.
further differentiating BorgWarner as a leader
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 54.3
44.7
45.0
74.1
31.1
(81.5)
(9.3)
(10.8)
Net cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$147.6
Etatech, Inc. Technology
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
lean burning engines to significantly improve fuel
ignition technology enables high-performing,
economy and reduce emissions compared with conventional combustion technologies. The Company
made a cash payment of $7.5 million in both June 2009 and May 2010 for the purchase of Etatech,
Inc., which has been reflected as an investing activity in the Consolidated Statements of Cash Flows.
BERU
The Company acquired approximately 95.6% of
the outstanding shares of BERU
Aktiengesellschaft (“BERU”), headquartered in Ludwigsburg, Germany prior to 2009.
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, an increase of €2.07 from the $71.32 share price included in the 2008 Domination and Profit
Transfer Agreement (“DPTA”). This increase 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. The Company
is awaiting the judge’s ruling regarding the share price from the hearing held on April 1, 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% of BERU shares, at a cost of
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$46.6 million, has been reflected as a financing activity in the Consolidated Statement of Cash Flows.
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.
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.
(“ROIC”) of
The Company allocates resources to each segment based upon the projected after-tax return on
invested capital
its business initiatives. ROIC is comprised of Adjusted EBIT after
deducting notional taxes compared to the projected average capital investment required. Adjusted
EBIT is comprised of earnings before interest, income taxes and noncontrolling interest (“EBIT”)
impairment charges, affiliates’ earnings and other items not
adjusted for restructuring, goodwill
reflective of on-going operating profit or loss.
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.
2011 Segment information
(millions of dollars)
Customers
Net
Year-end
assets
Depreciation/
amortization
Long-lived
asset
expenditures (b)
Engine . . . . . . . . . . . . . . . . . . . . . $5,030.2
Drivetrain . . . . . . . . . . . . . . . . . .
2,084.5
Inter-segment eliminations . . . .
$5,050.6 $3,329.0
1,562.8
—
— 2,084.5
(20.4)
— (20.4)
Total
. . . . . . . . . . . . . . . . . . . .
Corporate(a) . . . . . . . . . . . . . . . .
7,114.7
—
— 7,114.7
—
4,891.8
— 1,066.8
$188.6
80.0
—
268.6
14.4
Consolidated . . . . . . . . . . . . . $7,114.7
$ — $7,114.7 $5,958.6
$283.0
2010 Segment information
(millions of dollars)
Customers
Net
Year-end
assets
Depreciation/
amortization
Long-lived
asset
expenditures (b)
Net sales
Inter-
segment
$ 20.4
Net sales
Inter-
segment
$ 19.4
Engine . . . . . . . . . . . . . . . . . . . . . $4,041.4
Drivetrain . . . . . . . . . . . . . . . . . .
1,611.4
Inter-segment eliminations . . . .
$4,060.8 $3,277.7
1,230.5
—
— 1,611.4
(19.4)
— (19.4)
Total
. . . . . . . . . . . . . . . . . . . .
Corporate(a) . . . . . . . . . . . . . . . .
5,652.8
—
— 5,652.8
—
4,508.2
— 1,046.8
$184.4
63.6
—
248.0
4.9
Consolidated . . . . . . . . . . . . . $5,652.8
$ — $5,652.8 $5,555.0
$252.9
97
$264.3
115.9
—
380.2
13.5
$393.7
$181.3
83.5
—
264.8
11.8
$276.6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2009 Segment information
(millions of dollars)
Customers
Net sales
Inter-
segment
$ 14.9
Net
Year-end
assets
Depreciation/
amortization
Long-lived
asset
expenditures (b)
Engine . . . . . . . . . . . . . . . . . . . . . $2,868.3
1,093.5
Drivetrain . . . . . . . . . . . . . . . . . .
Inter-segment eliminations . . . .
$2,883.2 $2,812.8
1,104.1
—
— 1,093.5
(14.9)
— (14.9)
Total
. . . . . . . . . . . . . . . . . . . .
Corporate(a) . . . . . . . . . . . . . . . .
3,961.8
—
— 3,961.8
—
—
3,916.9
894.5
$188.7
65.9
—
254.6
6.3
Consolidated . . . . . . . . . . . . . $3,961.8
$ — $3,961.8 $4,811.4
$260.9
$115.6
44.6
—
160.2
11.8
$172.0
(a) Corporate assets include equity in affiliates’, investment and advances and deferred income
taxes. The December 31, 2009 assets are net of trade receivables securitized and sold to third
parties.
(b) Long-lived asset expenditures include capital expenditures and tooling outlays.
Adjusted earnings before interest, income taxes and noncontrolling interest (“Adjusted EBIT”)
(millions of dollars)
Year Ended December 31,
2011
2010
2009
Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $774.3 $537.9 $219.8
(13.5)
Drivetrain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161.2
137.0
Adjusted EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patent infringement settlement gain, net of legal costs incurred . . . . . . . . . .
Loss from disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BERU-Eichenauer equity investment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Muncie closure retiree obligation net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate, including equity in affiliates’ earnings and stock-based
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense and finance charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes and noncontrolling interest . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest, net of tax . . . . . . . .
935.5
(29.1)
21.5
—
—
—
107.4
—
(4.8)
74.6
765.9
195.3
570.6
20.5
674.9
—
—
28.0
(8.0)
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
9.4
Net earnings attributable to BorgWarner Inc.
. . . . . . . . . . . . . . . . . . . . . . . $550.1 $377.4 $ 27.0
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographic Information
Outside the U.S., only China, Germany, France, Hungary and South Korea exceeded 5% of
consolidated net sales during the year ended December 31, 2011, 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) of $189.2 million, $180.3 million and $174.0 million at December 31, 2011,
2010 and 2009, respectively, is excluded from the definition of long-lived assets, as are goodwill and
certain other non-current assets.
Net sales
Long-lived assets
(millions of dollars)
2011
2010
2009
2011
2010
2009
United States . . . . . . . . . . . . . . . . . . . $1,674.0 $1,451.1 $1,090.4 $ 492.6 $ 466.6 $ 469.4
Europe:
Germany . . . . . . . . . . . . . . . . . . . . .
Hungary . . . . . . . . . . . . . . . . . . . . .
France . . . . . . . . . . . . . . . . . . . . . . .
Other Europe . . . . . . . . . . . . . . . . .
Total Europe . . . . . . . . . . . . . . . . . . .
South Korea . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . .
Other foreign . . . . . . . . . . . . . . . . . . .
2,200.0
503.2
363.0
917.8
3,984.0
471.7
416.6
568.4
1,839.9
418.3
318.7
546.1
3,123.0
358.0
330.6
390.1
1,419.9
292.4
229.5
282.9
2,224.7
212.4
184.1
250.2
420.4
56.9
63.2
194.6
735.1
124.5
148.0
164.1
447.5
53.0
63.0
173.7
737.2
94.8
104.9
139.1
500.0
58.4
72.9
138.1
769.4
69.1
66.1
116.3
Total
. . . . . . . . . . . . . . . . . . . . . . . . $7,114.7 $5,652.8 $3,961.8 $1,664.3 $1,542.6 $1,490.3
Sales to Major Customers
Consolidated net sales to a single customer (including their subsidiaries), which exceeded 10% of
our total net sales, were to Volkswagen of approximately 19% for the years ended December 31,
2011 and 2010 and 22% for the year ended December 31, 2009; and to Ford of approximately 12%,
11%, and 12% for the years ended December 31, 2011, 2010 and 2009, respectively. Both of the
Company’s reporting segments had significant sales to Volkswagen and Ford in 2011, 2010 and
2009. Accounts receivable from these customers at December 31, 2011 comprised approximately
20% ($237.6 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 net sales in any of the years presented.
Sales by Product Line
Sales of turbochargers for light-vehicles represented approximately 26% of total net sales for the
years ended December 31, 2011 and 2010, respectively, and 27% of total net sales for the year
ended December 31, 2009. 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 net sales in any of
the years presented.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interim Financial Information (Unaudited)
(millions of dollars, except per share amounts)
Quarter ended
Mar-31
Jun-30
Sep-30 Dec-31
Year
Mar-31
Jun-30
Sep-30 Dec-31
Year
2011
2010
Net sales . . . . . . . . . . . . . . . . . . . . $1,730.4 $1,818.8 $1,791.8 $1,773.7 $7,114.7 $1,286.8 $1,421.7 $1,410.9 $1,533.4 $5,652.8
4,559.5
Cost of sales . . . . . . . . . . . . . . . . .
1,461.7
1,387.6
1,441.0
5,704.3
1,146.3
1,414.0
1,048.3
1,137.6
1,227.3
Gross profit . . . . . . . . . . . . . . . .
342.8
357.1
350.8
359.7
1,410.4
238.5
275.4
273.3
306.1
1,093.3
Selling, general and
administrative expenses . . . . .
Other (income) expense . . . . . . . .
165.1
(1.6)
157.7
(28.9)
Operating income . . . . . . . . . . .
179.3
228.3
151.4
0.6
198.8
146.8
21.8
191.1
621.0
(8.1)
797.5
130.3
1.6
106.6
137.8
20.3
117.3
150.2
0.1
123.0
148.3
0.4
157.4
566.6
22.4
504.3
Equity in affiliates’ earnings, net
of tax . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . .
Interest expense and finance
(8.4)
(1.0)
(8.1)
(1.2)
(11.5)
(1.3)
(10.2)
(1.3)
(38.2)
(4.8)
(9.3)
(0.6)
(10.0)
(0.6)
(10.5)
(0.6)
(9.8)
(1.0)
(39.6)
(2.8)
charges . . . . . . . . . . . . . . . . . . .
18.4
20.5
18.5
17.2
74.6
14.2
14.2
18.4
22.0
68.8
Earnings before income taxes
and noncontrolling
interest . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . .
Net earnings . . . . . . . . . . . . . . .
Net earnings attributable to the
noncontrolling interest, net of
tax . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable of
170.3
40.9
129.4
217.1
49.8
167.3
193.1
46.4
146.7
185.4
58.2
127.2
765.9
195.3
570.6
102.3
20.9
81.4
113.7
26.0
87.7
115.7
4.2
111.5
146.2
30.6
115.6
477.9
81.7
396.2
4.9
5.3
5.1
5.2
20.5
5.2
4.9
4.8
3.9
18.8
BorgWarner Inc.(a)
. . . . . . . . $ 124.5 $ 162.0 $ 141.6 $ 122.0 $ 550.1 $
76.2 $
82.8 $ 106.7 $ 111.7 $ 377.4
Earnings per share — basic . . . . $
Earnings per share — diluted . . . $
1.13 $
1.00 $
1.49 $
1.31 $
1.30 $
1.15 $
1.12 $
1.00 $
5.04 $
4.45 $
0.65 $
0.63 $
0.72 $
0.68 $
0.95 $
0.87 $
1.00 $
0.89 $
3.31
3.07
(a) The Company’s results were impacted by the following:
(cid:129) Quarter ended December 31, 2011: The Company incurred $21.5 million in expense associated
with the loss on sale of the tire pressure monitoring business,
including costs related to the
divestiture, and a write-down of a portion of the ignitor and electronic business. The Company
recorded $1.4 million of tax benefit associated with the disposals and $4.1 million of tax expense
related to an intercompany disposal transaction.
(cid:129) Quarter ended June 30, 2011: The Company recorded a $29.1 million patent
infringement
settlement gain, net of legal costs incurred, which was partially offset by $11.0 million of additional
tax expense. Additionally, the Company recorded a $6.2 million related to tax adjustments resulting
from a change in state corporate income tax legislation as well as an adjustment of the Company’s
tax accounts as a result of the closure of certain tax audits.
(cid:129) Quarter ended September 30, 2010: The Company recorded a $21.2 million foreign tax credit
valuation allowance reversal.
(cid:129) Quarter ended June 30, 2010: The Company recorded an $8.0 million BERU-Eichenauer Equity
investment gain and $28.0 million environmental litigation settlement.
(cid:129) Quarter ended March 31, 2010: The Company recorded a $2.5 million Medicare Part D tax
adjustment.
100
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Not applicable.
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, 2011, the Company’s internal control over financial reporting is effective based on
those criteria. Refer to Item 7 of this report for “Report of Management on Internal Control Over
Financial Reporting.”
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, 2011 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.
Item 9B. Other Information
Not applicable.
101
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 2012 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
its 2012 Annual Meeting of Stockholders under
Information with respect to director and executive compensation that appears in the Company’s
the captions “Director
proxy statement
Compensation,”
“Executive
Compensation,” “Compensation Discussion and Analysis,” “Restricted Stock and Stock Units,” “Long
Term Incentives,” and “Change of Control Employment Agreements” is incorporated herein by this
reference and made a part of this report.
for
“Compensation Committee Interlocks and Insider Participation,”
Item 12. Security Ownership and Certain Beneficial Owners and Management and Related
Stockholder 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 2012 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 2012 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 2012 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.
Item 15. Exhibits and Financial Statement Schedules
PART IV
102
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.
SIGNATURES
BORGWARNER INC.
By:
/S/
TIMOTHY M. MANGANELLO
Timothy M. Manganello
Chairman and Chief Executive Officer
Date: February 14, 2012
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 14th day of February, 2012.
Signature
Title
/S/ TIMOTHY M. MANGANELLO
Timothy M. Manganello
Chairman and Chief Executive Officer
(Principal Executive Officer) and Director
/S/ ROBIN J. ADAMS
Robin J. Adams
/S/ JAN A. BERTSCH
Jan A. Bertsch
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
Ernest J. Novak, Jr.
/S/ RICHARD O. SCHAUM
Director
Richard O. Schaum
/S/ THOMAS T. STALLKAMP
Director
Thomas T. Stallkamp
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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
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).
(incorporated by reference to
Amended and Restated By-Laws of
Exhibit 3.2/4.2 to the Company’s Registration Statement on Form S-3 (no. 333-163928
filed on February 18, 2010).
registrant
Certificate of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4.3 to the Company’s Registration
Statement 333-172198 filed on February 11, 2011).
Certificate of Ownership and Merger Merging BorgWarner
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).
Inc.
Indenture, dated as of February 15, 1999 between Borg-Warner Automotive, Inc. and The
Bank of New York Mellon Trust Company, N.A.
(successor in interest to The First
National Bank of Chicago), as trustee (incorporated by reference to Exhibit No. 4.5 to the
Company’s Registration Statement No. 333-172198 filed on February 11, 2011).
Indenture, dated as of September 23, 1999 between Borg-Warner Automotive, Inc. and
The Bank of New York Mellon Trust Company, N.A. (successor in interest to Chase
Manhattan Trust Company, National Association), as trustee (incorporated by reference
to Exhibit No. 4.6 to the Company’s Registration Statement 333-172198 filed on
February 11, 2011).
Form of First Supplemental Indenture between the registrant and The Bank of New York
Mellon Trust Company, N.A., as the indenture trustee (incorporated by reference to
Exhibit 4.7 to the Company’s Registration Statement 333-172198 filed on February 11,
2011).
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 4.8 to the Company’s Registration Statement 333-172198 filed on
February 11, 2011).
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 4.9 to the Company’s the Company’s Registration
Statement 333-172198 filed on February 11, 2011).
Form of Convertible Note Hedge confirmation between BorgWarner Inc. and Bank of
(incorporated by reference to Exhibit 10.1 to the Company’s Current
America, N.A.
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).
A-1
Exhibit
Number
10.4
10.5
10.6
10.7
10.8
10.9
†10.10
†10.11
†10.12
†10.13
†10.14
†10.15
Description
Form of Warrant confirmation between BorgWarner Inc. and Morgan Stanley & Co.
Incorporated, as its agent)
International Plc (represented by Morgan Stanley & Co.
(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 June 30, 2011, among BorgWarner Inc., as borrower, the
Administrative 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 June 30,
2011).
Guaranty dated as of June 30, 2011 among Bank of America, N.A., as Administrative
Agent and the Company’s subsidiaries that are parties thereto (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 30, 2011).
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
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).
Inc., as the collection agent,
Amendment No. 1 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.
to Wachovia Bank, National
(successor by merger
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).
Second Amendment dated as of July 26, 2011, to the BorgWarner Inc. Amended and
Restated 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
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).
A-2
Exhibit
Number
†10.16
†10.17
†10.18
†10.19
†10.20
†10.21
†10.22
†10.23
†10.24
†10.25
†10.26
†10.27
†10.28
10.29
10.30
Description
Form of BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan Restricted
the
Stock Agreement
Company’s Current Report on Form 8-K filed February 12, 2008).
for Employees (incorporated by reference to Exhibit 10.1 of
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).
First Amendment dated as of July 27, 2011, to BorgWarner Inc. 2005 Executive Incentive
Plan as amended and restated effective January 1, 2009 (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2011).
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).
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 (incorporated by reference to Exhibit 10.24 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2010.
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)).
A-3
Exhibit
Number
10.31
10.32
10.33
21.1
23.1
31.1
31.2
32.1
Description
Assignment of Trademarks and License Agreement (incorporated by reference to Exhibit
the Company’s Quarterly Report on Form 10-Q for the quarter ended
No. 10.0 of
September 30, 1994).
Amendment
reference to Exhibit No. 10.23 of
December 31, 1998).
to Assignment of Trademarks and License Agreement
the Company’s Form 10-K for
(incorporated by
the year ended
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).
Subsidiaries of the Company.*
Independent Registered Public Accounting Firm’s Consent.*
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.*
Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.*
Section 1350 Certifications.*
* Filed herewith.
† Indicates a management contract or compensatory plan or arrangement.
A-4
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BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
borgwarner.com