2012 Annual Report on Form 10 - K
Technology Leadership
Customer & Geographic Diversity
Financial Strength & Discipline
BorgWarner Letter to Stockholders
B o rg W a r n e r V i s i o n
To be the global technology leader in powertrain solutions
B o r g W a r n e r M i s s i o n
Develop leading powertrain technologies that improve
fuel economy, emissions and performance
B o r g W a r n e r B e l i e f s
Respect for Each Other
BorgWarner must operate in a climate of openness,
Personal Integrity
We at BorgWarner demand uncompromising ethical
trust, and cooperation, in which each of us freely
standards in all we do and say. We are committed
grants others the same respect and decency we
to doing what is right — in good times and in bad.
seek for ourselves. We expect open, honest, and
We are accountable for the commitments we make.
timely communication. As a global company, we
We are, above all, an honorable company of
invite and embrace the diversity of all our people.
honorable people.
Power of Collaboration
BorgWarner is both a community of entrepreneurial
businesses and a single enterprise. Our goal is
Responsibility to
Our Communities
BorgWarner is committed to good corporate
to preserve the freedom each of us needs to find
citizenship. We strive to supply goods and services
personal satisfaction while building a strong busi-
of superior value to our customers; to create jobs
ness that comes from unity of purpose. True unity
that provide meaning for those who do them; and to
is more than a melding of self-interests; it results
contribute generously of our talents and our wealth
when goals and values are shared.
in the communities in which we do business.
Passion for Excellence
BorgWarner chooses to be a leader — in serv-
ing our customers, advancing our technologies,
and rewarding all who invest in us. To sustain our
leadership, we relentlessly 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.
FEb
r u a r y 2 0 1 3
Timothy M. Manganello, Chairman
James Verrier, President and Chief Executive Officer
Dear Shareholder
M y L a sT sh a rEhO LdEr LE T T Er
The year 2012 was another strong year for our company in which we achieved record results.
As always, our performance reflects the dedicated execution of our entire team in the face of
uncertainty in the global economy. As I begin the next chapter of my life, I am very pleased that
BorgWarner remains well positioned to continue on its strong growth trajectory that we have
routinely produced since our company’s formation in 1993. Our successful business strategy
will continue to be based on three guiding principles: technology leadership, customer and
geographic diversity, and financial strength and discipline.
a LO Ok baCk
I am very proud of what our team accomplished over the years. I have had a gratifying career
at BorgWarner that started when PT Components-Link Belt was acquired by a BorgWarner
subsidiary in 1988. Throughout my career at our company, I assumed several rewarding roles in
sales, business development, operations and general management that ultimately led me to my
7
9
.
4
$
5
4
.
4
$
Earnings
Performance*
Per Diluted Share
*Excludes special items.
4
4
.
2
$
7
0
.
2
$
7
1
.
2
$
4
0
.
2
$
2
0
.
3
$
0
4
.
0
$
appointment to CEO in 2003.
'05 '06 '07 '08 '09 '10
‘11 ‘12
BorgWarner’s success has always been underpinned by our dedicated team of employees, who
thrived within the collaborative, results-driven culture that successive management teams have
strived to create, maintain and expand. This has allowed our company to prosper through various
transitions, and it will continue to do so, given our highly qualified pool of managers that develop
as they progress through the company. I learned many things from my predecessor, John Fiedler,
whose vision and leadership meant that the company was in a strong position when I became
CEO. I believe that through the efforts of the entire team, I was able to continue that legacy as we
refocused the company on better fuel economy, lower emissions and higher performance-oriented
products. I am sure that James Verrier, our new CEO, will lead the company to future success.
While I played a part in this process, my success was driven by the entire team, and in particular,
my partnership with Robin Adams, our current Vice Chairman and Chief Administrative Officer.
As many of you know, Robin worked alongside me as our Chief Financial Officer until last year.
Robin’s contributions have been instrumental in making BorgWarner the company it is today.
Going forward, James and Ron Hundzinski, Robin’s successor as CFO, will be no different. As
Sales Growth
Billions of Dollars
1
.
7
$
2
.
7
$
7
.
5
$
3
.
5
$
3
.
5
$
6
.
4
$
3
.
4
$
0
.
4
$
'05 '06 '07 '08 '09 '10
‘11 ‘12
“ As I step back from management of BorgWarner, I reflect on our record of shareholder value creation with a sense of satisfaction. I am personally gratified that, even after ten years of repeated successful execution, the culture of value creation and focus on future trends remain intact.” B o rGW
Ar nEr
S
t o c k h o lD ErS l
Et
tEr
2 0 1 2
a proven leader, James is another great example of BorgWarner’s ability
BorgWarner has a long history of providing the right technology at the
to develop its senior leadership team. Under his stewardship, I am confi-
right time in every product category we supply. This success has been
dent the BorgWarner team will continue to build upon the progress made
built on our ability to anticipate the needs of both our OEM customers
throughout our company’s history.
and vehicle drivers around the world. This isn’t limited to passenger
k Ey a C C O M P Li s hM EnTs
BorgWarner’s technology leadership, strong global presence, financial
discipline and focus on attracting and cultivating talented people have
been instrumental to our long-term success and will continue to drive
our business going forward.
The transformation that has occurred over the last several decades
is remarkable. In 1995, we were a small company with a market
capitalization of approximately $500 million. BorgWarner more than
doubled in size under John Fiedler’s successful leadership, amassing
a market capitalization of over $1 billion by the time I became the new
CEO. Building on our success, BorgWarner is now a global technology
leader in powertrain solutions with a market capitalization of nearly
$9 billion and a bright future as the company continues to lead the
industry in powertrain technology.
Over the years, our sales profile has become increasingly diverse.
The demand for our technology pulls BorgWarner into every major
market across our entire product portfolio. As a truly global company,
we partner with every major automotive original equipment manufac-
turer (“OEM”) in the world, in every major region of the world.
vehicles; we have continued to increasingly supply the commercial
vehicle market in recent years. BorgWarner has either led or has created
technology waves in the industry from automatic transmissions in
the 1950s to dual-clutch transmissions and turbochargers today.
BorgWarner was one of the first auto suppliers to primarily focus on
fuel economy and emissions improvements, a powertrain trend in
which our company will continue to play a major role in the future.
The awards and recognition we have received for our technologies,
customer quality and delivery are a true testament to our industry
leadership. For example, BorgWarner has received numerous Auto-
motive News PACE (Premier Automotive Suppliers’ Contribution to
Excellence) awards over the years, which are recognized around the
world as a symbol of excellence acknowledging automotive suppliers
for superior innovation, technological advancement and business per-
formance. Since 2005, BorgWarner has won six PACE awards, three
partnership & collaboration awards and one environmental award.
The success continues, as three BorgWarner technologies have been
named finalists for the 2013 PACE awards. We are proud of our record
and pleased to have our technologies in the final competition once
again. With these innovations, BorgWarner has become one of the
most decorated companies in the history of the PACE Awards.
In 2003, less than half of our business was focused outside of North
America. BorgWarner now generates approximately 75% of sales
2 0 1 2 hi g hLi g hTs
outside of North America, which is a testament to our global expansion.
From a macroeconomic perspective, 2012 was a challenging year. The
Over the last ten years, our sales have grown where new powertrain
production environment in Europe, our largest market, was weak. This
technology was valued the most, primarily in Europe. However, over
was also true for most of the commercial vehicle markets around the
the last six years, we have seen a surge in demand for our products
world. However, BorgWarner’s sound financial results underscored our
in Asia, particularly China, and we expect this to continue. As we look
operational proficiency and ability to manage costs during challenging
ahead, we expect our growth in Asia to outpace our growth in the
times. Across three key growth and profitability metrics—sales, earn-
rest of the world. And, our diverse customer base has experienced a
ings and operating income margin—we achieved all-time records in
notable shift from over reliance on a handful of North American custom-
2012 on a comparable basis; a tremendous accomplishment consider-
ers, to today when only two OEMs represent more than 10% of sales.
ing the weak market conditions in which it was achieved.
innoVAt1onyears
Over the last 10 years Tim Manganello’s leadership has guided BorgWarner to
unprecedented success. During that time, the company’s sales revenue grew from
$2.7 billion in 2002 to $7.2 billion in 2012 and our global presence expanded to 57
locations in 19 countries. Through his commitment to technology BorgWarner
has achieved significant industry recognition culminating in 6 PACE Awards,
3 Collaboration Awards and 1 Environmental Award.
M i
lE St o nE S
2003 First To Market With DCT–
Launched DualTronic® transmission modules
with VW/Audi changing the landscape of the
automatic transmission market in Europe
2004 R2S® Turbocharger Debut –
Launched the first regulated two-stage turbo-
charger for the light vehicle market with BMW
B o rGW
Ar nEr
S
t o c k h o lD ErS l
Et
tEr
2 0 1 2
We continue to deliver industry-leading shareholder returns. During
turbochargers, dual-clutch transmission technology, variable cam timing
the year, our stock appreciated 12% and reached another all-time
systems and emissions products. With the development of our fuel-
high of $87.45 in March. Furthermore, total shareholder return for
efficient technologies, we have outpaced the growth of the industry
BorgWarner shareholders over the last five years was approximately
to meet the increasing needs of the global market. We expect this
50%, compared with 9% for both our peer group and the S&P 500,
to continue as the regional mix of our backlog is aligned with this
providing outstanding results for you, our shareholders.
worldwide trend.
During the year, our strong balance sheet and cash flow enabled
Overall, the European market accounts for thirty percent of our ex-
us to execute a number of important initiatives:
pected new business compared with forty-five percent in the previous
• We repurchased approximately 4.2 million shares in 2012, as we
continued to opportunistically return capital to shareholders.
• We divested our spark plug business, which was a small non-core
segment of the BERU operations acquired by BorgWarner in 2005.
The divestiture allows us to focus on expanding the core BERU
Systems products: glow plugs, diesel cold start systems and other
gasoline ignition technologies.
• We continued to reinvest in our business in 2012 as we increased
capacity for dual clutch transmission modules in Europe, engine
timing systems in Asia, transfer cases in North America, and turbo-
chargers all over the world.
All of this was done while maintaining our investment grade credit
three-year net new business. Europe remains a leader in the adop-
tion of new powertrain technology; however the general economic
slowdown in the region has reset volume expectations in that market.
Fifty percent of our new business is in Asia, which continues to expand
in importance for our company, not only for its rapid growth, but also for
its demand for leading edge technologies. More specifically, approxi-
mately thirty-two percent of our expected new business is in China as
our sales to the world’s fastest growing market continue to accelerate.
Twenty percent of our backlog is in North America, including eleven
percent with the North American domestic OEMs, where we see inten-
sified customer focus on programs aimed at improved fuel economy
and lower emissions.
rating, which is a clear signal that our balance sheet remains strong
In China, we are well positioned for growth as our strong brand is
and provides opportunities for the future.
s E T Ti n g ThE s T a gE F Or COnTi n uEd grOwTh
built on relationships with every major OEM in China, both Chinese-
Western OEM joint ventures and domestic manufacturers. In addition,
we have developed relationships with the leading domestic Chinese
OEMs that are now bringing new technologies to China. Our advanced
With our broad geographic and customer diversification, as well
technologies help them offer features and options that were typically
as a strong portfolio of innovative products, the future is bright for
available only on imported vehicles. For example, we recently opened
BorgWarner. To highlight part of our continued growth, in November
a new manufacturing facility and engineering center in Ningbo. Our latest
2012 we announced $2.3 billion of expected net new powertrain
manufacturing expansion increases our existing product lines and
business over the next three years (2013-2015). This backlog of net
enhances our ability to produce products for our customers locally. Our
new business encompasses some of the most promising technologies
newest engineering center expands BorgWarner’s global network of
and geographies in the auto sector and is representative of how
technical centers and allows us to better support our local Chinese and
BorgWarner is leading the way in important powertrain developments
global customers. BorgWarner has delivered advanced technologies to
around the world.
We continue to experience increased demand for our company’s
advanced powertrain technologies, such as gasoline and diesel
the Chinese market for nearly 20 years and we look forward to continu-
ing our growth in China over the next 20 years.
2005 BERU Acquisition – Acquired
a majority stake in Beru AG establishing
BorgWarner as a leader in diesel cold start
technology, electronic controls for engines
and sensors
First Automotive News PACE Award –
for the DualTronic® transmission system.
PACE Awards honor superior innovation,
technological advancement and business
performance among automotive suppliers
2006 Ningbo, China Campus Opens
– A new manufacturing campus becomes the
launching point of BorgWarner’s rapid expan-
sion in China
2008 DCT To China – Established a
joint venture with 12 leading Chinese auto-
makers to produce DualTronic® transmission
modules in China
2007 Won a Record Five Awards –
at the Automotive News PACE Awards – two
finalists, two PACE OEM collaboration honors
and a PACE innovation award for its variable
turbine geometry turbocharger technology
Won Two Automotive News PACE Awards
– for innovation and environmental sustain-
ability for the regulated two-stage (R2S®)
turbocharging technology
2009 Two More Automotive News
PACE Awards – for the cam torque actu-
| c o n t i n u e d o n n e x t p a g e
borgwarner.com
T hE r Oa d ahEa d
Over the long-term, fuel economy and emissions improvements will re-
main key objectives for automakers around the world and BorgWarner’s
product portfolio is very much synonymous with these trends. There-
fore, the adoption of such products such as downsized turbocharged
engines, automatic transmissions, EGR systems and enhanced engine
timing systems should continue to drive growth for our company.
We expect that more of our components and modules will be added
to smaller engines to improve fuel economy and lower emissions as
regulations are making these essential technologies for the future. We
expect our products to be key components for the fuel economy and
• Accelerate the pace of INNOVATION and product leadership into
new technologies, markets and geographic regions
• Consistently drive profitable sales GROWTH at least 10 percentage
points above the global industry growth rate
• Be the supplier / strategic partner of choice for our CUSTOMERS,
while meeting our company objectives
• Realize a QUALITY operating system that focuses on zero defects
• Continuously improve the STRUCTURAL EFFICIENCY
of BorgWarner
• Ensure we have the right TALENT in the right locations to carry out
our strategies
emissions strategies of tomorrow and OEMs to continue to rely on
• Protect, nurture and sustain the unique and SUCCESSFUL
BorgWarner as a partner.
CULTURE of BorgWarner
Looking ahead, we believe increased demand for the electrification of
vehicle systems provides another growth opportunity for our company.
More specifically, there will be opportunities in both stop-start and
hybrid technologies, which should employ BorgWarner technology in
combination with electrification.
Aside from passenger vehicles, opportunities for both on-road and
off-road commercial vehicles are also important parts of our future.
These vehicles face the same global challenges of fuel economy
improvement and emissions reduction that passenger vehicles face.
Having already established a strong reputation for reliability and
performance, BorgWarner is at the forefront of innovation for
applications in this market.
E nT ErPr i sE s Tr a T Eg iEs
Our innovative offerings and capabilities continue to enhance our mar-
ket position as a leading supplier of highly engineered components and
systems for powertrain applications worldwide. As James takes over as
CEO, our senior leadership believes our company’s continued success
lies in our ability to apply principles from our past accomplishments
to today’s initiatives. The eight Enterprise Strategies that will guide
BorgWarner to 2020 therefore remain unchanged:
• Supplement organic growth with MERGERS & ACQUISITIONS to
achieve our product, technology, customer and geographic goals
si g n i n g O F F…
As I step back from management of BorgWarner, I reflect on our record
of shareholder value creation with a sense of satisfaction. I am person-
ally gratified that, even after ten years of repeated successful execution,
the culture of value creation and focus on future trends remain intact.
Building on the collaborative efforts of our entire BorgWarner team, I
look forward with enthusiasm and confidence to following the future
success of the company. Led by an outstanding management team, we
have almost 20,000 dedicated people driving the future of our company.
Technology leadership has been the cornerstone of our company’s
success, and will remain the top priority going forward. The team
will continue to drive our company forward, building on the strong
foundation currently in place. As I sign off with my last shareholder
letter, I want to express my deepest appreciation to our employees,
customers, partners, suppliers, Board members and shareholders
for their support over the years, as well as their contributions to
BorgWarner’s enduring success.
M i
lE St o nE S|
c o n t i n u e d
ated (CTA) variable cam timing phaser (VCT)
and pressure sensor glow plug for diesel engines
and an honorable mention for the DualTronic®
performance package for the Nissan GTR. Won
a collaboration award with Ford for the 2009
Ford 3.0-liter Duratec V6 engine
2010 Dytech ENSA SL Acquired – A
leading producer of exhaust gas recirculation
coolers, a synergistic addition to BorgWarner’s
existing air management businesses
The eGearDrive® Transmission –
Named an Automotive News PACE
Awards finalist
2011 Haldex Traction Systems Acquired –
A globally recognized leader in all-wheel drive
technology for front-wheel drive based vehicles
Automotive News PACE Awards finalist –
recognizing Morse TEC’s variable cam timing
(VCT) with mid position lock technology
2012 Won an Automotive News PACE
Award – for BorgWarner’s turbocharger
with low-pressure exhaust gas recirculation
technology
2013 Three BorgWarner technologies
are finalists in the Automotive News
PACE Awards – including the regulated
three-stage turbocharging system, advanced
compact brushless actuator, and Visctronic®
high-speed reservoir system
Customer Diversity
Worldwide
2013 Sales outlook*
Asia
~27%* 21%**
Americas ~27%* 29%**
Europe ~46%* 50%**
*nSk-Warner included
**nSk-Warner excluded
14% VW/Audi
5% Ford
5% Daimler
4% renault
3% BMW
1% Fiat
1% GM
1% PSA
3% commercial Vehicles
9% other
toyota 5%
hyundai/kia 5%
nissan 1%
honda 1%
china 8%
other 7%
other 4%
commercial
Vehicles 6%
Ford 7%
chrysler 4%
GM 4%
Asian oEMs 2%
Total Shareholder
Return
$100 invested on 12/31/07
in stock or index including
reinvestment of dividends.
Fiscal year ending December 31.
BorgWarner inc.
S&P 500
$200
$150
$100
$50
$0
Peer Group
Sic 3714 Motor Vehicle Parts
12/07
12/08
12/09
12/10
12/11
12/12
Net New Business
2013 thru 2015
$2.3 Billion of net new Business – By Product
Engine – 78%
Drivetrain – 22%
5% ignition Systems
5% thermal Systems
6% Emissions Systems
14% Engine timing and Vct
20% Gas turbochargers
28% Diesel turbochargers
5% traditional transmission
components
6% All-Wheel Drive
11% Dct Modules
Engine
grOuP
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 in development.
k Ey TE Ch nO L Og iEs
Engine
Group Sales
Millions of Dollars
M
1
5
0
,
5
$
M
3
1
9
4
$
,
M
1
6
0
,
4
$
M
2
6
8
,
3
$
M
3
8
8
,
2
$
'08
'09
'10
'11
'12
Drivetrain
grOuP
regulated
two-Stage
turbocharger
cooling
Systems
cam torque
Actuated Variable
cam timing
Diesel
cold-Start
technology
Exhaust Gas
recirculation
Engine
timing
Chain Products Global leader in the design and manufacture of engine timing chain systems and
chain for drivetrain systems. Products include engine timing chain, variable cam timing, crankshaft and
camshaft sprockets, tensioners, guides and snubbers, HY-VO® front-wheel drive transmission chain
and four-wheel drive chain for light vehicles.
Emissions Systems A global leader in the design and supply of exhaust gas recirculation (EGR)
systems, electric air pumps, and advanced actuators for enhanced engine performance, fuel economy,
and reduced emissions.
Thermal Systems Systems for thermal management designed to improve engine cooling, and reduce
emissions and fuel consumption.
Turbochargers Leading designer and manufacturer of turbochargers for passenger cars, light trucks and
commercial vehicles. Systems enhance fuel efficiency, reduce emissions and enhance vehicle performance.
BERU Systems A worldwide leading supplier of diesel cold-start technology and a designer and
manufacturer of ignition technology for gasoline vehicles. Also designer and manufacturer of elec-
tronic control units and sensor technology that provide more comfort and stability for applications in
various engine and vehicle functions.
The Drivetrain Group harnesses a legacy of more than 100 years as an industry innovator in
transmission and all-wheel drive technology. The group is leveraging its understanding of pow-
ertrain clutching technology to develop interactive control systems and strategies for all types
of torque management.
k Ey TE Ch nO L Og iEs
Drivetrain
Group Sales
Millions of Dollars
M
9
9
2
,
2
$
M
5
8
0
,
2
$
M
1
1
6
1
$
,
M
6
2
4
1
$
,
M
4
9
0
1
$
,
'08
'09
'10
'11
'12
Dualtronic™
transmission
clutch Modules
GenerationV
All-Wheel
Drive
All-Wheel Drive
transfer cases
transmission
one-Way
clutches
transmission
control
Modules
transmission
Friction
Products
Torque Management Leading global designer and producer of torque management products including
coupling systems for front-wheel drive vehicles and transfer cases for rear-wheel drive applications,
focused on electronically controlled torque management devices that will enhance stability, security
and drivability of passenger cars, crossover vehicles, SUVs and light trucks.
Transmission Products A global designer and manufacturer of automatic transmission components and
modules and supplier to virtually every major automatic transmission manufacturer in the world. Friction
and mechanical products include dual clutch modules, friction clutch modules, friction and steel 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.
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, 2012
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, 2012 (the last business day of the
most recently completed second fiscal quarter) was approximately $7.4 billion.
As of February 8, 2013, the registrant had 115,639,856 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 2013 Annual Meeting of Stockholders . . . . . . . .
Part of Form 10-K
into which
incorporated
Part III
BORGWARNER INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2012
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
PART I
ITEM 1. BUSINESS
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 17, “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, 2012, 2011 and 2010 are as follows:
(millions of dollars)
Year Ended December 31,
2012
2011
2010
Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Drivetrain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inter-segment eliminations . . . . . . . . . . . . . . . . . . . . . . . . .
$4,913.0
2,298.7
(28.5)
$5,050.6
2,084.5
(20.4)
$4,060.8
1,611.4
(19.4)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,183.2
$7,114.7
$5,652.8
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
$871 million, $817 million and $779 million for the years ended December 31, 2012, 2011 and 2010,
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 gasoline and
diesel engines and alternative powertrains. The Engine Group’s products include: turbochargers,
timing devices and chains, emissions systems, 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
4
increasing demand for diesel engines in light vehicles, which typically use turbochargers, and for
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, 2012, 2011 and 2010, respectively. The Company currently supplies light
vehicle turbochargers to many OEMs including BMW, Daimler, Fiat, Ford, General Motors, Hyundai,
PSA, Renault and Volkswagen. The Company also supplies commercial vehicle turbochargers to
Daimler, Deutz, MAN and Navistar 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®, regulated 3-stage turbocharging systems (“R3S”), 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 and its R3S turbocharger system, an
industry first, to BMW for its new high-powered 3.0 liter diesel engine. Also, the Company supplies
VTG turbochargers to Renault’s 1.6 liter R9M diesel engine featured in the Mégane Scénic and to
Great Wall for its 2.0 liter diesel engine. Ford selected BorgWarner’s leading gasoline turbocharger
technology for its new 1.6 liter and 2.0 liter four-cylinder EcoBoost engines, the latter of which
launched in the U.S. in the 2012 Explorer and 2012 Edge models and in China in the Ford Mondeo.
The Engine Group’s timing systems products include timing chain, variable cam timing (“VCT”),
crankshaft and camshaft sprockets, tensioners, guides and snubbers, HY-VO® front-wheel drive
(“FWD”) transmission chain and four-wheel drive (“4WD”) chain 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 product technology is its VCT with mid position lock, which allows a
range of camshaft positioning thereby enabling greater control over airflow and the
greater
opportunity to improve fuel economy, reduce emissions and improve engine performance 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 drivetrain systems. The
Company’s HY-VO® chain is used to transfer power from the engine to the drivetrain in FWD
transmissions and also in 4WD transfer cases, which distributes power between a vehicle’s front and
rear wheels.
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 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
that control fans to sense and respond to multiple cooling requirements. The Engine Group also
5
manufactures and markets polymer fans for engine cooling systems. The Company’s thermal
products provide improved vehicle fuel economy and reduced engine emissions while minimizing
parasitic horsepower loss. The Company has been awarded the “standard position” (the OEM-
designated preferred supplier of component systems available to the end-customer) at 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 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 is
expected to enable high-performing, lean burning engines to significantly improve fuel economy and
reduce emissions compared with conventional combustion technologies.
In 2010, 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 Company sold its tire pressure monitoring and spark plug businesses during the fourth
quarter of 2011 and third quarter of 2012, respectively. The sale of these businesses will allow the
Company to continue to focus on expanding BERU Systems’ core products of glow plugs, diesel cold
start systems and other gasoline ignition technologies.
Drivetrain
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, dual clutch transmissions (“DCT”), automated manual transmissions and
continuously variable 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
and steel plates, transmission bands, torque converter clutches, one-way clutches and torsional
vibration dampers. Controls products feature electro-hydraulic solenoids for standard and high
pressure hydraulic systems, transmission solenoid modules and dual clutch control modules. The
Company’s 50%-owned joint venture in Japan, NSK-Warner KK (“NSK-Warner”),
is a leading
producer of friction plates and one-way clutches in Japan and China.
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 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
Company is working on several other DCT programs with OEMs around the world. BorgWarner
6
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 DCT modules for the Chinese market. The joint venture’s operations are located in
Dalian, China and production is scheduled to begin in 2013. The Company owns 66% of the joint
venture.
The Drivetrain Group’s torque management products include rear-wheel drive (“RWD”)/all-wheel
drive (“AWD”) transfer case systems, FWD/AWD coupling systems and cross-axle coupling systems.
The Company’s focus is on developing electronically controlled torque management devices and
systems that will benefit vehicle dynamics, fuel economy and stability.
Transfer cases are installed on RWD based light
trucks, SUVs, 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. There
are many variants of the Company’s transfer case technology in the market today, including Torque
On-Demand (TOD®), chain-driven, gear-driven, 1-speed and 2-speed transfer cases. The Company’s
transfer cases are featured on the Ford F-150 and on the Dodge Ram light-duty and heavy-duty
trucks.
The Company is involved in the AWD market for FWD based vehicles with couplings that use
electronically-controlled clutches to distribute power to the rear wheels instantly as traction is
required. The Company’s latest coupling innovation,
the Centrifugal Electro-Hydraulic (“CEH”)
Actuator, which is utilized to engage the clutches in the coupling, produces outstanding vehicle
stability and traction while promoting better fuel economy with reduced weight. The CEH Actuator is
found in the AWD couplings featured in several current FWD/AWD vehicles including the Audi A3,
Skoda Octavia, Volvo XC60 and VW Golf.
In 2011, the Company acquired the Traction Systems division of Haldex Group, a leading
provider of innovative AWD products for the global vehicle industry headquartered in Stockholm,
Sweden. This acquisition has accelerated BorgWarner’s growth in the global AWD market as it
continues to shift toward FWD based vehicles. The acquisition will continue to add industry leading
AWD technologies for FWD based vehicles, with a strong European customer base, to BorgWarner’s
portfolio of front- and rear-wheel drive based products. This enables BorgWarner to offer global
customers a broader range of AWD solutions to meet their vehicle needs.
7
Joint Ventures
As of December 31, 2012, the Company had nine joint ventures in which it had a less-than-100%
ownership interest. Results from the six 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.
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
Percentage
owned by
the
Company
Year
organized
Location of
operation Joint venture partner
Fiscal 2012
sales (millions
of dollars)
(a)
Unconsolidated:
NSK-Warner
Turbo Energy
Limited(b)
Transmission components
1964
50% Japan/China NSK Ltd.
Turbochargers
1987
32.6% India
Sundaram Finance
Limited; Brakes India
Limited
Jayant Dave
$696.7
$167.5
$
6.7
BERU Diesel Start
Glow Plugs
1996
49% India
Systems Pvt. Ltd.
Consolidated:
BorgWarner
Transmission components
1987
60% Korea
NSK-Warner
$253.4
Transmission
Systems Korea
Ltd.(c)
Divgi-Warner Private
Limited
Transfer cases and
synchronizer rings
1995
60% India
Divgi Metalwares, Ltd.
$ 23.8
Borg-Warner
Fans and fan drives
1999
70% China
Shenglong (Ningbo)
Co. Ltd.
BorgWarner
Transfer cases
2000
80% China
TorqTransfer
Systems Beijing Co.
Ltd.
SeohanWarner Turbo
Turbochargers
2003
71% Korea
Systems Ltd.
BorgWarner United
Transmission
Systems Co. Ltd.
Transmission components
2009
66% China
Ningbo Shenglong
Automotive
Powertrain Systems
Co., Ltd.
Beijing Automotive
Components Stock
Co. Ltd.
Korea Flange
Company
China Automobile
Development United
Investment Co., Ltd.
$ 33.1
$ 81.7
$123.3
$
2.0
(a) All sales figures are for the year ended December 31, 2012, except NSK-Warner and Turbo
Energy Limited. NSK-Warner’s sales are reported for the 12 months ended November 30, 2012.
Turbo Energy Limited’s sales are reported for the 12 months ended September 30, 2012.
(b) The Company made purchases from Turbo Energy Limited totaling $24.2 million, $22.5 million
and $22.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
(c) BorgWarner
Inc. owns 50% of NSK-Warner, which has a 40% interest
Transmission Systems Korea Ltd. This gives the Company an additional
ownership percentage of 20%. This results in a total effective ownership interest of 80%.
in BorgWarner
indirect effective
8
Financial Information About Geographic Areas
During the year ended December 31, 2012, approximately 74% of the Company’s consolidated
net sales were outside the United States (“U.S.”), attributing sales to the location of production rather
than the location of the customer.
Refer to Note 17, “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, 2012, approximately 80% of the Company’s net sales were
for
light-vehicle applications; approximately 9% were for commercial vehicle applications;
approximately 6% were for off-highway vehicle applications; and approximately 5% 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,
2012
2011
2010
Volkswagen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ford . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17% 19% 19%
13% 12% 11%
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 OEM production
schedules. The Company typically ships its products directly from its plants to the OEMs.
Sales and Marketing
Each of the Company’s businesses 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
customers.
In addition, the sales and marketing employees of our Engine and Drivetrain reporting segments
often work together
the business units. The
development of DualTronic®, the Company’s wet-clutch and control-system technology for a new-
concept automated transmission, is an example of a successful collaboration.
to explore cross-development opportunities for
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
9
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. This function
manages a venture capital fund that was created by the Company as seed money for new innovation
and collaboration across businesses.
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,
2012
2011
2010
Gross R&D expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$309.3
(43.4)
$294.7
(51.0)
$233.2
(48.2)
Net R&D expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$265.9
$243.7
$185.0
Net R&D expenditures as a percentage of net sales were 3.7%, 3.4% and 3.3% in the years
ended December 31, 2012, 2011 and 2010, 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.
Intellectual Property
The Company has more than 4,200 active domestic and foreign patents and patent applications
pending or under preparation, and receives royalties from licensing patent rights to others. While it
considers its patents on the whole to be important, the Company does not consider any single patent,
any group of related patents or any single license essential to its operations in the aggregate or to the
operations of any of the Company’s business groups individually. The expiration of the patents
individually and in the aggregate is not expected to have a material effect on the Company’s financial
position or future operating results. The Company owns numerous trademarks, some of which are
valuable, but none of which are essential to its business in the aggregate.
10
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:
Product Type: Drivetrain
Torque transfer: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transmission:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Names of Competitors
Cummins Turbo Technology
Honeywell
IHI
Mitsubishi Heavy Industries (MHI)
Behr
Denso
Modine
Pierburg
Denso
Iwis
Schaeffler Group
Tsubaki Group
Behr
Horton/Sachs
Usui
Xuelong
Bosch
Delphi
Eberspacher Catem
NGK
Names of Competitors
American Axle
GKN Driveline
JTEKT
Magna Powertrain
Bosch
Dynax
FCC
Schaeffler Group
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.
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.”
11
Workforce
As of December 31, 2012, the Company had a salaried and hourly workforce of approximately
19,100 (as compared with approximately 19,250 at December 31, 2011), of which approximately
5,500 were in the U.S. Approximately 20% 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 2016.
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 remained volatile in 2012. 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
the Consolidated Financial
2013 and beyond. Refer
Statements in Item 8 of this report for information related to the Company’s hedging activities.
to Note 10, “Financial
Instruments,” of
For 2013, 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, 2013.
Name
Age
Position with the Company
Timothy M. Manganello . .
Robin J. Adams . . . . . . . . .
James R. Verrier . . . . . . . .
Ronald T. Hundzinski
. . . .
Steven G. Carlson . . . . . . .
Stefan Demmerle . . . . . . . .
Brady D. Ericson . . . . . . . .
Joseph F. Fadool
. . . . . . .
John J. Gasparovic . . . . . .
Robin Kendrick . . . . . . . . .
Pete B. Kohler . . . . . . . . . .
Frederic B. Lissalde . . . . .
Janice K. McAdams . . . . .
. . . . . . .
Thomas J. McGill
63
59
50
54
62
48
41
46
55
48
57
45
54
46
Executive Chairman of the Board
Vice Chairman of the Board, Executive Vice President
and Chief Administrative Officer
President and Chief Executive Officer
Vice President and Chief Financial Officer
Vice President and Controller
Vice President
Vice President
Vice President
Vice President, General Counsel and Secretary
Vice President
Vice President
Vice President
Vice President, Human Resources
Vice President and Treasurer
Mr. Manganello has been Executive Chairman of the Board since June 2003 and was Chief
Executive Officer of the Company from February 2003 through December 2012. Mr. Manganello also
served as the Board Chairman of the Federal Reserve Bank of Chicago, Detroit branch from 2006
through 2011 and is a director of Bemis Company, Inc. and Zep Inc.
Mr. Adams has been Vice Chairman of the Board since March 2012 and Executive Vice President
and Chief Administrative Officer of the Company since April 2004. From April 2004 through March
the Company and has been a member of
2012, he was also the Chief Financial Officer of
BorgWarner’s Board of Directors since April 2005. Mr. Adams is also a director of Carlisle Companies
Inc.
Mr. Verrier has been President, Chief Executive Officer and member of BorgWarner’s Board of
Directors since January 1, 2013. From March 2012 through December 2012, he was the President
and Chief Operating Officer of the Company. From January 2010 to March 2012, he was Vice
President of the Company and President and General Manager of BorgWarner Morse TEC Inc. He
was Vice President and General Manager, Passenger Car of BorgWarner Turbo Systems Inc. from
January 2006 to January 2010.
Mr. Hundzinski has been Vice President and Chief Financial Officer of the Company since March
2012. From August 2011 through March 2012, he was Vice President and Treasurer of the Company.
From April 2010 until 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. Carlson has been Vice President and Controller of the Company since May 2012. From
August 2011 through April 2012, he was Vice President of Finance of BorgWarner Transmissions
Systems Inc. From June 2009 until August 2011, he was Vice President of Finance of BorgWarner
Morse TEC Inc. From November 2006 until June 2009, he was Group Controller of BorgWarner
Thermal Systems Inc.
13
Dr. Demmerle has been Vice President of the Company and President and General Manager of
BorgWarner TorqTransfer Systems Inc. since September 2012. From July 2010 to September 2012,
he was Vice President, Engine Control Electronics at Continental Automotive Systems. From
December 2007 to June 2010, he was President and CEO of Continental Diesel Systems US LLC
(formerly known as Siemens Diesel Systems Technology LLC).
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.
Mr. Fadool has been Vice President of the Company and President and General Manager of
BorgWarner Morse TEC Inc. since May 2012. He was Vice President of the Company and President
and General Manager of BorgWarner TorqTransfer Systems Inc. from June 2011 until May 2012. 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.
Mr. Gasparovic has been Vice President, General Counsel and Secretary of the Company since
January 2007.
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 & Manufacturing Holdings, Inc. 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, President and General
Manager of BorgWarner Thermal Systems since February 2013 and President Global Commercial
Market Development and Strategy since March 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.
Ms. McAdams has been Vice President, Human Resources of the Company since March 2010.
She was Director of Compensation and Benefits from May 2005 to March 2010.
Mr. McGill has been Vice President and Treasurer of the Company since May 2012. He was Vice
President of Finance of BorgWarner Turbo Systems from April 2010 until May 2012. He was Vice
14
President of Finance of BorgWarner Thermal Systems Inc. from June 2009 to April 2010. He was Vice
President of Finance TorqTransfer Systems Inc. from February 2009 to June 2009. He was Director of
Audit & Analysis of the Company from December 2006 to February 2009.
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.
OEM customers,
faced with intense international competition, have expanded their worldwide
sourcing of components. As a result, we have experienced competition from suppliers in other parts
of the world that enjoy economic advantages, such as lower labor costs, lower health care costs,
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 have become a permanent feature of
our business environment. To maintain our profit margins, we seek price reductions from our
improve production processes to increase manufacturing efficiency, update product
suppliers,
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
15
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,
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 material increases. The discontinuation of our ability to pass-through or hedge
increasing commodity costs could 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. If these
supply interruptions occur, it could adversely affect our business.
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.
16
Part of our workforce is unionized which could subject us to work stoppages.
As of December 31, 2012, approximately 20% 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 2016. 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.
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, product liability, 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
17
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 sales 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 that 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.
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 2012, approximately 74% 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.
Risks related to our customers
We rely on sales to major 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. We base our growth projections, in part,
on commitments made by our customers. These commitments generally renew yearly during a
program life cycle.
If actual production orders from our customers do not approximate such
commitments 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 2012 to Volkswagen
and Ford constituted approximately 17% and 13%, respectively, of our 2012 consolidated net sales.
18
We are sensitive to the effects of our major customers’ labor relations.
All three of our primary North American customers, Ford, Chrysler and General Motors, have
major union contracts with the United Automobile, Aerospace and Agricultural Implement Workers of
America. Because of domestic 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
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 other factors 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
19
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.
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 2012 fiscal year that remain unresolved.
20
Item 2. Properties
In addition to its 14 U.S.
As of December 31, 2012,
the Company had 57 manufacturing, assembly, and technical
locations worldwide.
locations, the Company has seven 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 Hungary and one location in each of Brazil, France,
Ireland, Italy, Monaco, Poland, Portugal, Spain, 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
Kirchheimbolanden, Germany
Ludwigsburg, Germany
Markdorf, Germany
Muggendorf, Germany
Oroszlany, Hungary
Rzeszow, Poland
Tralee, Ireland
Valenca, Portugal (b)
Vigo, Spain
Aoyama, Japan
Changwon, South Korea (b)
Chennai, India
Chonburi, Thailand
Chungju-City, South Korea
Kakkalur, India
Manesar, India (b)
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 13, “Contingencies,” to
the 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, 2013, there were 2,196 holders of record of Common Stock.
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
Company’s common stock for each quarter in 2011 and 2012 were:
Quarter Ended
March 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$81.07
$82.28
$81.98
$77.70
$87.45
$87.00
$78.18
$74.88
$64.22
$65.78
$57.39
$54.59
$64.28
$62.62
$60.17
$60.53
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
$200
$150
$100
$50
$0
2007
2008
2009
2010
2011
2012
* $100 invested on 12/31/2007 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)
2007
2008
2009
2010
2011
2012
100.00
100.00
100.00
100.00
45.53
63.00
41.02
49.25
69.95
79.67
74.87
73.41
152.36
134.21
150.80
91.67
126.38
93.61
94.34
108.59
109.28
114.58
103.92
127.13
(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 has authorized the purchase of up to 24.8 million shares of
the Company’s common stock. As of December 31, 2012, the Company had repurchased 21,669,252
shares under the Common Stock Repurchase Program. All shares purchased under this authorization
have been and will continue to be repurchased in the open market at prevailing prices and at times
and in amounts to be determined by management as market conditions and the Company’s capital
position warrant. The Company may use Rule 10b5-1 plans to facilitate share repurchase.
Repurchased shares will be deemed common stock held in treasury and may subsequently be
reissued for general corporate purposes.
23
Employee transactions include restricted shares withheld to offset statutory minimum tax
withholding that occurs upon vesting of restricted shares. The BorgWarner Inc. Amended and
Restated 2004 Stock Incentive Plan provides that the withholding obligations be settled by the
Company retaining stock that is part of the Award. Withheld 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
to Section 12 of
that are registered pursuant
December 31, 2012:
ISSUER REPURCHASES OF EQUITY SECURITIES
Period
Month Ended October 31, 2012
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
Common Stock Repurchase Program . . . . . .
Employee transactions . . . . . . . . . . . . . . . . . .
— $ —
$65.82
657
—
—
Month Ended November 30, 2012
Common Stock Repurchase Program . . . . . . 1,188,100
Employee transactions . . . . . . . . . . . . . . . . . .
$63.14
— $ —
1,188,100
—
Month Ended December 31, 2012
Common Stock Repurchase Program . . . . . .
Employee transactions . . . . . . . . . . . . . . . . . .
311,900
$66.05
— $ —
311,900
—
4,630,748
3,442,648
3,130,748
NOTE: All purchases made on the open market.
Equity Compensation Plan Information
As of December 31, 2012, 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 . . . .
2,467,429
Equity compensation plans not
approved by security holders . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . .
2,467,429
$42.46
$ —
$42.46
1,935,283
—
1,935,283
24
Item 6. Selected Financial Data
(millions of dollars, except share and per share data)
2012 (a)
2011 (a)
2010 (a)
2009 (a)
2008 (b)
Year Ended December 31,
Operating results
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,183.2 $ 7,114.7 $ 5,652.8 $ 3,961.8 $ 5,263.9
Operating income (c)
7.3
Net earnings (loss) attributable to
. . . . . . . . . . . . . . . . . . . $ 752.9 $ 797.5 $ 504.3 $
50.8 $
BorgWarner Inc. (c) . . . . . . . . . . . . . . . . . . . $ 500.9 $ 550.1 $ 377.4 $
3.31 $
3.07 $
(35.6)
(0.31)
Earnings (loss) per share — basic . . . . . . . . . $
Earnings (loss) per share — diluted . . . . . . . $
(0.31)
Net R&D expenditures . . . . . . . . . . . . . . . . . . $ 265.9 $ 243.7 $ 185.0 $ 155.2 $ 205.7
Capital expenditures, including tooling
27.0 $
0.23 $
0.23 $
4.45 $
4.17 $
5.04 $
4.45 $
outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 407.4 $ 393.7 $ 276.6 $ 172.0 $ 369.7
Depreciation and tooling amortization . . . . . $ 260.2 $ 252.2 $ 224.5 $ 234.6 $ 259.7
Number of employees . . . . . . . . . . . . . . . . . .
13,800
Financial position
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 715.7 $ 359.6 $ 449.9 $ 357.4 $ 103.4
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,400.8 $ 5,958.6 $ 5,555.0 $ 4,811.4 $ 4,644.0
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,067.2 $ 1,329.1 $ 1,180.4 $ 842.3 $ 780.3
Common share information
Cash dividend declared and paid per
12,500
17,500
19,250
19,100
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
— $
0.12 $
0.44
Market prices of the Company’s common
stock
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87.45 $ 82.28 $ 73.43 $ 36.78 $ 55.99
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60.17 $ 54.59 $ 33.43 $ 14.62 $ 15.00
Weighted average shares outstanding
(thousands)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,652
121,377
109,229
128,468
114,155
129,575
116,522
116,939
116,007
116,007
(a) Refer to Note 15, “Earnings per Share,” in Item 8 of this report regarding the impact of the
Company’s 3.50% convertible senior notes and associated call options and warrants on the
Company’s earnings per share for the years ended December 31, 2012, 2011 and 2010. For the
year ending December 31, 2009, the impact of the Company’s 3.50% convertible senior notes
and associated warrants were not included in the calculation of diluted earnings per share
because including them, under the if-converted method, would have increased 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) Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” for discussion of non-comparable items impacting the years ending December 31,
2012, 2011 and 2010. 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, 2012, 2011 and 2010 is as
follows:
(millions of dollars, except per share data)
Year Ended December 31,
2012
2011
2010
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,183.2
5,716.3
$7,114.7
5,704.3
$5,652.8
4,559.5
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . .
Other (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,466.9
629.3
84.7
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 for income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest,
752.9
(42.8)
(4.7)
39.4
761.0
238.6
522.4
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.5
20.5
18.8
Net earnings attributable to BorgWarner Inc.
. . . . . . . .
$ 500.9
$ 550.1
$ 377.4
Earnings per share — diluted . . . . . . . . . . . . . . . . . . . . . . .
$
4.17
$
4.45
$
3.07
26
Non-comparable items impacting the Company’s earnings per diluted share and net earnings
The Company’s earnings per diluted share were $4.17, $4.45 and $3.07 for the years ended
December 31, 2012, 2011 and 2010, 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,
2012
2011
2010
Non-comparable items:
Loss from disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement related obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patent infringement settlement, net of legal costs incurred . . .
Environmental litigation settlement . . . . . . . . . . . . . . . . . . . . . . .
Medicare Part D tax law change . . . . . . . . . . . . . . . . . . . . . . . . .
Reversal of foreign tax credit valuation allowance . . . . . . . . . . .
BERU—Eichenauer equity investment gain . . . . . . . . . . . . . . . .
$(0.37)
(0.17)
(0.10)
(0.16)
—
—
—
—
—
$(0.19)
—
—
0.05
0.14
—
—
—
—
$ —
—
—
—
(0.14)
(0.02)
0.17
0.04
Total impact of non-comparable items per share — diluted:
. .
$(0.80)
$ — $ 0.05
A summary of non-comparable items impacting the Company’s net earnings for the years ended
December 31, 2012, 2011 and 2010 is as follows:
Year ended December 31, 2012:
(cid:129) The Company incurred $39.7 million of expense and $5.7 million of tax expense associated
with the loss on sale of the spark plug business, primarily related to the write-down of prior
purchase price accounting adjustments included within the disposal group. The Company also
recorded restructuring expense of $27.4 million, primarily associated with the disposal and
future requirements of BERU’s on-going business, which was partially offset by a tax benefit of
$7.7 million.
(cid:129) Retirement related obligations of $17.3 million are comprised of a $5.7 million loss resulting
from the settlement of a portion of the Muncie Plant’s pension obligation and an $11.6 million
expense associated with the retirement of certain Named Executive Officers. These obligations
were partially offset by a $6.1 million tax benefit.
(cid:129) The Company incurred $19.8 million of tax expense resulting from other tax adjustments.
These other tax adjustments primarily include tax expense resulting from the settlement of
certain tax audits, the Company’s second quarter 2012 decision to change its cash repatriation
assertion for some of its foreign subsidiaries and a correction of the income taxes payable
balance, partially offset by a tax benefit related to certain countries enacting changes to their
respective statutory income tax rates.
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 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.
27
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.
The Company’s effective tax rate, after giving tax effect to the non-comparable items shown
above, was 26.8%, 24.8% and 21.7% for the years ended December 31, 2012, 2011 and 2010,
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, 2012 and 2011:
North America* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Worldwide* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BorgWarner year over year net sales change . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BorgWarner year over year net sales change, excluding the impact of
Years Ended
December 31,
2012
2011
17% 9%
(6)% 5%
11% —
6% 3%
1% 26%
acquisitions, divestitures and foreign currencies . . . . . . . . . . . . . . . . . . . . . . . .
6% 17%
* Estimated data provided by IHS Automotive.
Net sales for the year ended December 31, 2012 totaled $7,183.2 million, a 1.0% increase from
the year ended December 31, 2011. Excluding the impact of the first quarter 2011 acquisition of
Haldex Traction Holding AB, fourth quarter of 2011 and third quarter of 2012 dispositions and the
impact of weaker foreign currencies, primarily the Euro, net sales increased approximately 6%. This
increase occurred while estimated light vehicle production was up 6% worldwide, primarily driven by
a 17% increase in North America and a 19% increase in Japan, partially offset by a 6% decrease in
Europe from the year ended December 31, 2011.
Net sales for the year ended December 31, 2011 totaled $7,114.7 million, a 25.9% increase from
the year ended December 31, 2010 and better than the then estimated worldwide market production
increase of 3%. 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.
28
The following table details our results of operations as a percentage of net sales:
(percentage of net sales)
Year Ended December 31,
2012
2011
2010
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0%100.0%100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79.6
80.2
80.7
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest, net of tax . . . . . . . . . . .
20.4
8.8
1.2
10.4
(0.6)
(0.1)
0.5
10.6
3.3
7.3
0.3
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
Net earnings attributable to BorgWarner Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.0% 7.7% 6.7%
Cost of sales as a percentage of net sales was 79.6%, 80.2% and 80.7% in the years ended
December 31, 2012, 2011 and 2010, respectively. The Company’s material cost of sales was
approximately 50% of net sales in the years ended December 31, 2012, 2011 and 2010. 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, 2012
and December 31, 2011 compared to December 31, 2010 as a result of increased net sales and
successful cost reduction actions. Gross profit as a percentage of net sales was 20.4%, 19.8% and
19.3% in the years ended December 31, 2012, 2011 and 2010, respectively.
Selling, general and administrative expenses (“SG&A”) was $629.3 million, $621.0 million and
$566.6 million or 8.8%, 8.7% and 10.0% of net sales for the years ended December 31, 2012, 2011
and 2010, respectively. SG&A remained relatively flat during the year ended December 31, 2012
compared to the year ended December 31, 2011 as a result of increased research and development
(“R&D”) costs included in SG&A, offset by continued cost management. The increase in SG&A for the
year ended December 31, 2011 compared with the year ended December 31, 2010 of $54.4 million
was primarily due to the $58.7 million, or 31.7%, increase in R&D costs. The SG&A decrease as a
percentage of net sales was primarily driven by the significant year over year increase in net sales.
R&D costs, net of customer reimbursements, was $265.9 million, or 3.7% of net sales, in the year
ended December 31, 2012, compared to $243.7 million, or 3.4% of net sales, and $185.0 million, or
3.3% of net sales, in the years ended December 31, 2011 and 2010, 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.
Other (income) expense was $84.7 million, $(8.1) million and $22.4 million for the years ended
December 31, 2012, 2011 and 2010, respectively. This line item is primarily comprised of transactions
discussed within the subtitle “Non-comparable items impacting the Company’s earnings per diluted
share and net earnings” above.
29
Equity in affiliates’ earnings, net of tax was $42.8 million, $38.2 million and $39.6 million in the
years ended December 31, 2012, 2011 and 2010, 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 increase in equity in affiliates’ earnings for the year ended
December 31, 2012 compared with the year ended December 31, 2011 is primarily due to year over
year growth in the Japanese auto market resulting in improved earnings from the Company’s interest
in NSK-Warner. 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. 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 $39.4 million, $74.6 million and $68.8 million in the
years ended December 31, 2012, 2011 and 2010, respectively. The decrease in interest expense for
the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily
due to the April 2012 settlement of the Company’s convertible senior notes, the ineffectiveness of
cross-currency swaps and higher capitalized interest associated with increased long-term capital
projects. The increase in interest expense for the year ended December 31, 2011 compared with the
year ended December 31, 2010 was primarily due to higher debt levels.
Provision for income taxes The provision for income taxes resulted in an effective tax rate of
31.4% for the year ended December 31, 2012, compared with rates of 25.5% and 17.1% for the
years ended December 31, 2011 and 2010, respectively.
The Company’s provision for income taxes for the year ended December 31, 2012 includes a net
tax benefit of $2.0 million associated with the loss from disposal activities and restructuring expense.
The $2.0 million net benefit is comprised of a tax benefit of $7.7 million associated with restructuring
expense, partially offset by tax expense of $5.7 million resulting from the sale of the spark plug
business. Additionally, the provision includes a tax benefit of $6.1 million related to retirement related
obligations and additional tax expense of $19.8 million resulting from other tax adjustments. These
other tax adjustments include $5.9 million of tax expense primarily resulting from the settlement of
certain tax audits, $7.5 million of tax expense associated with the Company’s second quarter 2012
decision to change its cash repatriation assertion for some of its foreign subsidiaries, $4.7 million of
tax benefit related to certain countries enacting changes to their respective statutory income tax rates
and $11.1 million of U.S. tax expense to correct the income taxes payable balance. Excluding the
impact of these non-comparable items, the Company’s annual effective tax rate associated with
ongoing operations for 2012 was 26.8%.
In January 2013, the United States Congress passed an extension of the federal research and
development tax credit and other international tax provisions through December 31, 2013. As a result,
we expect that our tax provision for the first quarter of fiscal year 2013 will include a discrete tax
benefit which will reduce our effective tax rate for the quarter and, to a lesser extent, the full year.
The effective tax rate of 25.5% for the year ended December 31, 2011 includes $11.0 million of
tax expense associated with the Company’s patent infringement settlement, $2.7 million of tax
expense associated with the loss on disposals 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. 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 these non-comparable items, the Company’s annual
effective tax rate associated with ongoing operations for 2011 was 24.8%.
30
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
impact of the items mentioned above, the Company’s annual effective tax rate associated with
ongoing business operations was 21.7%.
Net earnings attributable to the noncontrolling interest, net of tax of $21.5 million for the year
ended December 31, 2012 increased by $1.0 million and $2.7 million compared to 2012 for the years
ended December 31, 2011 and 2010,
respectively. The increases during the years ended
December 31, 2012 and December 31, 2011 compared to the year ended December 31, 2010 are
primarily related to higher sales and earnings by the Company’s joint ventures.
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
its business initiatives. ROIC is comprised of Adjusted EBIT after
invested capital
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 ongoing operating income or loss.
Adjusted EBIT is the measure of segment income 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.
Net Sales
(millions of dollars)
Year Ended December 31,
2012
2011
2010
Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Drivetrain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inter-segment eliminations . . . . . . . . . . . . . . . . . . . . . . . . .
$4,913.0
2,298.7
(28.5)
$5,050.6
2,084.5
(20.4)
$4,060.8
1,611.4
(19.4)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,183.2
$7,114.7
$5,652.8
31
Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest (“Adjusted EBIT”)
(millions of dollars)
Year Ended December 31,
2012
2011
2010
Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Drivetrain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$786.4
209.1
$774.3
161.2
$537.9
137.0
Adjusted EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement related obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patent infringement settlement, net of legal costs incurred . . .
. . . . . . . . . . . . . . . . . . . . . . .
Environmental litigation settlement
BERU—Eichenauer equity investment gain . . . . . . . . . . . . . . . .
Corporate, including equity in affiliates’ earnings and stock-
based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense and finance charges . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes and noncontrolling interest
. .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest, net of
995.5
39.7
27.4
17.3
—
—
—
115.4
(4.7)
39.4
761.0
238.6
522.4
935.5
21.5
—
—
(29.1)
—
—
107.4
(4.8)
74.6
765.9
195.3
570.6
674.9
—
—
—
—
28.0
(8.0)
111.0
(2.8)
68.8
477.9
81.7
396.2
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.5
20.5
18.8
Net earnings attributable to BorgWarner Inc. . . . . . . . . . . . . .
$500.9
$550.1
$377.4
The Engine segment’s net sales for the year ended December 31, 2012 decreased $137.6
million, or 2.7%, and segment Adjusted EBIT increased $12.1 million, or 1.6%, from the year ended
December 31, 2011. Excluding the impact of the fourth quarter 2011 and third quarter 2012
dispositions and weaker foreign currencies, primarily the Euro, net sales increased approximately 4%
from the year ended December 31, 2011. This increase was primarily driven by global growth in most
major product groups. The segment Adjusted EBIT margin was 16.0% for
the year ended
December 31, 2012, up from 15.3% in the year ended December 31, 2011. The Adjusted EBIT margin
increase was primarily driven by continued cost management.
The Engine segment’s net sales for the year ended December 31, 2011 increased $989.8 million,
or 24.4%, and segment Adjusted 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 Adjusted 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 Adjusted EBIT margin increases were
primarily driven by strong global growth in all major product groups and continued cost management.
The Drivetrain segment’s net sales for the year ended December 31, 2012 increased $214.2
million, or 10.3%, and segment Adjusted EBIT increased $47.9 million, or 29.7%, from the year ended
December 31, 2011. Excluding the acquisition of Haldex Traction AB and the impact of weaker
foreign currencies, primarily the Euro, net sales increased approximately 13% from the year ended
December 31, 2011. This increase was primarily driven by strong global growth in all major product
groups. The segment Adjusted EBIT margin was 9.1% in the year ended December 31, 2012, up from
7.7% in the year ended December 31, 2011. The Adjusted EBIT margin increase was primarily driven
by strong global growth in all major product groups, operational improvements and continued cost
management.
32
The Drivetrain segment’s net sales for the year ended December 31, 2011 increased $473.1
million, or 29.4%, and segment Adjusted EBIT increased $24.2 million, or 17.7%, 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 Adjusted 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.
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 $115.4 million, $107.4 million and $111.0 million for the years ended December 31,
2012, 2011 and 2010, respectively.
Outlook
Based on weakening global economic conditions, particularly in Europe, our overall outlook for
2013 is cautious. The Company expects global production volumes to be slightly higher in 2013
compared with 2012. In Europe, our largest market, we expect production volumes to decline in 2013
compared with 2012. However, we expect that higher adoption rates of BorgWarner products around
the world will result in sales growth for the Company in 2013.
The Company maintains a positive long-term outlook for its global business and is committed to
investments to enhance its product leadership
new product development and strategic capital
strategy. The trends that are driving our long-term growth are expected to continue, including the
growth of direct
the increased adoption of
automated transmissions in Europe and Asia-Pacific, and the move to variable cam and chain engine
timing systems in Europe and Asia-Pacific.
injection diesel and gasoline engines worldwide,
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains various liquidity sources including cash and cash equivalents and the
the
unused portion of our multi-currency revolving credit agreement. At December 31, 2012,
Company had $715.7 million of cash, including $712.1 million of cash held by our subsidiaries outside
of the United States. Cash held by these subsidiaries is used to fund foreign operational activities and
future investments, including acquisitions. The vast majority of cash held outside the United States is
available for repatriation, however, doing so could result in increased foreign and U.S. federal, state
and local
income taxes. A deferred tax liability has been recorded for the portion of these funds
anticipated to be repatriated to the United States.
The Company’s $650 million multi-currency revolving credit facility, which includes a feature that
allows the Company’s borrowings to be increased to $1 billion, 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, 2012 and
expects to remain compliant in future periods. At December 31, 2012 and 2011, the Company had
outstanding borrowings of $140.0 million and $70.0 million, respectively, under this facility.
33
On April 9, 2009, the Company issued $373.8 million in convertible senior notes, which were
settled in April 2012 by delivering approximately 11.4 million shares of common stock held in treasury
to the note holders. The settlement resulted in a reduction in the current portion of long-term debt of
$373.8 million, a reduction in common stock held in treasury of $617.3 million and a reduction in
capital in excess of par value of $243.5 million.
In conjunction with the convertible senior note offering, the Company entered into a bond hedge
overlay, including both call options and warrants, at a net pre-tax cost of $25.2 million, effectively
raising the conversion premium to 50%, or approximately $38.61 per share. On April 16, 2012, the
Company settled the call option portion of
receiving approximately
6.5 million shares of its common stock. The settlement resulted in an increase to common stock held
in treasury of $503.9 million offset by an increase to capital in excess of par value of $503.9 million.
the bond hedge overlay,
During the third and fourth quarters of 2012, the Company settled the warrants included in the
bond hedge overlay, delivering approximately 4.9 million shares of its common stock held in treasury,
resulting in a reduction in common stock held in treasury of $338.5 million offset by a reduction to
capital in excess of par value of $338.5 million.
In addition to the credit facility, the Company’s universal shelf registration with the Securities and
Exchange Commission has an unlimited amount of various debt and equity instruments that could be
issued.
From a credit quality perspective, the Company has a credit rating of Baa2 from Moody’s. In April
2012, the Company’s credit rating was raised to BBB+ from BBB by both Standard & Poor’s and
Fitch Ratings. The current outlook from Moody’s, Standard & Poor’s and Fitch Ratings is stable. None
of the Company’s debt agreements require accelerated repayment in the event of a downgrade in
credit ratings.
Capitalization
(millions of dollars)
December 31,
2012
2011
Notes payable and short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
$ 239.1
4.3
823.8
$ 196.3
381.5
751.3
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt, net of cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,067.2
715.7
351.5
3,146.1
1,329.1
359.6
969.5
2,453.0
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,497.6
$3,422.5
Total debt, net of cash, to capital ratio . . . . . . . . . . . . . . . . . . . . . .
10.0%
28.3%
Balance sheet debt decreased by $261.9 million and cash on hand increased by $356.1 million
compared to December 31, 2011 primarily due to net cash provided by operating activities, net of
capital expenditures, and the Company’s settlement of its 3.50% convertible senior notes, which was
partially offset by share repurchases.
34
Total equity increased by $693.1 million in the year ended December 31, 2012 as follows:
(millions of dollars)
Balance, January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible bond settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared to noncontrolling stockholders . . . . . . . . . . . . . . . . . . . . . .
BorgWarner BERU Systems Korea Co., Ltd. acquisition . . . . . . . . . . . . . . . . .
$2,453.0
522.4
373.8
(295.9)
94.4
32.3
(18.9)
(15.0)
Balance, December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,146.1
Operating Activities
Net cash provided by operating activities was $878.7 million, $708.2 million and $538.9 million in
the years ended December 31, 2012, 2011 and 2010, respectively. The increase for the year ended
December 31, 2012 compared with the year ended December 31, 2011 primarily reflects improved
working capital management. The increase in the year ended December 31, 2011 compared to the
year ended December 31, 2010 primarily reflects higher earnings.
Investing Activities
Net cash used in investing activities was $345.2 million, $564.5 million and $429.5 million in the
years ended December 31, 2012, 2011 and 2010, respectively. The decrease in the year ended
December 31, 2012 compared with the year ended December 31, 2011 primarily reflects the cash
payment of $203.7 million made during the first quarter of 2011 for the acquisition of Haldex Traction
AB and the cash proceeds of $55.2 million received during the third quarter of 2012 from the sale of
the spark plug business, which was partially offset by increased capital expenditures. The increase in
cash used in investing activities in the year ended December 31, 2011 compared to the year ended
December 31, 2010 was primarily due to increased capital spending and higher payments for
businesses acquired, net of cash acquired. Year over year capital spending increases of $13.7 million
and $117.1 million during the years ended December 31, 2012 and December 31, 2011, respectively,
were primarily due to higher spending levels required to meet increased program launches worldwide.
Financing Activities
Net cash used in financing activities was $188.6 million, $219.7 million and $13.2 million for the
years ended December 31, 2012, 2011 and 2010, respectively. The $31.1 million decrease in the year
ended December 31, 2012 compared with the year ended December 31, 2011 was primarily driven by
decreased purchases of
treasury stock partially offset by an increase in dividends paid to
noncontrolling stockholders.
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.
35
The Company’s significant contractual obligation payments at December 31, 2012 are as follows:
(millions of dollars)
Total
2013
2014-2015
2016-2017 After 2017
Other postretirement benefits, excluding
pensions(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 297.3 $ 21.1
7.1
243.4
38.4
18.1
39.8
201.1
. . . . . . . . . . . . . .
Defined benefit pension plans(b)
Notes payable and long-term debt
. . . . . . . . . . . .
Projected interest payments(c) . . . . . . . . . . . . . . . .
Non-cancelable operating leases . . . . . . . . . . . . . .
Capital spending obligations . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Income tax payments(d)
101.0
1,071.0
339.4
68.7
39.8
201.1
$ 40.3
19.0
12.8
73.7
27.2
—
—
$ 37.6
18.3
290.0
66.1
20.0
—
—
$198.3
56.6
524.8
161.2
3.4
—
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,118.3 $569.0
$173.0
$432.0
$944.3
(a) Other postretirement 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 postretirement 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. Amount
contained in “After 2017” column is for unfunded plans and includes estimated payments through
2022. See Note 11 to the Consolidated Financial Statements for disclosures related to the
Company’s pension benefits.
(c) Projection is based upon actual fixed rates where appropriate, and a projected floating rate for
the variable rate portion of the total debt portfolio. The floating rate projection is based upon
current market conditions and rounded to the nearest 50th basis point (0.50%), which is 4.0% for
this purpose. Projection is also based upon debt being redeemed upon maturity.
(d) See Note 4 to the Consolidated Financial Statements for disclosures related to the Company’s
income taxes.
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 non-cancelable operating lease obligations at December 31,
2012 is $68.7 million. See Note 14 to the Consolidated Financial Statements for more information on
operating leases, including future minimum payments.
Pension and Other Postretirement 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,
2012, all legal funding requirements had been met. The Company contributed $18.0 million, $37.0
million and $25.1 million to its defined benefit pension plans in the years ended December 31, 2012,
2011 and 2010, respectively. The Company expects to contribute a total of $15 million to $25 million
into its defined benefit pension plans during 2013. Of the $15 million to $25 million in projected 2013
contributions, $7.1 million are contractual obligations, while the remaining payments are discretionary.
36
The funded status of all pension plans was a net unfunded position of $317.1 million and $236.4
million at December 31, 2012 and 2011, respectively. Of these amounts, $192.4 million and $128.7
million at December 31, 2012 and 2011, 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 postretirement benefits primarily consist of postretirement 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 postretirement benefits had an unfunded status of $220.5 million
and $251.0 million at December 31, 2012 and 2011, 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
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 did 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,
37
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. 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. A decision on the merits of the suit could be rendered sometime in 2013.
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 32 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; and remediation alternatives), the Company has an
accrual for indicated environmental
liabilities of $3.9 million at December 31, 2012. 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,
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.
in July 2010 regarding the personal
injury claims of
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
38
encapsulation and the manner of use lead the Company to believe that these products are highly
unlikely to cause harm. As of both December 31, 2012 and December 31, 2011, the Company had
approximately 16,000 pending asbestos-related product
the
approximately 16,000 outstanding claims at December 31, 2012, approximately half were pending in
jurisdictions that have undergone significant tort and judicial reform activities subsequent to the filing
of these claims.
respectively. Of
liability 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 2012, of the approximately 2,400 claims resolved, 308 (13%) resulted in payment being
made to a claimant by or on behalf of the Company. In the full year of 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.
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 against the Company and certain of
its historical general liability insurers. The court has issued a number of interim rulings and discovery
is continuing. The Company has entered into settlement agreements with some of its insurance
carriers, resolving their coverage disputes by agreeing to pay specified amounts to the Company. The
Company is vigorously pursuing the litigation against the remaining insurers.
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.
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 $235.8 million in defense and indemnity in advance
of insurers’ reimbursement and has received $124.8 million in cash and notes from insurers. The net
balance of $111.0 million, is expected to be fully recovered, of which approximately $20 million is
expected 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,
2011, insurers owed $109.8 million in association with these claims.
In addition to the $111.0 million net balance relating to past settlements and defense costs, the
Company has estimated a liability of $85.6 million for claims asserted, but not yet resolved and their
related defense costs at December 31, 2012. The Company also has a related asset of $85.6 million
39
to recognize proceeds from the insurance carriers, which is expected to be fully recovered. Receipt of
these proceeds is not expected prior to the resolution of the declaratory judgment action referred to
above, which, more-likely-than-not, will occur subsequent to December 31, 2013. At December 31,
2011, the comparable value of the accrued liability and associated insurance asset was $61.7 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,
2012
2011
Prepayments and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $28.8
32.9
85.6
Total insurance assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$85.6
$61.7
Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$36.5
49.1
$28.8
32.9
Total accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$85.6
$61.7
The 2012 increase in the accrued liability and associated insurance asset is primarily due to an
expected higher rate of claim settlement based on recent litigation claim activity.
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.
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.
40
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
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
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 valuation of the asset.
Goodwill and other indefinite-lived intangible assets During the fourth quarter of each year,
the Company qualitatively assesses its goodwill and indefinite-lived intangible assets assigned to
each of its reporting units. This qualitative assessment evaluates 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. Using this qualitative assessment,
the Company determines whether it is more-likely-than not the reporting unit’s fair value exceeds its
carrying value. If it is determined that it is not more-likely-than-not the reporting unit’s fair value
exceeds the carrying value, or upon a triggering event, including recent acquisition or divestiture
activity, the Company performs a quantitative, “step one,” goodwill impairment analysis.
During the fourth quarter of 2012, the Company performed a qualitative analysis on each
reporting unit and determined it was more-likely-than-not the fair value exceeded the carrying value of
these reporting units. For the reporting unit with recent 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.
41
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, 2012 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 the reporting unit being evaluated.
In addition to the above primary assumptions, the Company notes the following risks 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 2012 indicated the Company’s goodwill assigned to the reporting unit that was 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 the reporting unit 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
continued to decrease in conjunction with Company’s improved quality efforts and has trended as
follows:
the warranty accrual
(millions of dollars)
Year Ended December 31,
2012
2011
2010
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision as a percentage of net sales . . . . . . .
$7,183.2
33.7
$
$7,114.7
47.5
$
$5,652.8
39.3
$
0.5%
0.7%
0.7%
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,
2012
2011
2010
25 basis point decrease (income)/expense . . . . . . . . . . . . . . . . . .
25 basis point increase (income)/expense . . . . . . . . . . . . . . . . . . .
$(18.0)
$ 18.0
$(17.8)
$ 17.8
$(14.1)
$ 14.1
42
At December 31, 2012, the total accrued warranty liability was $64.9 million. The accrual
is
represented as $33.1 million in current liabilities and $31.8 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. 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. Management’s estimate of the loss for environmental liability was $3.9 million at December 31,
2012.
See Note 13 to the Consolidated Financial Statements for more information regarding
environmental accrual.
Pension and other postretirement defined benefits The Company provides postretirement
defined benefits to a number of
its current and former employees. Costs associated with
postretirement defined benefits include pension and postretirement health care expenses for
employees, retirees and surviving spouses and dependents.
The Company’s defined benefit pension and other postretirement plans are accounted for in
accordance with ASC Topic 715. The determination of the Company’s obligation and expense for its
pension and other postretirement 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.
In accordance with GAAP, actual results that differ from assumptions used are accumulated and
future periods. The primary assumptions affecting the Company’s
generally amortized over
accounting for employee benefits under ASC Topics 712 and 715 as of December 31, 2012 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
43
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, 2012, the Company used long-term rates of return on plan
assets ranging from 1.75% to 6.75% outside of the U.S. and 6.75% in the U.S.
Actual returns on U.S. pension assets were 11.0%, 3.7% and 14.6% for the years ended
December 31, 2012, 2011 and 2010, respectively, compared to the expected rate of return
assumption of 6.75% for the year ended December 31, 2012 and 7.50% for the years ended
December 31, 2011 and 2010, respectively.
Actual returns on U.K. pension assets were 10.0%, 3.3% and 13.3% for the years ended
December 31, 2012, 2011 and 2010, respectively, compared to the expected rate of return
assumption of 6.75% for the year ended December 31, 2012 and 7.50% for the years ended
December 31, 2011 and 2010, 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 6.75% to determine its pension and other benefit obligations as of December 31, 2012,
including weighted average discount rates of 3.67% in the U.S., 3.86% outside of the U.S., and
3.25% for U.S. other postretirement 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, 2012, the
Company used health care cost trend rates of 7.50%, declining to an ultimate trend rate of 5%
by the year 2019.
While the Company believes that these assumptions are appropriate, significant differences in
actual experience or significant changes in these assumptions may materially affect the Company’s
pension and other postretirement employee benefit obligations and its future expense.
The following table illustrates the sensitivity to a change in certain assumptions for Company
sponsored U.S. and non-U.S. pension plans on its 2013 pre-tax pension expense:
(millions of dollars)
Impact on
U.S. 2013
pre-tax pension
(expense)/income
Impact on
Non-U.S. 2013
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2.7)
1 percentage point increase in expected return on
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.7
$(4.9)
$ 4.9
$(1.8)
$ 1.8
* A 1 percentage point increase or decrease in the discount rate would have a negligible impact
on the Company’s U.S. 2013 pre-tax pension expense.
44
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 2013
pre-tax OPEB
interest
(expense)/income
1 percentage point decrease in discount rate . . . . . . . . . . . . . . . . . . . . . . . . . .
1 percentage point increase in discount rate . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2.4)
$ 2.4
The sensitivity to a change in the discount rate assumption related to the Company’s total 2013
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 postretirement benefit obligation . . . . . . . . . . . . . . . . . . . .
Effect on total service and interest cost components . . . . . . . . . . . . . . . .
$16.2
$ 0.5
$(14.3)
$ (0.5)
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.
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, 2012, 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,
45
See Note 4 to the Consolidated Financial Statements for more information regarding income
taxes.
New Accounting Pronouncements
In November 2012, the Financial Accounting Standards Board (“FASB”) amended ASC Topic
220, “Comprehensive Income,” requiring companies to disclose the income statement line items
impacted by the reclassification of comprehensive income (loss) into net earnings. This guidance is
effective retrospectively for interim and annual periods beginning on or after December 15, 2012. The
Company anticipates the adoption of this guidance will not have a material impact on its Consolidated
Financial Statements.
In December 2011, the 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 its 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, 2012, the amount of debt with fixed interest rates was 43.5% of total debt, including
the impact of the interest rate swaps. Our earnings exposure related to adverse movements in interest
rates is primarily derived from outstanding floating rate debt instruments that are indexed to floating
money market rates. A 10% increase or decrease in the average cost of our variable rate debt would
result in a change in pre-tax interest expense of approximately $1.6 million, $1.8 million and
$1.6 million in the years ended December 31, 2012, 2011 and 2010, respectively.
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 Chinese Yuan, the Euro, the Hungarian Forint, the Japanese Yen, the
46
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 $258.3 million and $280.4 million as of December 31, 2012 and 2011,
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, 2012,
the Company was holding foreign exchange derivatives with positive and negative fair market values
of $5.9 million and $9.8 million, respectively, of which $5.2 million in gains and $9.8 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, 2012, 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
The information in this report
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
is the responsibility of management. BorgWarner
Inc. and
Consolidated Subsidiaries (the “Company”) has in place reporting guidelines and policies designed to
ensure that the statements and other information contained in this report present a fair and accurate
financial picture of the Company. In fulfilling this management responsibility, we make informed
judgments and estimates conforming with accounting principles generally accepted in the United
States of America.
The
accompanying
Consolidated
Financial
Statements
have
been
audited
by
PricewaterhouseCoopers LLP, an independent registered public accounting firm.
The management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles in the
United States of America. The internal control process includes those policies and procedures that:
(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, 2012. In making this assessment, the Company’s management
used the criteria set
the Treadway
Commission (“COSO”) in Internal Control—Integrated Framework.
forth by the Committee of Sponsoring Organizations of
Based on management’s assessment and those criteria, we believe that, as of December 31,
2012, 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, 2012 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/ James R. Verrier
President and Chief Executive Officer
/s/ Ronald T. Hundzinski
Vice President and Chief Financial Officer
February 14, 2013
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 17, “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 Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
51
52
53
54
55
56
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of BorgWarner Inc.
financial
in all material
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly,
in all material respects, the financial position of BorgWarner Inc. and its subsidiaries at
December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2012 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, 2012, based on criteria established in Internal Control—Integrated Framework issued
the Treadway Commission (COSO). The
by the Committee of Sponsoring Organizations of
for maintaining effective
Company’s management is responsible for these financial statements,
internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Management’s Report on Internal Control over Financial Reporting
appearing under Item 9A. 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, Michigan
February 14, 2013
50
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(millions of dollars)
December 31,
2012
2011
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 715.7 $ 359.6
1,183.0
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
454.3
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58.5
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82.4
Prepayments and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,147.3
447.6
94.7
67.5
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,472.8
1,788.0
382.7
1,181.4
575.9
2,137.8
1,664.3
345.3
1,186.2
625.0
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,400.8 $5,958.6
LIABILITIES AND EQUITY
Notes payable and other short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 239.1 $ 196.3
381.5
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,297.8
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29.8
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.3
1,287.2
72.5
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities:
Retirement-related liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Total other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,603.1
823.8
1,905.4
751.3
509.7
318.1
827.8
457.0
391.9
848.9
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: (2012-123,023,159; 2011-121,315,705); outstanding shares:
(2012-115,572,699; 2011-108,514,462)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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: (2012-7,450,460 shares;
1.2
1.2
—
1,160.7
2,611.2
(121.3)
—
1,134.3
2,110.3
(150.8)
2011-12,801,243 shares)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(569.2)
(707.1)
Total BorgWarner Inc. stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,082.6
63.5
2,387.9
65.1
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,146.1
2,453.0
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,400.8 $5,958.6
See Accompanying Notes to Consolidated Financial Statements.
51
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Year Ended December 31,
2012
2011
2010
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,183.2 $ 7,114.7 $ 5,652.8
4,559.5
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,704.3
5,716.3
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . .
Other (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,466.9
629.3
84.7
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 for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest, net of
752.9
(42.8)
(4.7)
39.4
761.0
238.6
522.4
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.5
20.5
18.8
Net earnings attributable to BorgWarner Inc.
. . . . . . . . . . . . . . . . . $ 500.9 $ 550.1 $ 377.4
Earnings per share — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4.45 $
5.04 $
Earnings per share — diluted* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4.17 $
4.45 $
3.31
3.07
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112.652
121.377
109.229
128.468
114.155
129.575
* The Company’s diluted earnings per share for the years ended December 31, 2012, 2011 and 2010
includes the impact of the Company’s 3.50% convertible senior notes and associated warrants.
Refer to Note 15, “Earnings Per Share,” for further information on the diluted earnings per share
calculation.
See Accompanying Notes to Consolidated Financial Statements.
52
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(millions of dollars)
Net earnings attributable to BorgWarner Inc.
Other comprehensive income
Foreign currency translation adjustments
. . . . . . . . . . . . . . . . . . . . . . . . . $500.9 $550.1 $377.4
Year Ended December 31,
2012
2011
2010
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency loss reclassified into net earnings related to
disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in foreign currency translation adjustments . . . . . . . . .
Hedge instrument adjustments
Market value change of hedge instruments . . . . . . . . . . . . . . . . . . . . .
Income taxes associated with the market value change of hedge
instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss reclassified into net earnings . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes reclassified into net earnings . . . . . . . . . . . . . . . . . . . . .
Net change in hedge instruments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit postretirement plans
Net unrecognized gain (loss) arising during the period . . . . . . . . . . . .
Income taxes associated with net unrecognized gain (loss) arising
38.2
(62.2)
(63.6)
16.8
55.0
—
—
(62.2)
(63.6)
30.3
(9.2)
(14.3)
(10.4)
(8.8)
2.2
13.3
3.0
1.5
(1.0)
(5.7)
6.7
(6.2)
0.2
(13.6)
(60.8)
(45.3)
15.0
during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.2
12.8
(12.9)
Amortization of prior service benefit and unrecognized loss into net
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes reclassified into net earnings . . . . . . . . . . . . . . . . . . . . .
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes associated with acquisition . . . . . . . . . . . . . . . . . . . . . .
9.1
(3.1)
—
—
7.6
(2.7)
(2.0)
0.5
Net change in defined benefit postretirement plans . . . . . . . . . . . .
Other changes in comprehensive income, net of tax . . . . . . . . . . . . . . .
(38.6)
(0.2)
(29.1)
(0.1)
8.9
(3.2)
—
—
7.8
1.2
Total other comprehensive income attributable to BorgWarner Inc. . . .
29.5
(97.1)
(68.2)
Comprehensive income attributable to BorgWarner Inc. . . . . . . . . . . . . . . . .
Comprehensive income (loss) attributable to the noncontrolling interest . . .
530.4
2.8
453.0
(1.3)
309.2
2.5
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $533.2 $451.7 $311.7
See Accompanying Notes to Consolidated Financial Statements.
53
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
Year Ended December 31,
2012
2011
2010
OPERATING
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 522.4 $ 570.6 $ 396.2
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, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental litigation settlement, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
260.2
28.4
31.7
23.3
—
56.7
(10.7)
5.3
—
(13.0)
904.3
43.8
(5.3)
(15.4)
(27.1)
44.9
(66.5)
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
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
878.7
708.2
538.9
INVESTING
Capital expenditures, including tooling outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from asset disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for businesses acquired, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(393.7)
(407.4)
5.4
7.9
— (203.7)
25.0
56.8
(276.6)
6.8
(164.7)
5.0
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(345.2)
(564.5)
(429.5)
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 . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from accounts receivable securitization facility . . . . . . . . . . . . . . . . . . . . . . .
Payments for purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock options exercised, including the tax benefit . . . . . . . . . . . . . . . .
Taxes paid on employees’ restricted stock award vestings . . . . . . . . . . . . . . . . . . . . .
Purchase of noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital contribution from noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to noncontrolling stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.8
313.9
(246.4)
30.0
(295.9)
52.0
(18.1)
(15.0)
—
(21.9)
(188.6)
11.2
356.1
359.6
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
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 715.7 $ 359.6 $ 449.9
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57.0 $ 68.5 $ 53.4
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158.9 $ 175.5 $ 83.1
See Accompanying Notes to Consolidated Financial Statements.
54
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(millions of dollars, except share data)
Number of shares
BorgWarner Inc. stockholder’s equity
Issued
common
stock
Common
stock held
in treasury
Issued
common
stock
Capital in
excess of
par value
Treasury
stock
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Noncontrolling
interests
Balance, January 1, 2010 . . . . . . . . . 118,336,410 (1,498,855) $1.2
—
—
—
—
—
— (7,066,100) —
—
—
—
—
—
—
Dividends declared . . . . . . . . . . . . .
Stock option expense . . . . . . . . . .
Stock incentive plans . . . . . . . . . . .
Executive stock plan . . . . . . . . . . .
Net issuance of restricted stock . .
Purchase of treasury stock . . . . . .
Net earnings . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . .
Dytech Ensa, S.L. acquisition . . . .
—
—
—
—
1,749,796
—
—
525,297
269,896
—
—
—
—
Balance, December 31, 2010 . . . . . . 120,086,206 (7,769,762) $1.2
—
—
—
—
— (5,031,481) —
—
—
—
—
Dividends declared . . . . . . . . . . . . .
Stock incentive plans . . . . . . . . . . .
Executive stock plan . . . . . . . . . . .
Net issuance of restricted stock . .
Purchase of treasury stock . . . . . .
Net earnings . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . .
Capital contribution from
—
1,020,375
104,205
104,919
—
—
—
—
—
—
—
0.1
43.5
3.8
18.9
$1,034.1 $ (57.9) $1,193.4
—
—
(10.6)
—
—
—
— 377.4
—
—
—
—
—
—
22.6
11.5
—
— (325.7)
—
—
—
—
38.7
6.8
15.0
$1,100.4 $(349.5) $1,560.2
—
—
—
—
—
— 550.1
—
—
—
—
—
—
— (357.6)
—
—
noncontrolling interest . . . . . . . .
BorgWarner Vikas Emissions India
Private Limited acquisition . . . . .
—
—
—
—
—
—
—
(26.6)
—
—
—
—
Balance, December 31, 2011 . . . . . . 121,315,705 (12,801,243) $1.2
—
—
—
—
—
—
(241,250) —
— (4,155,694) —
—
— 11,382,771
Dividends declared . . . . . . . . . . . . .
Stock incentive plans . . . . . . . . . . .
Executive stock plan . . . . . . . . . . .
Net issuance of restricted stock . .
Purchase of treasury stock . . . . . .
Convertible bond settlement . . . . .
Convertible bond—hedge
—
777,925
538,180
391,349
—
52.0
39.3
21.2
$1,134.3 $(707.1) $2,110.3
—
—
—
—
—
—
—
—
—
(18.1)
— (295.9)
(243.5) 617.3
settlement
. . . . . . . . . . . . . . . . . .
— (6,489,698) —
503.9 (503.9)
—
Convertible bond—warrant
settlement
. . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . .
BorgWarner BERU Systems Korea
Co., Ltd. acquisition . . . . . . . . . .
— 4,854,654
—
—
—
—
—
—
—
—
—
—
(338.5) 338.5
—
— 500.9
—
—
—
—
(8.0)
—
—
$ 14.5
—
—
—
—
—
—
—
(68.2)
—
$ (53.7)
—
—
—
—
—
—
(97.1)
—
—
$(150.8)
—
—
—
—
—
—
—
—
—
29.5
—
$ 37.4
(9.5)
—
—
—
—
—
18.8
2.5
2.0
$ 51.2
(22.0)
—
—
—
—
20.5
(1.3)
19.5
(2.8)
$ 65.1
(18.9)
—
—
—
—
—
—
—
21.5
2.8
(7.0)
Balance, December 31, 2012 . . . . . . 123,023,159 (7,450,460) $1.2
$1,160.7 $(569.2) $2,611.2
$(121.3)
$ 63.5
See Accompanying Notes to Consolidated Financial Statements.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following paragraphs briefly describe the Company’s significant accounting policies.
Basis of presentation The Company retrospectively adopted the amendment to Accounting
Standards Codification (“ASC”) Topic 220, “Comprehensive Income,” which requires companies to
separately disclose reclassifications from other comprehensive income into net income on the face of
the financial statements. Prior year balances within the Consolidated Statements of Comprehensive
Income conform to this requirement.
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
inter-company accounts and transactions have
subsidiaries with a controlling financial interest. All
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.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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 and continues to administer the collection of these receivables on behalf
of the third party. The amount can vary each month based on the amount of underlying receivables.
On December 21, 2009, the Company entered into a $50 million accounts receivable securitization
facility, which was amended on September 8, 2010 to increase the facility to $80 million and then
again on November 1, 2012 to increase the facility to $110 million. The amended facility matures on
October 31, 2014.
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 $102.1 million and
$100.6 million at December 31, 2012 and 2011, respectively. Such inventories, if valued at current
cost instead of LIFO, would have been greater by $16.0 million and $15.3 million at December 31,
2012 and 2011, 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
income tax purposes, accelerated methods of
depreciation are generally used.
lives for buildings range from 15 to 40 years and useful
range from three to 12 years. For
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See Note 5 to the Consolidated Financial Statements for more information on property, plant and
equipment, net.
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.
Goodwill and other indefinite-lived intangible assets During the fourth quarter of each year,
the Company qualitatively assesses its goodwill and indefinite-lived intangible assets assigned to
each of its reporting units. This qualitative assessment evaluates 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. Using this qualitative assessment,
the Company determines whether it is more-likely-than not the reporting unit’s fair value exceeds its
carrying value. If it is determined that it is not more-likely-than-not the reporting unit’s fair value
exceeds the carrying value, or upon a triggering event, including recent acquisition or divestiture
activity, the Company performs a quantitative, “step one,” goodwill impairment analysis.
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
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
See Note 5 to the Consolidated Financial Statements for more information on accumulated other
comprehensive income (loss).
Environmental contingencies The Company accounts for environmental costs in accordance
with ASC Topic 450. Costs related to environmental assessments and remediation efforts at operating
facilities are accrued when it is probable that a liability has been incurred and the amount of that
liability can be reasonably estimated. Estimated costs are recorded at undiscounted amounts, based
on experience and assessments and are regularly evaluated. The liabilities are recorded in accounts
payable and accrued expenses and other non-current liabilities in the Company’s Consolidated
Balance Sheets.
See Note 13 to the Consolidated Financial Statements for more information regarding
environmental contingencies.
Pensions and other postretirement employee defined benefits The Company’s defined
benefit pension and other postretirement employee benefit plans are accounted for in accordance
with ASC Topic 715. Disability, early retirement and other postretirement employee benefits are
accounted for in accordance with ASC Topic 712.
Pensions and other postretirement employee benefit costs and related liabilities and assets are
dependent upon assumptions used in calculating such amounts. These assumptions include discount
rates, expected returns on plan assets, health care cost trends, compensation and other factors. In
accordance with GAAP, actual results that differ from the assumptions used are accumulated and
amortized over future periods, and accordingly, generally affect recognized expense in future periods.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 November 2012, the Financial Accounting Standards Board (“FASB”) amended ASC Topic
220, “Comprehensive Income,” requiring companies to disclose the income statement line items
impacted by the reclassification of comprehensive income (loss) into net earnings. This guidance is
effective retrospectively for interim and annual periods beginning on or after December 15, 2012. The
Company anticipates the adoption of this guidance will not have a material impact on its Consolidated
Financial Statements.
In December 2011, the 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 its 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,
2012
2011
2010
Gross R&D expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$309.3
(43.4)
$294.7
(51.0)
$233.2
(48.2)
Net R&D expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$265.9
$243.7
$185.0
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net R&D expenditures as a percentage of net sales were 3.7%, 3.4% and 3.3% in the years
ended December 31, 2012, 2011 and 2010, 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.
NOTE 3 OTHER (INCOME) EXPENSE
The following table presents items included in other (income) expense:
(millions of dollars)
Loss from disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement related obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patent infringement settlement, net of legal costs incurred . . . . . .
Environmental litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . .
BERU—Eichenauer equity investment gain . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2012
2011
2010
$39.7
27.4
17.3
—
—
—
0.3
$ 21.5
—
—
(29.1)
—
—
(0.5)
$ —
—
—
—
28.0
(8.0)
2.4
Other (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$84.7
$ (8.1)
$22.4
During the second and third quarters of 2012, the Company incurred $39.7 million in expense
associated with the loss on sale of the spark plug business, primarily related to the to write-down of
prior purchase price accounting adjustments included within the disposal group. These purchase
price accounting adjustments were originally reported in the Engine segment and related to the BERU
acquisition. The Company also recorded restructuring expense of $27.4 million in the third quarter of
2012 primarily associated with the disposal and future requirements of BERU’s on-going business,
which included $9.0 million of employee termination benefits, $6.3 million of contract cancellation
costs and $12.1 million of other charges, primarily related to the write-down of certain assets. The
Company expects to pay all employee termination benefits in the next 12 months.
During the fourth quarter of 2012, the Company recorded retirement related obligations of $17.3
million comprised of a $5.7 million loss resulting from the settlement of a portion of the Muncie Plant’s
pension obligation and an $11.6 million expense associated with the retirement of certain Named
Executive Officers. Refer to Notes 11 and 12 to the Consolidated Financial Statements for further
information regarding the Muncie Plant’s settlement loss and the Company’s decision to waive the
forfeiture provisions of existing restricted stock and performance share grants made to certain retiring
Named Executive Officers.
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.
Refer to Note 16 to the Consolidated Financial Statements for information regarding the
Company’s loss from disposal activities and BERU—Eichenauer equity investment gain and Note 13
to the Consolidated Financial Statements for information regarding the Company’s environmental
litigation settlement.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 4 INCOME TAXES
Earnings (loss) before income taxes and the provision for income taxes are presented in the
following table.
Year Ended
December 31, 2012
Year Ended
December 31, 2011
Year Ended
December 31, 2010
(millions of dollars)
U.S.
Non-U.S.
Total
U.S.
Non-U.S.
Total
U.S.
Non-U.S.
Total
Earnings (loss) before income
taxes . . . . . . . . . . . . . . . . . . . . .
$132.3
$628.7
$761.0
$119.2
$646.7
$765.9
$ (26.7)
$504.6
$477.9
Provision for income taxes:
Current:
Federal/foreign . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . .
$ 59.8
3.4
$186.1
—
$245.9
3.4
$ 31.8
1.7
$162.9
—
$194.7
1.7
$ 14.0
2.2
$117.7
—
$131.7
2.2
Total current . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . .
63.2
19.5
186.1
(30.2)
249.3
(10.7)
33.5
17.4
162.9
(18.5)
196.4
(1.1)
16.2
(48.9)
117.7
(3.3)
133.9
(52.2)
Total provision for income
taxes . . . . . . . . . . . . . . . . .
$ 82.7
$155.9
$238.6
$ 50.9
$144.4
$195.3
$ (32.7)
$114.4
$ 81.7
Effective tax rate . . . . . . . . .
62.5% 24.8% 31.4% 42.7% 22.3% 25.5% (122.5)% 22.7% 17.1%
The provision for income taxes resulted in an effective tax rate of 31.4%, 25.5% and 17.1% for
the years ended December 31, 2012, 2011 and 2010, respectively. An analysis of the differences
between the effective tax rate and the U.S. statutory rate for the years ended December 31, 2012,
2011 and 2010 is presented below.
(millions of dollars)
Year Ended December 31,
2011
2010
2012
Income taxes at U.S. statutory rate of 35% . . . . . . . . . . . . . . . .
Increases (decreases) resulting from:
$266.4
$268.1
$167.3
Income from non-U.S. sources, including withholding
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Affiliates’ earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit
. . . . . . . . . . . . . . . . . . . . . .
Business and foreign tax credits . . . . . . . . . . . . . . . . . . . . . . .
Accrual adjustment and settlement of prior year tax
matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryforward valuation allowance . . . . . . . . . . . .
Reversal of foreign tax credit valuation allowance . . . . . . . . .
Unremitted foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-temporary differences and other . . . . . . . . . . . . . . . . . . .
(58.3)
(15.0)
2.2
8.8
9.3
—
9.7
—
13.4
2.1
(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
Provision for income taxes, as reported . . . . . . . . . . . . . . . . . . .
$238.6
$195.3
$ 81.7
The Company’s provision for income taxes for the year ended December 31, 2012 includes a net
tax benefit of $2.0 million associated with the loss from disposal activities and restructuring expense.
The $2.0 million net benefit is comprised of a tax benefit of $7.7 million associated with restructuring
expense, partially offset by tax expense of $5.7 million resulting from the sale of the spark plug
business. The provision also includes additional tax expense of $19.8 million resulting from other tax
adjustments. These other tax adjustments include $5.9 million of tax expense primarily resulting from
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the settlement of certain tax audits, $7.5 million of tax expense associated with the Company’s
second quarter 2012 decision to change its cash repatriation assertion for some of its foreign
subsidiaries, $4.7 million of
tax benefit related to certain countries enacting changes to their
respective statutory income tax rates and $11.1 million of U.S. tax expense to correct the income
taxes payable balance. The Company concluded this item was not material to the current or prior
period financial statements.
The Company’s provision for income taxes for the year ended December 31, 2011 includes $11.0
million of tax expense associated with the Company’s patent infringement settlement, $2.7 million of
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 these changes had a material impact on the Company’s effective
tax rate.
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 roll forward of the Company’s total gross unrecognized tax benefits for the years ended
is presented below. Of the total $25.8 million of
December 31, 2012 and 2011, respectively,
unrecognized tax benefits as of December 31, 2012, approximately $23.4 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
2012
2011
$ 26.2
2.0
13.4
(14.6)
(1.7)
0.5
$27.6
0.5
3.9
(4.3)
(0.8)
(0.7)
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25.8
$26.2
The Company recognizes interest and penalties related to unrecognized tax benefits in income
tax expense. The amount recognized in income tax expense for 2012 and 2011 is $0.5 million and
$1.7 million, respectively. The Company has an accrual of approximately $8.3 million and $7.8 million
for the payment of interest and penalties at December 31, 2012 and 2011, respectively. Included in
the $25.8 million of unrecognized tax benefits is $18.5 million for the settlement of audits and resulting
amended returns in certain foreign jurisdictions, most of which the Company expects to pay in the
first quarter of 2013. Possible changes within the next 12 months related to other examinations
cannot be reasonably estimated at this time.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years no longer
subject to audit
2010 and prior
2007 and prior
2007 and prior
2007 and prior
2008 and prior
2011 and prior
2006 and prior
2006 and prior
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The gross components of deferred tax assets and liabilities as of December 31, 2012 and 2011
consist of the following:
(millions of dollars)
Current deferred tax assets:
December 31,
2012
2011
Foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29.0 $ —
28.0
Employee related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Research and development capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.5
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.5
Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.2
Customer claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.7
13.4
8.4
5.3
3.6
13.1
Total current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98.5 $ 60.7
Current deferred tax liabilities:
Unremitted foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.1) $ —
(3.7)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.6)
Total current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3.7) $ (3.7)
Non-current deferred tax assets:
Foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 117.0 $ 158.2
116.7
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76.7
Research and development capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.1
. . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss and capital loss carryforwards*
33.9
Pension and other postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.9
Employee related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.0
Research and development credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.7
Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.0
Litigation and environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113.7
89.1
44.3
37.7
27.4
4.9
4.5
1.2
3.1
Total non-current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 442.9 $ 458.3
Non-current deferred tax liabilities:
Goodwill & intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(130.9) $(155.5)
(79.7)
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.3)
Unremitted foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.9)
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.6)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(101.9)
(12.3)
(3.0)
(6.6)
Total non-current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(254.7) $(246.0)
Total deferred tax items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 283.0 $ 269.3
(23.6)
Valuation allowances* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(35.0)
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 248.0 $ 245.7
* Net operating loss and capital loss carryforwards are shown gross with the corresponding valuation
allowances located at the end of the table.
65
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,
2012
2011
Deferred income taxes — current assets* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes — current liabilities* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 94.7
(1.4)
244.1
(89.4)
$ 58.5
(6.5)
313.9
(120.2)
Net deferred tax asset (current and non-current) . . . . . . . . . . . . . . . . . . . . . . . . . .
$248.0
$ 245.7
* Current and non-current assets and liabilities have been netted within their respective taxing
jurisdictions.
Deferred income taxes—current assets are primarily comprised of amounts from the U.S., China,
France, Italy, Japan, Mexico and South Korea. Deferred income taxes—current liabilities are primarily
comprised of amounts from the U.K. Other non-current assets are primarily comprised of amounts
from the U.S., China and Japan. Other non-current liabilities are primarily comprised of amounts from
Germany, Sweden and the U.K.
At December 31, 2012, certain non-U.S. subsidiaries have net operating loss carryforwards
totaling $42.4 million available to offset future taxable income. Of the total $42.4 million, $35.4 million
expire at various dates from 2013 through 2032 and the remaining $7.0 million have no expiration
date. The Company has a valuation allowance of $0.7 million recorded on $2.5 million of non-U.S net
operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards
totaling $490.7 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 $26.7 million and $21.8 million in 2012 and 2011,
respectively. Most existing tax holidays remain in effect during 2013. The U.S. has foreign tax credit
carryforwards of $146.1 million, which expire at various dates from 2015 through 2020.
The Company is not required to provide U.S. federal or state income taxes on cumulative
undistributed earnings of
foreign subsidiaries when such earnings are considered permanently
reinvested. At December 31, 2011, the Company considered most of its foreign unremitted earnings
to be permanently reinvested. The Company’s policy is to evaluate this assertion on a quarterly basis.
During the second quarter of 2012, the Company changed the assertion for some of its foreign
subsidiaries to provide management additional financial flexibility.
At December 31, 2012, the Company’s deferred tax liability associated with unremitted foreign
earnings was $13.4 million, which includes the $7.5 million of tax expense associated with the second
quarter 2012 decision to change its cash repatriation assertion for some of its foreign subsidiaries and
$5.9 million of tax expense associated with unremitted foreign earnings during the current year.
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
$2.1 billion in 2012, as these amounts are essentially permanent in nature. The difference will become
taxable upon repatriation of assets, sale or liquidation of the investment. Due to fluctuation in tax laws
around the world and fluctuations in foreign exchange rates, it is not practicable to determine the
unrecognized deferred tax liability on this difference because the actual tax liability,
is
dependent on circumstances existing when the repatriation occurs.
if any,
66
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,
2012
2011
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,014.6
134.8
$ 1,037.4
149.9
Gross receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt allowance(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,149.4
(2.1)
1,187.3
(4.3)
Total receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,147.3
$ 1,183.0
Inventories, net:
Raw material and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FIFO inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIFO reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 264.0
82.0
117.6
463.6
(16.0)
$ 254.4
90.9
124.3
469.6
(15.3)
Total inventories, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 447.6
$ 454.3
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 and land use rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
39.1
—
5.7
0.7
22.0
67.5
76.4
640.8
2,282.4
2.3
243.7
$
$
$
23.5
28.8
2.7
0.8
26.6
82.4
71.2
616.7
2,006.9
2.3
206.8
3,245.6
(1,567.0)
1,678.6
109.4
2,903.9
(1,343.9)
1,560.0
104.3
Property, plant & equipment, net . . . . . . . . . . . . . . . . . . . . . .
$ 1,788.0
$ 1,664.3
Investments and advances:
Investment in equity affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments and advances . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 217.7
165.0
$ 217.4
127.9
Total investments and advances . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 382.7
$ 345.3
Other non-current assets:
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product liability insurance asset . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 244.1
206.3
85.6
39.9
$ 313.9
243.3
32.9
34.9
Total other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 575.9
$ 625.0
67
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 liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable to noncontrolling shareholders . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2012
2011
$ 815.4
39.8
180.7
36.5
36.3
33.1
27.9
11.7
9.8
9.5
9.2
8.9
4.2
1.6
1.4
61.2
$ 820.7
48.9
201.9
28.8
29.9
38.6
30.9
14.2
2.4
11.7
10.5
5.6
6.8
3.4
6.5
37.0
Total accounts payable and accrued expenses . . . . . . . . . . . . . . .
$1,287.2
$1,297.8
Other non-current liabilities:
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cross currency swaps and derivatives . . . . . . . . . . . . . . . . . . . . . . . .
Product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
89.4
58.1
49.1
31.8
30.5
2.3
56.9
$ 120.2
85.5
32.9
34.1
26.0
8.1
85.1
Total other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 318.1
$ 391.9
Accumulated other comprehensive loss
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . .
Market value of hedge instruments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit postretirement plans . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 140.8
(37.2)
(225.8)
0.9
$
85.8
(50.5)
(187.2)
1.1
Total accumulated other comprehensive loss . . . . . . . . . . . . . . . .
$ (121.3)
$ (150.8)
(a) Bad debt allowance:
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment and other
2012
2011
2010
$(4.3)
(0.8)
3.0
—
$(4.0)
(1.4)
1.0
0.1
$(4.3)
(1.1)
2.5
(1.1)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2.1)
$(4.3)
$(4.0)
As of December 31, 2012 and December 31, 2011, accounts payable of $39.8 million and $48.9
million, respectively, were related to property, plant and equipment purchases.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest costs capitalized for the years ended December 31, 2012 and 2011 were $17.8 million
and $15.0 million, respectively.
NSK-Warner KK (“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 $28.1 million, $33.4
million and $35.5 million in calendar years ended December 31, 2012, 2011 and 2010, 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,
the years ended
November 30, 2012, 2011 and 2010 (unaudited):
translated using the ending or periodic rates, as of and for
(millions of dollars)
Balance sheets:
November 30,
2012
2011
Cash and securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $123.3 $119.4
344.1
Current assets, including cash and securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
182.0
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
172.1
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.3
308.7
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
320.0
175.3
147.4
50.2
297.7
(millions of dollars)
Statements of operations:
Year Ended November 30,
2012
2011
2010
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $696.7 $655.2 $634.7
131.9
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68.3
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128.5
61.6
138.2
68.5
NSK-Warner had no debt outstanding as of November 30, 2012 and 2011. Purchases by the
Company from NSK-Warner were $22.8 million, $16.6 million and $14.6 million for the years ended
December 31, 2012, 2011 and 2010, respectively.
NOTE 6 GOODWILL AND OTHER INTANGIBLES
During the fourth quarter of each year, the Company qualitatively assesses its goodwill and
indefinite-lived intangible assets assigned to each of its reporting units. This qualitative assessment
evaluates 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. Using this qualitative assessment, the Company determines whether it is more-likely-
than not the reporting unit’s fair value exceeds its carrying value. If it is determined that it is not more-
likely-than-not the reporting unit’s fair value exceeds the carrying value, or upon a triggering event,
including recent acquisition or divestiture activity, the Company performs a quantitative, “step one,”
goodwill impairment analysis.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the fourth quarter of 2012, the Company performed a qualitative analysis on each
reporting unit and determined it was more-likely-than-not the fair value exceeded the carrying value of
these reporting units. For the reporting unit with recent 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, 2012 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 the reporting unit being evaluated.
In addition to the above primary assumptions, the Company notes the following risks to volume
and operating income assumptions that could have an impact on the discounted cash flow model:
(cid:129)
(cid:129)
(cid:129)
The automotive industry is cyclical and the Company’s results of operations would be
adversely affected by industry downturns.
The Company is dependent on market segments that use our key products and would be
affected by decreasing demand in those segments.
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 2012 indicated the Company’s goodwill assigned to the reporting unit 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 the reporting unit quantitatively assessed.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the carrying amount of goodwill for the years ended December 31, 2012 and
2011 are as follows:
(millions of dollars)
2012
2011
Engine
Drivetrain
Engine
Drivetrain
Gross goodwill balance, January 1 . . . . . . . . . .
Accumulated impairment losses, January 1 . . .
$1,334.7
(501.8)
$353.5
(0.2)
$1,351.9
(501.8)
$263.6
(0.2)
Net goodwill balance, January 1 . . . . . . . .
$ 832.9
$353.3
$ 850.1
$263.4
Goodwill during the year:
Acquisition* . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestitures* . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . .
$
— $ — $
(16.9)
6.3
—
5.8
— $ 96.2
—
(6.3)
(7.9)
(9.3)
Ending balance, December 31 . . . . . . . . . .
$ 822.3
$359.1
$ 832.9
$353.3
* Goodwill acquired relates to the 2011 purchase of Haldex Traction AB. Goodwill divested
relates to the Company’s 2011 sale of the tire pressure monitoring business and 2012 sale of
the spark plug business.
The Company’s other intangible assets, primarily from acquisitions, consist of the following:
(millions of dollars)
Amortized intangible assets:
Patented and unpatented
December 31, 2012
December 31, 2011
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
technology . . . . . . . . . . . . . . . . . . $ 80.0
216.3
2.9
Customer relationships . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . .
Total amortized intangible assets . . . . . .
In-process R&D . . . . . . . . . . . . . . . .
Unamortized trade names . . . . . . . .
299.2
10.8
25.4
$ 26.2
100.0
2.9
129.1
—
—
$ 53.8 $ 81.2
213.4
2.8
116.3
—
170.1
10.8
25.4
297.4
10.8
33.5
$20.4
76.7
1.3
98.4
—
—
$ 60.8
136.7
1.5
199.0
10.8
33.5
Total other intangible assets . . . . . . . . . . $335.4
$129.1
$206.3 $341.7
$98.4
$243.3
Amortization of other intangible assets was $28.4 million, $30.8 million and $28.4 million for the
years ended December 31, 2012, 2011 and 2010, respectively. The estimated useful
lives of the
Company’s amortized intangible assets range from three to 15 years. The Company utilizes the
lives of the assets. The
straight line method of amortization recognized over the estimated useful
estimated future annual amortization expense, primarily for acquired intangible assets, is as follows:
$26.8 million in 2013, $26.8 million in 2014, $18.1 million in 2015, $17.6 million in 2016 and $15.9
million in 2017.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestitures*
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
$341.7
—
(15.7)
9.4
$244.3
117.2
(5.6)
(14.2)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$335.4
$341.7
* Divestitures relate to the Company’s 2011 sale of the tire pressure monitoring business and
2012 sale of the spark plug business.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestitures*
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
$ 98.4
28.4
(0.6)
2.9
$75.5
30.8
(3.8)
(4.1)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$129.1
$98.4
* Divestitures relate to the Company’s 2011 sale of the tire pressure monitoring business and
2012 sale of the spark plug business.
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.
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 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 $10.8 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 $10.8 million of in-process R&D will coincide with the
commercial application of the technology.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 7 PRODUCT WARRANTY
The changes in the carrying amount of the Company’s total product warranty liability for the years
ended December 31, 2012 and 2011 were as follows:
(millions of dollars)
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
$ 72.7
—
33.7
(42.8)
1.3
$ 66.8
4.5
47.5
(43.5)
(2.6)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 64.9
$ 72.7
The product warranty liability is classified in the Consolidated Balance Sheets as follows:
(millions of dollars)
December 31,
2011
2012
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33.1
31.8
$38.6
34.1
Total product warranty liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$64.9
$72.7
NOTE 8 NOTES PAYABLE AND LONG-TERM DEBT
As of December 31, 2012 and 2011,
the Company had short-term and long-term debt
outstanding as follows:
(millions of dollars)
December 31,
2012
2011
Short-term debt
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables securitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$129.1
110.0
$ 116.3
80.0
Total short-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$239.1
$ 196.3
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 and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized portion of debt derivatives . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 368.5
149.5
133.9
247.7
119.3
70.0
19.8
24.1
149.6
133.9
247.9
119.4
140.0
17.1
20.2
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$828.1
4.3
$1,132.8
381.5
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . .
$823.8
$ 751.3
The weighted average interest rate on all borrowings outstanding as of December 31, 2012 and
2011 was 4.0% and 5.9%, respectively.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Annual principal payments required as of December 31, 2012 are as follows :
(millions of dollars)
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: unamortized discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 243.4
0.4
12.4
290.0
—
524.8
$1,071.0
3.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,067.2
The Company’s long-term debt includes various financial covenants, none of which are expected
to restrict future operations.
The Company’s $650 million multi-currency revolving credit facility, which includes a feature that
allows the Company’s borrowings to be increased to $1 billion, 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, 2012 and
expects to remain compliant in future periods. At December 31, 2012 and 2011, the Company had
outstanding borrowings of $140.0 million and $70.0 million, respectively, under this facility.
On April 9, 2009, the Company issued $373.8 million in convertible senior notes, which were
settled in April 2012 by delivering approximately 11.4 million shares of common stock held in treasury
to the note holders. The settlement resulted in a reduction in the current portion of long-term debt of
$373.8 million, a reduction in common stock held in treasury of $617.3 million and a reduction in
capital in excess of par value of $243.5 million. Prior to the settlement, the Company accreted the
discounted carrying value of the convertible notes to their face value over the term of the notes.
The total interest expense related to the convertible senior notes in the Company’s Consolidated
Statements of Operations for the years ended December 31, 2012, 2011 and 2010 was as follows:
(millions of dollars)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2012
$9.0
5.3
2011
$33.1
20.0
2010
31.3
18.3
In conjunction with the convertible senior note offering, the Company entered into a bond hedge
overlay, including both call options and warrants, at a net pre-tax cost of $25.2 million, effectively
raising the conversion premium to 50%, or approximately $38.61 per share. On April 16, 2012, the
Company settled the call option portion of
receiving approximately
6.5 million shares of its common stock. The settlement resulted in an increase to common stock held
in treasury of $503.9 million offset by an increase to capital in excess of par value of $503.9 million.
the bond hedge overlay,
During the third and fourth quarters of 2012, the Company settled the warrants included in the
bond hedge overlay, delivering approximately 4.9 million shares of its common stock held in treasury,
resulting in a decrease to common stock held in treasury of $338.5 million offset by a decrease to
capital in excess of par value of $338.5 million.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2012 and 2011, the estimated fair values of the Company’s senior unsecured
notes totaled $770.3 million and $1,454.4 million, respectively. The estimated fair values were $119.5
million and $435.5 million higher than their carrying value at December 31, 2012 and 2011,
respectively. Fair market values of the senior unsecured notes are developed using observable values
for similar debt instruments, which are considered Level 2 inputs as defined by ASC Topic 820. The
carrying value of the Company’s multi-currency revolving credit facility is equal to its fair value. 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 $59.1 million and $58.5 million at December 31,
2012 and 2011, 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 for identical assets or liabilities 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
information generated by market
transactions involving identical or comparable assets, liabilities or a group of assets or
liabilities, such as a business.
relevant
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).
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables classify assets and liabilities measured at fair value on a recurring basis as of
December 31, 2012 and 2011:
(millions of dollars)
Assets:
Foreign currency contracts . . . . . . . . . . . . .
Other non-current assets (insurance
settlement agreement note
receivable) . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Foreign currency contracts . . . . . . . . . . . . .
Net investment hedge contracts . . . . . . . . .
(millions of dollars)
Assets:
Foreign currency contracts . . . . . . . . . . . . .
Other non-current assets (insurance
settlement agreement note
receivable) . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Foreign currency contracts . . . . . . . . . . . . .
Net investment hedge contracts . . . . . . . . .
Basis of fair value measurements
Quoted
prices in
active
markets for
identical
items
(Level 1)
Balance at
December 31,
2012
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Valuation
technique
$ 5.9
$—
$ 5.9
$—
$41.0
$—
$41.0
$ 9.8
$58.1
$—
$—
$ 9.8
$58.1
$—
$—
$—
Basis of fair value measurements
A
C
A
A
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
$ 2.9
$85.0
$—
$—
$—
$21.3
$ 2.9
$85.0
$—
$—
$—
A
C
A
A
76
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, 2012 and 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
(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,
2012
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Valuation
technique
$157.4
100.0
25.3
$282.7
$ 67.3
99.0
11.6
$177.9
$ —
48.9
—
$48.9
$ —
—
—
$ —
$157.4
51.1
25.3
$233.8
$ 67.3
99.0
11.6
$177.9
$—
—
—
$—
$—
—
—
$—
A
A
A
A
A
A
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
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.
77
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, 2012 and 2011, 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, 2012 and 2011, 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. The Company did not have
any commodity derivative contracts outstanding at December 31, 2012 and 2011.
The Company uses foreign currency forward and option contracts to protect against exchange
rate movements for forecasted cash flows,
including capital expenditures, 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. At December 31, 2012
and 2011, the following foreign currency derivative contracts were outstanding:
Functional
currency
British pound . . . . . . . .
Euro . . . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . .
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, 2012
Notional in
traded currency
December 31, 2011
Euro
British pound
Hungarian forint
Japanese yen
Polish zloty
US dollar
US dollar
Euro
US dollar
Euro
US dollar
Euro
Euro
Indian rupee
Japanese yen
28.8
4.7
9,300.0
6,760.0
87.4
15.2
9.5
32.4
17.5
—
20.9
—
—
111.1
3,000.0
78
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
Duration
Dec - 13
Dec - 13
Nov - 13
Dec - 13
Dec - 13
Dec - 13
Dec - 13
Dec - 14
Dec - 13
Dec - 12
Dec - 13
Dec - 12
Dec - 12
Oct - 13
Mar - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2012 and 2011, the following amounts were recorded in the Consolidated
Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:
Assets
Liabilities
December 31,
2012
December 31,
2011
Location
December 31,
2012
December 31,
2011
(millions of dollars)
Location
Foreign currency . . . . . . Prepayments and
Net investment
hedges . . . . . . . . . . . .
other current assets
Other non-current
assets
Other non-current
assets
$5.7
$0.2
$—
$2.6
$0.1
$—
Accounts payable and
accrued expenses
Other non-current
liabilities
Other non-current
liabilities
$9.8
$—
$2.4
$0.5
$58.1
$85.0
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, gains and losses arising from these contracts are deferred into accumulated other
(“AOCI”) and reclassified into income as the underlying operating
comprehensive income (loss)
transactions are recognized. These realized gains or losses offset the hedged transaction and are
recorded on the same line in the statement of operations. To the extent that derivative instruments are
deemed to be ineffective, gains or losses are recognized into income.
The table below shows deferred gains (losses) reported in AOCI as well as the amount expected
to be reclassified to income in one year or less. The amount 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,
2012 market rates.
(millions of dollars)
December 31, 2012
December 31, 2011
Deferred gain (loss) in AOCI at
Gain (loss) expected to
be reclassified to income
in one year or less
Foreign currency . . . . . . . . . . . .
Net investment hedges . . . . . . .
Total
. . . . . . . . . . . . . . . . . .
$ (3.5)
(54.5)
$(58.0)
$ (0.6)
(78.9)
$(79.5)
$(3.8)
—
$(3.8)
Derivative instruments designated as hedging instruments as defined by ASC Topic 815 held
during the period resulted in the following gains and losses recorded in income:
Gain (loss) reclassified
from AOCI to Income
(effective portion)
Gain (loss)
recognized in income
(ineffective portion)
Year Ended December 31,
Year Ended December 31,
(millions of dollars)
Location
Foreign currency . . . . . . . Sales
Foreign currency . . . . . . . Cost of goods sold
Foreign currency . . . . . . . SG&A expense
Net investment hedges . . N/A
2012
$5.3
$3.5
$ —
2011
Location
$(1.4) SG&A expense
$(0.6) SG&A expense
SG&A expense
$ 0.5
Interest expense
2012
$ —
$0.1
$ —
$2.3
2011
$ —
$ —
$ —
$0.5
At December 31, 2012, derivative instruments that were not designated as hedging instruments
as defined by ASC Topic 815 were immaterial.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 11 RETIREMENT BENEFIT PLANS
The Company sponsors various defined contribution savings plans, primarily in the U.S., that
allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with
plan specified guidelines. Under specified conditions, the Company will make contributions to the
plans and/or match a percentage of the employee contributions up to certain limits. Total expense
related to the defined contribution plans was $24.8 million, $18.9 million and $19.2 million in the years
ended December 31, 2012, 2011 and 2010, respectively.
The Company has a number of defined benefit pension plans and other postretirement 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 France,
Germany, Ireland, Italy, Japan, Mexico, Monaco, South Korea, Sweden, U.K. and U.S. The other
postretirement benefit plans, which provide medical and life insurance benefits, are unfunded plans.
All pension and other postretirement 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.
The Plant Shutdown Agreement included terms allowing for lump sum payment of the pension
obligation for certain participants if funding of the plan exceeded a defined level. In accordance with
these terms, in December 2012, the Company settled a portion of the pension obligation resulting in a
non-cash loss of $5.7 million, which was recorded in other (income) expense within the Consolidated
Statement of Operations.
On March 24, 2010, the Company finalized its settlement agreement regarding the closure of the
Muncie Plant with the Pension Benefit Guaranty Corporation (“PBGC”) in which the Company agreed
to make certain payments directly to the Muncie Plant’s defined benefit pension plan (the “Plan”). In
accordance with the settlement agreement, the Company made an initial cash contribution of $23
million for the 2009 Plan year and a cash contribution of $15 million in the year ended December 31,
2011. During the fourth quarter of 2012, the Company received notification from the PBGC that the
terms of the settlement have been suspended pending review of the Company’s financial strength
under the PBGC’s revised enforcement policy pilot program announced on November 2, 2012. The
evaluation was confirmed in January 2013 and as a result the Company currently does not have any
obligations as described in the original agreement.
The following table summarizes the expenses for the Company’s defined contribution and
defined benefit pension plans and the other postretirement defined benefit plans.
(millions of dollars)
Year Ended December 31,
2012
2011
2010
Defined contribution expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other postretirement benefit expense . . . . . . . . . . . . . . . . . . . . . . . .
$24.8
27.3
11.1
$18.9
17.5
13.5
$19.2
19.8
17.5
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$63.2
$49.9
$56.5
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following provides a roll forward 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
2012
2011
Pension benefits
Year Ended December 31,
Other postretirement
benefits
2012
2011
Year Ended December 31,
Change in projected benefit obligation:
Projected benefit obligation, January 1 . . . $337.4 $ 344.3 $326.2 $ 326.0
9.1
Service cost . . . . . . . . . . . . . . . . . . . . . . . . .
17.8
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . .
0.3
Plan participants’ contributions . . . . . . . . .
(0.5)
Plan amendments . . . . . . . . . . . . . . . . . . . .
11.9
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . .
(5.8)
Currency translation . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.9
(15.4)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . .
—
14.3
—
—
15.5
—
—
(37.1)
9.1
17.2
0.5
—
84.1
11.3
(4.5)
(14.4)
—
16.1
—
—
21.8
—
—
(26.7)
$ 251.0
0.5
10.1
—
(0.3)
(20.7)
—
—
(20.1)
$ 261.9
0.7
11.8
—
3.9
(6.8)
—
—
(20.5)
Projected benefit obligation,
December 31 . . . . . . . . . . . . . . . . . . . . . . $330.1 $ 447.6 $337.4 $ 344.3
$ 220.5
$ 251.0
Change in plan assets:
Fair value of plan assets, January 1 . . . . . . $290.4 $ 154.9 $287.2 $ 154.6
5.0
Actual return on plan assets . . . . . . . . . . . .
16.0
Employer contribution . . . . . . . . . . . . . . . . .
0.3
Plan participants’ contribution . . . . . . . . . .
(0.7)
Currency translation . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4.9)
(15.4)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . .
15.0
18.0
0.5
6.0
(2.1)
(14.4)
29.4
—
—
—
—
(37.1)
8.9
21.0
—
—
—
(26.7)
Fair value of plan assets, December 31 . . $282.7 $ 177.9 $290.4 $ 154.9
Funded status . . . . . . . . . . . . . . . . . . . . . . $ (47.4) $(269.7) $ (47.0) $(189.4)
$(220.5)
$(251.0)
Amounts in the Consolidated Balance
Sheets consist of:
Non-current assets . . . . . . . . . . . . . . . . . . . $ — $ — $ — $
Current liabilities . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . .
(7.0)
(262.7)
(0.1)
(46.9)
(0.1)
(47.3)
0.5
(6.5)
(183.4)
$ — $ —
(24.3)
(226.7)
(20.8)
(199.7)
Net amount
. . . . . . . . . . . . . . . . . . . . . . . . . $ (47.4) $(269.7) $ (47.0) $(189.4)
$(220.5)
$(251.0)
Amounts in accumulated other
comprehensive loss consist of:
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . $163.8 $ 135.1 $172.8 $ 54.4
0.8
Net prior service cost (credit) . . . . . . . . . . .
(10.5)
(11.3)
0.5
$ 78.7
(42.6)
$ 106.3
(48.7)
Net amount* . . . . . . . . . . . . . . . . . . . . . . . . . $153.3 $ 135.6 $161.5 $ 55.2
$ 36.1
$ 57.6
Total accumulated benefit obligation
for all plans . . . . . . . . . . . . . . . . . . . . . . . $330.1 $ 430.2 $337.4 $ 327.9
* AOCI shown above does not include our equity investee, NSK-Warner. NSK-Warner had an AOCI
loss of $7.9 million and $6.9 million at December 31, 2012 and 2011, 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,
2012
2011
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(757.7)
458.0
$(656.9)
435.5
Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(299.7)
$(221.4)
Pension deficiency by country:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (47.4)
(22.4)
(192.4)
(37.5)
$ (47.0)
(13.4)
(128.7)
(32.3)
Total pension deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(299.7)
$(221.4)
The weighted average asset allocations of the Company’s funded pension plans and target
allocations by asset category are as follows:
December 31,
2012
2011
Target
Allocation
U.S. Plans:
Real estate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9% 11% 5%-15%
56% 54% 45%-65%
35% 35% 25%-45%
100% 100%
Non-U.S. Plans:
Real estate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6% 8% 2%-8%
38% 41% 37%-43%
56% 51% 52%-58%
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, 2012 and 2011. A portion of pension assets are
invested in common and comingled trusts.
82
Settlements, curtailments
and other
Amortization of
. . . . . . . . . . . .
unrecognized prior
service benefit
. . . . . . . .
Amortization of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company expects to contribute a total of $15 million to $25 million into its defined benefit
pension plans during 2013. Of the $15 million to $25 million in projected 2013 contributions, $7.1
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, 2012 and 2011.
See the table below for a breakout of 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
2012
2011
2010
Pension benefits
Year Ended December 31,
Other postretirement
benefits
2012
2011
2010
Year Ended December 31,
Service cost . . . . . . . . . . . . $ — $ 9.1
Interest cost . . . . . . . . . . . .
17.2
Expected return on plan
14.3
$ — $ 9.1 $ — $ 7.4
17.6
17.8
16.1
17.5
assets . . . . . . . . . . . . . . .
(18.8)
(9.3)
(20.8)
(11.2)
(19.7)
(9.7)
5.7
0.5
—
(0.1)
—
—
$ 0.5 $ 0.7 $ 0.8
14.5
11.8
10.1
—
—
—
—
—
—
(0.7)
—
(0.7)
—
(0.7)
—
(6.4)
(6.9)
(6.9)
unrecognized loss . . . . .
8.1
1.2
6.5
0.8
6.6
0.8
6.9
7.9
9.1
Net periodic benefit
cost . . . . . . . . . . . . . . . . . $ 8.6
$18.7
$ 1.1 $ 16.4 $ 3.7
$16.1
$11.1 $13.5 $17.5
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 $13.5 million. The estimated net loss and prior service credit for the other postretirement plans that
will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost
over the next fiscal year are $4.9 million and $(6.4) million, respectively.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s weighted-average assumptions used to determine the benefit obligations for its
defined benefit pension and other postretirement plans as of December 31, 2012 and 2011 were as
follows:
(percent)
U.S. pension plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. other postretirement plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. pension plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2012
2011
3.67
N/A
3.25
N/A
3.86
2.72
4.42
N/A
4.25
N/A
5.13
2.78
The Company’s weighted-average assumptions used to determine the net periodic benefit cost
the years ended
its defined benefit pension and other postretirement benefit plans for
for
December 31, 2012, 2011 and 2010 were as follows:
(percent)
U.S. pension plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. other postretirement 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,
2012
2011
2010
4.42
N/A
6.75
4.25
N/A
N/A
5.13
2.78
6.49
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
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 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.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated future benefit payments for the pension and other postretirement benefits are as
follows:
(millions of dollars)
Year
Pension benefits
Other postretirement benefits
U.S.
Non-U.S.
w/o Medicare
Part D
reimbursements
with Medicare
Part D
reimbursements
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018-2022 . . . . . . . . . . . . . . . . . . . . . . . .
$ 24.9
24.2
23.4
22.9
22.3
105.4
$ 15.7
18.0
19.8
18.8
20.1
110.1
$21.9
21.3
20.6
19.9
19.3
82.1
$21.1
20.5
19.8
19.1
18.5
78.8
The weighted-average rate of increase in the per capita cost of covered health care benefits is
projected to be 7.50% in 2013 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 postretirement benefit obligation . . . . . . . . . . . . . . . . . . . .
Effect on total service and interest cost components . . . . . . . . . . . . . . . .
$16.2
$ 0.5
$(14.3)
$ (0.5)
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 vested over periods up to three years and have a term of 10 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 1.9 million shares are available for future issuance.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Options A summary of the plans’ shares under option at December 31, 2012, 2011 and
2010 is as follows:
Outstanding at January 1, 2010 . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2010 . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2011 . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2012 . . . . . . .
Options exercisable at December 31,
Shares
(thousands)
5,177
(1,888)
(36)
3,253
(1,033)
2,220
(784)
1,436
Weighted
average
exercise
price
$27.98
$26.73
$33.95
$28.64
$27.15
$29.36
$26.86
$30.65
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,436
$30.65
Weighted
average
remaining
contractual
life (in years)
5.8
4.9
4.1
3.4
3.4
Aggregate
intrinsic
value
(in millions)
$ 29.7
$ 50.3
$142.2
$ 48.4
$ 76.3
$ 40.1
$ 58.8
$ 58.8
Proceeds from stock option exercises for the years ended December 31, 2012, 2011 and 2010
were as follows:
(millions of dollars)
Proceeds from stock options exercised — gross . . . . . . . . . .
Tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock options exercised, net of tax . . . . . . . . .
Year Ended
December 31,
2012
$20.9
31.1
$52.0
2011
2010
$28.6
24.4
$55.4
11.7
$53.0
$67.1
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 vests 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 2012, restricted stock in the amount of 328,138 and 9,677 shares was granted
to employees and non-employee directors, respectively, 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 recorded in the Consolidated Statements of Operations
is as follows:
(millions of dollars, except per share data)
Year Ended December 31,
2012
2011
2010
Restricted stock compensation expense . . . . . . . . . . . . . . . . . . . . .
Restricted stock compensation expense, net of tax . . . . . . . . . . . .
$21.2
$15.5
$15.1
$11.4
$18.9
$14.7
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company’s nonvested restricted stock for employees and non-
employee directors at December 31, 2012, 2011 and 2010 is as follows:
Nonvested at January 1, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
subject to
restriction
(thousands)
Weighted
average
price
1,547
603
(188)
(91)
1,871
274
(609)
(106)
1,430
338
(675)
(61)
1,032
$29.90
$36.16
$44.80
$27.10
$30.55
$70.57
$27.39
$38.05
$39.02
$78.41
$27.43
$54.35
$58.77
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. In the first quarter of 2012, the Company modified all outstanding Performance Share
Award Agreements to allow for the payment of these awards entirely in the Company’s common
stock, rather than 40% in cash and 60% in the Company’s common stock. Using the lattice model
(Monte Carlo simulation) at the date of modification, the Company determined the first quarter 2012
compensation expense associated with the modification to be negligible. Within the Consolidated
Statement of Cash Flows for the years ended December 31, 2011 and 2010, the Company’s
$19.6 million and $16.6 million of expense associated with the 40% cash portion of the award was
included in the changes in accounts payable and accrued expenses and other non-current assets and
liabilities line items.
The Company recognizes compensation expense relating to its performance share plans ratably
over the performance period. Prior to the modification, compensation expense for the 60% stock
component was based on the performance share’s fair value at the date of grant using a lattice model
(Monte Carlo simulation) and the 40% cash component was based on quarterly mark to market of the
cash liability on a quarterly basis. After the first quarter 2012 modification, 100% of compensation
expense associated with the performance share plans is calculated using a lattice model (Monte Carlo
simulation). The amounts expensed under the plan and the share issuances for the three-year
measurement periods ended December 31, 2012, 2011 and 2010 were as follows:
(millions of dollars, except share data)
Year Ended December 31,
2012
2011
2010
Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of shares* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
35.5
558,000
$
26.3
538,180
$
23.9
104,205
* Shares are issued in February of the following year.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The restricted stock and performance share plan compensation expense disclosed above
includes $7.0 million of expense related to the Company’s fourth quarter 2012 decision to waive the
forfeiture provisions of existing restricted stock and performance share grants made to certain retiring
Named Executive Officers. The Company recorded this expense within other (income) expense in the
Consolidated Statement of Operations.
NOTE 13 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.
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 did 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. 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. A decision on the merits of the suit could be rendered sometime in 2013.
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
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
presently be liable for
remedial activities at 32 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; and remediation alternatives), the Company has an
accrual for indicated environmental
liabilities of $3.9 million at December 31, 2012. 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,
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.
in July 2010 regarding the personal
injury claims of
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 both December 31, 2012 and December 31, 2011, the Company had
the
approximately 16,000 pending asbestos-related product
approximately 16,000 outstanding claims at December 31, 2012, approximately half were pending in
jurisdictions that have undergone significant tort and judicial reform activities subsequent to the filing
of these claims.
respectively. Of
liability 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
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2012, of the approximately 2,400 claims resolved, 308 (13%) resulted in payment being
made to a claimant by or on behalf of the Company. In the full year of 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.
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 against the Company and certain of
its historical general liability insurers. The court has issued a number of interim rulings and discovery
is continuing. The Company has entered into settlement agreements with some of its insurance
carriers, resolving their coverage disputes by agreeing to pay specified amounts to the Company. The
Company is vigorously pursuing the litigation against the remaining insurers.
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.
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 $235.8 million in defense and indemnity in advance
of insurers’ reimbursement and has received $124.8 million in cash and notes from insurers. The net
balance of $111.0 million, is expected to be fully recovered, of which approximately $20 million is
expected 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,
2011, insurers owed $109.8 million in association with these claims.
In addition to the $111.0 million net balance relating to past settlements and defense costs, the
Company has estimated a liability of $85.6 million for claims asserted, but not yet resolved and their
related defense costs at December 31, 2012. The Company also has a related asset of $85.6 million
to recognize proceeds from the insurance carriers, which is expected to be fully recovered. Receipt of
these proceeds is not expected prior to the resolution of the declaratory judgment action referred to
above, which, more-likely-than-not, will occur subsequent to December 31, 2013. At December 31,
2011, the comparable value of the accrued liability and associated insurance asset was $61.7 million.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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,
2012
2011
Prepayments and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $28.8
32.9
85.6
Total insurance assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$85.6
$61.7
Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$36.5
49.1
$28.8
32.9
Total accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$85.6
$61.7
The 2012 increase in the accrued liability and associated insurance asset is primarily due to an
expected higher rate of claim settlement based on recent litigation claim activity.
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 14 LEASES AND COMMITMENTS
Certain assets are leased under long-term operating leases, including 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 $31.3 million, $30.7 million and $25.6 million in the years ended
December 31, 2012, 2011 and 2010, respectively. The Company does not have any material capital
leases.
On September 30, 2010, the Company paid $6.0 million for certain machinery and equipment it
had previously leased, 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, 2012 were as follows:
(millions of dollars)
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18.1
13.9
13.3
10.2
9.8
3.4
$68.7
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 15 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 assumed 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.
In April 2012, the Company settled its 3.50% convertible senior notes. Prior to the settlement, the
potential common shares associated with these notes were reflected in diluted EPS using the “if-
converted” method. Under this method, if dilutive, the common shares were 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 senior notes was added back to the numerator
in calculating diluted EPS.
In conjunction with the convertible senior note offering, the Company entered into a bond hedge
overlay, including both call options and warrants. On April 16, 2012, the Company settled the call
option portion of the bond hedge overlay, receiving approximately 6.5 million shares, which reduced
the weighted average basic and dilutive shares outstanding. Prior to the settlement, if the Company’s
weighted average share price exceeded $32.82 per share, the call options were anti-dilutive. During
the third and fourth quarters of 2012, the Company settled the warrant portion of the bond hedge
overlay, delivering approximately 4.9 million shares. Prior to settlement, if the Company’s weighted-
average share price exceeded $38.61 per share, the warrants were dilutive to the Company’s
earnings.
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,
2012
2011
2010
Net earnings attributable to BorgWarner Inc. . . . . . . .
$ 500.9
$ 550.1
$ 377.4
Weighted average shares of common stock
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112.652
109.229
114.155
Basic earnings per share of common stock . . . . . . . .
$
4.45
$
5.04
$
3.31
Diluted earnings per share:
Net earnings attributable to BorgWarner Inc. . . . . . . .
Adjusted for net interest expense on convertible
$ 500.9
$ 550.1
$ 377.4
notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.8
21.5
20.4
Diluted net earnings attributable to
BorgWarner Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 506.7
$ 571.6
$ 397.8
Weighted average shares of common stock
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of 3.50% convertible senior notes . . . . . . . .
Effect of warrant
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock-based compensation . . . . . . . . . . . .
112.652
3.322
3.400
2.003
109.229
11.389
5.215
2.635
114.155
11.389
1.464
2.567
Total dilutive effect on weighted average shares of
common stock outstanding . . . . . . . . . . . . . . . . . . .
8.725
19.239
15.420
Weighted average shares of common stock
outstanding including dilutive shares . . . . . . . . . . .
121.377
128.468
129.575
Diluted earnings per share of common stock . . . . . . .
$
4.17
$
4.45
$
3.07
Total anti-dilutive shares:
Call options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.939
6.141
2.836
NOTE 16 RECENT TRANSACTIONS
BorgWarner BERU Systems Korea Co., Ltd.
During the third and fourth quarters of 2012, the Company completed the purchase of the
remaining 49% of BorgWarner BERU Systems Korea Co., Ltd. for $15.0 million in cash, which has
been classified as a financing activity within the Consolidated Statement of Cash Flows.
In
accordance with ASC Topic 810,”Consolidation,” the Company reduced its noncontrolling interest
balance by $7.0 million and reduced capital in excess of par value by $8.0 million. As a result of these
transactions, the Company now owns 100% of BorgWarner BERU Systems Korea Co., Ltd.
Spark plug business
During the second and third quarters of 2012, the Company incurred $39.7 million in expense
associated with the loss on sale of the spark plug business to Federal-Mogul Corporation primarily
related to the write-down of prior purchase price accounting adjustments. These purchase price
accounting adjustments were originally reported in the Engine segment and related to the BERU
acquisition. As a result of the sale, the Company received $55.2 million in cash, which is classified as
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
an investing activity within the Consolidated Statement of Cash Flows. The sale will allow BorgWarner
to continue to focus on expanding BERU Systems’ core products of glow plugs, diesel cold start
systems and other gasoline ignition technologies.
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 the write-down of prior purchase
price accounting adjustments related to the BERU acquisition, 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 to Huf Electronics GmbH. The sale will allow BorgWarner
to continue to focus on expanding BERU Systems’ core products of glow plugs, diesel cold start
systems and other gasoline ignition 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 considered non-cash
transactions in the Consolidated Statement of Cash Flows.
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.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
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
ignition technology enables high-performing,
lean burning engines to significantly improve fuel
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
In 2009, the Company completed the acquisition of 100% of BERU Aktiengesellschaft’s (“BERU”)
outstanding shares through a German legal process referred to as a “squeeze out,” which required
the Company to pay €73.39 per share to the non-controlling shareholders. Certain non-controlling
shareholders had challenged the “squeeze out” share price of €73.39 . In November 2012, the court
ruled confirming the adequacy of the share price of €73.39, therefore the Company would not be
required to pay any additional amount to the “squeezed-out” shareholders. However, the non-
controlling shareholders have appealed the ruling and no date has been set by the court to rule on the
appeal.
In addition, certain non-controlling shareholders had challenged the 2008 Domination and Profit
Sharing Agreement (“DPTA”).
In the same ruling on the “squeeze out,” the court ruled on the
adequacy of the guaranteed dividend calculated in the DPTA. The ruling increased the guaranteed
divided by a negligible amount. The non-controlling shareholders and the Company have appealed
this ruling and no date has yet been set by the court to rule on the appeals.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 17 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 income or loss.
Adjusted EBIT is the measure of segment income 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.
2012 Segment information
(millions of dollars)
Customers
Net
Year-end
assets
Depreciation/
amortization
asset
expenditures (b)
Long-lived
Engine . . . . . . . . . . . . . . . . . . . . . $4,884.5
2,298.7
Drivetrain . . . . . . . . . . . . . . . . . . .
Inter-segment eliminations . . . . .
$4,913.0 $3,299.2
1,652.2
—
— 2,298.7
(28.5)
— (28.5)
Total . . . . . . . . . . . . . . . . . . . . .
Corporate (a) . . . . . . . . . . . . . . . .
7,183.2
—
— 7,183.2
—
4,951.4
— 1,449.4
$177.8
91.3
—
269.1
19.5
Consolidated . . . . . . . . . . . . . . $7,183.2
$ — $7,183.2 $6,400.8
$288.6
$269.9
125.6
—
395.5
11.9
$407.4
2011 Segment information
(millions of dollars)
Customers
Net
Year-end
assets
Depreciation/
amortization
asset
expenditures (b)
Long-lived
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
96
$264.3
115.9
—
380.2
13.5
$393.7
Net sales
Inter-
segment
$ 28.5
Net sales
Inter-
segment
$ 20.4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2010 Segment information
Net sales
Inter-
segment
$ 19.4
Net
Year-end
assets
Depreciation/
amortization
asset
expenditures (b)
Long-lived
(millions of dollars)
Customers
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
(a) Corporate assets include investments and advances and deferred income taxes.
(b) Long-lived asset expenditures include capital expenditures and tooling outlays.
$181.3
83.5
—
264.8
11.8
$276.6
Adjusted earnings before interest, income taxes and noncontrolling interest (“Adjusted EBIT”)
(millions of dollars)
Year Ended December 31,
2012
2011
2010
Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $786.4 $774.3 $537.9
137.0
Drivetrain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161.2
209.1
Adjusted EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from disposal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement related obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patent infringement settlement, net of legal costs incurred . . . . . . . . . . . . . .
Environmental litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BERU—Eichenauer equity investment gain . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate, including equity in affiliates’ earnings and stock-based
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense and finance charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes and noncontrolling interest . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to the noncontrolling interest, net of tax . . . . . . . .
995.5
39.7
27.4
17.3
935.5
21.5
—
—
— (29.1)
—
—
—
—
115.4
(4.7)
39.4
761.0
238.6
522.4
21.5
107.4
(4.8)
74.6
765.9
195.3
570.6
20.5
674.9
—
—
—
—
28.0
(8.0)
111.0
(2.8)
68.8
477.9
81.7
396.2
18.8
Net earnings attributable to BorgWarner Inc.
. . . . . . . . . . . . . . . . . . . . . . . $500.9 $550.1 $377.4
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographic Information
Outside the U.S., only China, Germany, Hungary and South Korea exceeded 5% of consolidated
net sales during the year ended December 31, 2012, attributing sales to the location of production
rather than the location of the customer. Also, the Company’s 50% equity investment in NSK-Warner
(see Note 5) of $184.4 million, $189.2 million and $180.3 million at December 31, 2012, 2011 and
2010, 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)
2012
2011
2010
2012
2011
2010
United States . . . . . . . . . . . . . . . . . . . $1,857.2 $1,674.0 $1,451.1 $ 508.1 $ 492.6 $ 466.6
Europe:
Germany . . . . . . . . . . . . . . . . . . . . .
Hungary . . . . . . . . . . . . . . . . . . . . .
France . . . . . . . . . . . . . . . . . . . . . . .
Other Europe . . . . . . . . . . . . . . . . .
Total Europe . . . . . . . . . . . . . . . . . . .
South Korea . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . .
Other foreign . . . . . . . . . . . . . . . . . . .
1,871.3
448.9
335.2
1,015.1
3,670.5
505.6
499.1
650.8
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
432.2
64.3
45.9
225.8
768.2
140.4
184.3
187.0
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
Total
. . . . . . . . . . . . . . . . . . . . . . . . $7,183.2 $7,114.7 $5,652.8 $1,788.0 $1,664.3 $1,542.6
Sales to Major Customers
the years ended December 31, 2011 and 2010,
Consolidated net sales to a single customer (including their subsidiaries), which exceeded 10% of
our total net sales, were to Volkswagen of approximately 17% for the year ended December 31, 2012
and 19% for
respectively; and to Ford of
approximately 13%, 12%, and 11% for the years ended December 31, 2012, 2011 and 2010,
respectively. Both of the Company’s reporting segments had significant sales to Volkswagen and
Ford in 2012, 2011 and 2010. Accounts receivable from these customers at December 31, 2012
comprised approximately 18% ($218.8 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, 2012, 2011 and 2010, respectively. The Company currently supplies light
vehicle turbochargers to many OEMs including BMW, Daimler, Fiat, Ford, General Motors, Hyundai,
PSA, Renault and Volkswagen. No other single product line accounted for more than 10% of
consolidated net sales in any of the years presented.
98
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
2012
2011
Net sales . . . . . . . . . . . . . . . . . . . . $1,912.5 $1,856.4 $1,695.2 $1,719.1 $7,183.2 $1,730.4 $1,818.8 $1,791.8 $1,773.7 $7,114.7
5,704.3
Cost of sales . . . . . . . . . . . . . . . . .
1,516.7
1,473.2
1,461.7
1,374.9
1,387.6
5,716.3
1,351.5
1,414.0
1,441.0
Gross profit . . . . . . . . . . . . . . . .
395.8
383.2
343.7
344.2
1,466.9
342.8
357.1
350.8
359.7
1,410.4
Selling, general and
administrative expenses . . . . .
Other (income) expense . . . . . . . .
Operating income . . . . . . . . . . .
Equity in affiliates’ earnings, net
of tax . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . .
Interest expense and finance
169.0
1.1
225.7
153.1
36.6
193.5
151.0
29.7
163.0
156.2
17.3
170.7
629.3
84.7
752.9
165.1
(1.6)
157.7
(28.9)
179.3
228.3
151.4
0.6
198.8
146.8
21.8
191.1
621.0
(8.1)
797.5
(9.2)
(1.4)
(12.5)
(1.3)
(11.1)
(1.0)
(10.0)
(1.0)
(42.8)
(4.7)
(8.4)
(1.0)
(8.1)
(1.2)
(11.5)
(1.3)
(10.2)
(1.3)
(38.2)
(4.8)
charges . . . . . . . . . . . . . . . . . . .
15.1
12.6
5.0
6.7
39.4
18.4
20.5
18.5
17.2
74.6
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 to
221.2
57.5
163.7
194.7
68.5
126.2
170.1
64.2
105.9
175.0
48.4
126.6
761.0
238.6
522.4
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
5.7
5.6
4.8
5.4
21.5
4.9
5.3
5.1
5.2
20.5
BorgWarner Inc. (a) . . . . . . . . $ 158.0 $ 120.6 $ 101.1 $ 121.2 $ 500.9 $ 124.5 $ 162.0 $ 141.6 $ 122.0 $ 550.1
Earnings per share — basic . . . . $
Earnings per share — diluted . . . $
1.46 $
1.28 $
1.08 $
1.00 $
0.88 $
0.85 $
1.05 $
1.03 $
4.45 $
4.17 $
1.13 $
1.00 $
1.49 $
1.31 $
1.30 $
1.15 $
1.12 $
1.00 $
5.04
4.45
(a) The Company’s results were impacted by the following:
(cid:129) Quarter ended December 31, 2012: Retirement
related obligations of $17.3 million are
comprised of a $5.7 million loss resulting from the settlement of a portion of the Muncie Plant’s
pension obligation and an $11.6 million expense associated with the retirement of certain Named
Executive Officers. These obligations were partially offset by a $6.1 million tax benefit. The
Company incurred tax expense of $3.9 million which included $11.1 million of U.S. tax expense to
correct the income taxes payable balance, partially offset by tax benefits resulting from changes
to the statutory income tax rate in certain countries and the settlement of certain tax audits.
(cid:129) Quarter ended September 30, 2012: The Company incurred $1.8 million of expense and $11.2
million of tax expense associated with the completion of the sale of its spark plug business. The
Company also recorded restructuring expense of $27.4 million primarily associated with the
disposal and future requirements of BERU’s on-going business, which was partially offset by a tax
benefit of $7.7 million. Additionally, the Company incurred tax expense of $6.9 million primarily
resulting from the settlement of certain tax audits.
99
(cid:129) Quarter ended June 30, 2012: The Company recorded expense of $37.9 million primarily
due to the write-down of prior purchase price accounting adjustments included within the
disposal group as a result of signing a Master Purchase Agreement to sell the spark plug
business to Federal-Mogul Corporation, which was partially offset by a tax benefit of $5.5
million resulting from the write-down. Additionally, the Company recorded tax expense of
$9.0 million related to its decision to change its cash repatriation assertion for some of its
foreign subsidiaries.
(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 $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.
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, 2012, 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, 2012 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 2013 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 2013 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 of 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 2013 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, 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 2013 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 2013 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
The information required by this Section (a)(3) of Item 15 is set forth on the Exhibit Index that
follows the Signatures page of this Form 10-K. The information required by this Section (a)(1) of
Item 15 is set forth above in Item 8, Financial Statements and Supplementary Data. All financial
statement schedules have been omitted, since the required information is not applicable or is not
present in amounts sufficient to require submission of the schedule, or because the information
required is included in the consolidated financial statements and notes thereto included in this Form
10-K.
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/
JAMES R. VERRIER
James R. Verrier
President and Chief Executive Officer
Date: February 14, 2013
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, 2013.
Signature
Title
/S/ JAMES R. VERRIER
James R. Verrier
/S/ RONALD T. HUNDZINSKI
Ronald T. Hundzinski
/S/ STEVEN G. CARLSON
Steven G. Carlson
/S/ TIMOTHY M. MANGANELLO
Timothy M. Manganello
/S/ ROBIN J. ADAMS
Robin J. Adams
President and Chief Executive Officer
(Principal Executive Officer) and Director
Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President and Controller
(Principal Accounting Officer)
Executive Chairman of the Board
Vice Chairman of the Board, Executive Vice
President and Chief Administrative Officer
/S/ PHYLLIS O. BONANNO
Director
Phyllis O. Bonanno
/S/ DAVID T. BROWN
David T. Brown
/S/ JAN CARLSON
Jan Carlson
/S/ DENNIS C. CUNEO
Dennis C. Cuneo
Director
Director
Director
/S/ JERE A. DRUMMOND
Director
Jere A. Drummond
/S/ JOHN R. MCKERNAN, JR.
Director
John R. McKernan, Jr.
/S/ ALEXIS P. MICHAS
Alexis P. Michas
Director
/S/ ERNEST J. NOVAK, JR.
Director
Ernest J. Novak, Jr.
/S/ RICHARD O. SCHAUM
Richard O. Schaum
Director
/S/ THOMAS T. STALLKAMP
Director
Thomas T. Stallkamp
[THIS PAGE INTENTIONALLY LEFT BLANK]
Exhibit
Number
3.1/4.1
3.2/4.2
3.3
3.4
4.3
4.4
4.5
4.6
10.1
10.2
10.3
EXHIBIT INDEX
Description
Restated Certificate of Incorporation of the Company, as amended, (incorporated by
reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30,2012).
(incorporated by
Amended and Restated By-Laws of
reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2012).
the Company, as amended,
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
Automotive, Inc.*
Inc.
into Borg-Warner
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).
First Supplemental Indenture between the Company 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).
Third Supplemental Indenture dated as of September 16, 2010 between the Company
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 Registration Statement 333-
172198 filed on February 11, 2011).
Credit Agreement dated as of June 30, 2011, among the Company, 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).
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
†10.16
Description
Receivables Purchase Agreement dated as of December 21, 2009 among BWA
Receivables Corporation, as seller, the Company, as the collection agent, the purchasers
from time to time party thereto, and Wachovia Bank, National Association, as
administrative agent (incorporated by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed December 28, 2009).
Amendment No. 1 Receivables Purchase Agreement dated as of September 8, 2010,
among BWA Receivables Corporation, as seller, the Company., 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 Quarterly Report on Form 10-Q filed October 27, 2010).
Amendment No. 2 Receivables Purchase Agreement dated as of November 1, 2012,
among BWA Receivables Corporation, as seller, the Company, as the collection agent and
Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as
administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report Form 8-K filed November 7, 2012).
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. Amended and Restated 2004 Stock Incentive Plan Amended
Performance Share Award Agreement (incorporated by reference to Exhibit 10.1 of the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
Form of BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan Performance
Units Award Agreement (incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K filed March 31, 2009).
Form of BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan Restricted
Stock Agreement for Employees.*
Form of BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan Stock Units
Award Agreement Non-U.S. Employees.*
Form of BorgWarner Inc. 2004 Stock Incentive Plan Non-Qualified Stock Option Award
Agreement.*
Borg-Warner Automotive,
approved February 2, 2000.*
Inc. Executive Stock Performance Plan, Revised and Re-
A-2
Exhibit
Number
†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
21.1
23.1
31.1
31.2
32.1
Description
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).
Form of Amendment dated December 10, 2012 to the Borg-Warner Automotive Inc.
Retirement Savings Excess Benefit Plan.*
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).
Inc. 2004 Deferred Compensation Plan (as amended and restated)
BorgWarner
(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.*
Assignment of Trademarks and License Agreement.*
Amendment to Assignment of Trademarks and License Agreement.*
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-3
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BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
borgwarner.com