Stockholders letter and annual report on form 10-K
BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
borgwarner.com
321396_BorgWarner_CVR.indd 1-3
3/6/17 6:35 PM
We Deliver Propulsion B O R G W A R N E R V I S I O N
B O R G W A R N E R B E L I E F S
D e a r F e l l ow S t o c k h o l D e r S ,
ongoing efforts, the name BorgWarner
Over the course of my 28-year career at
continues to be synonymous with
BorgWarner, people have often asked
cutting-edge technology and quality,
me what is the secret to our success.
allowing us to recruit and retain a team
There are two parts to the answer, with
of approximately 27,000 people in
the first and most crucial – our people
17 countries around the world, that is
– appearing to be a simple response.
second to none!
However, building and nurturing an
engaged and dedicated team is no
small feat, and is predicated on the
daily contributions from every person
at the Company to strengthen our
position in the industry. Based on these
The second part of the “secret to
our success” answer is best outlined
using the three key factors we have
consistently highlighted over the years
– and continue to provide an excellent
J A M E S V E R R I E R ,
President and Chief Executive Officer
321396_BorgWarner_CVR.indd 4-6
3/6/17 6:35 PM
2016BORGWARNER TODAY: Balance andA Clean, Energy-Efficient World Respect for Each Other Power of CollaborationPassion for ExcellencePersonal Integrity Responsibility to Our Communities second to none!
roadmap for the Company going
evolved over time, most recently to
forward:
• Technology Leadership
• Customer, Geographic and
Propulsion System Diversity
• Financial Strength and Discipline
While these three main areas of focus
include propulsion system diversity.
Today, we passionately refer to
ourselves as a propulsion company,
which we believe best encapsulates the
diverse array of products we provide
for our global customer base. Our track
record of success demonstrates our
leadership in clean, energy-efficient
solutions for combustion, hybrid, and
have been at the core of our corporate
electric vehicles.
identity for many years, they have
I N S H O R T, W E D E L I V E R P R O P U L S I O N !
Earnings Performance*
Per Diluted Share *Excludes special items.
Sales Growth
Billions of Dollars
'12
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'14
'15
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$2.49
$2.89
$3.25
$3.04
$3.27
'12
'13
'14
'15
'16
$7.2
$7.4
$8.3
$8.0
$9.1
BORGWARNER TODAY: Diversity2016 STOCKHOLDERS LETTER AND ANNUAL REPORT ON FORM 10-K 1
2
While the methods of transporting
second key factor. We partner with
position. On behalf of the Company,
people and goods have been evolving
every major OEM and our revenue is
I’d like to personally thank our global
since the invention of the wheel, the
well-balanced geographically around the
finance leadership team for their ongoing
rate of change continues to increase
world. No single customer comprises
sound stewardship that continually
exponentially. At BorgWarner, we
more than 15% of our overall business
ensures our robust financial health,
have maintained our commitment to
and our geographic balance remains
which in turn allows us to succeed.
constantly advance the technologies
broad and strong. These two elements
that improve efficiency, emissions, and
help to minimize risks and insulate us
2016: Building upon our success
performance in all types of vehicles.
from varying regulations, consumer
Looking back, I would characterize our
Today, we remain at the forefront of
demands, automaker requirements, and
2016 operating performance as very
technology leadership. We are setting
regional economic shifts. BorgWarner
strong. The primary reason for that
the pace and driving changes across
has a long history of adapting to stay
assessment is our ability to deliver on
the industry, while maintaining our
ahead of the competition; as we evolve
our promises and meet or exceed the
strong competitive positioning. Our
into the next phase of growth, we will
expectations we placed on ourselves,
company has been the true innovator
continue to adapt as penetration rates
which is extremely important for all
in the industry throughout our more
for our products and average content
stakeholders. Not only did we meet or
than 90-year history. Propulsion sys-
per vehicle continue to grow in 2017
exceed our top- and bottom-line finan-
tem diversity is the best way to simply
and beyond.
describe the breadth and depth of
our offering as well as our ability to
lead the way as the automotive space
continues to transform in the 21st
Century.
While they are sometimes easy to
overlook, financial strength and
discipline are the most important
hallmarks of our Company and, quite
frankly, are the reasons we have been
cial expectations, we also implemented
a robust forecasting methodology, set
expectations, and delivered on them.
We were able to accomplish all of
this in spite of the significant macro
environment headwinds we faced.
We firmly believe the key to our future
able to excel in the previous two areas.
In summary, our 2016 U.S. GAAP net
success is the balance across propulsion
Without our financial strength we would
sales increased more than 13% to ap-
systems combined with customer
not be able to make the necessary
proximately $9 billion when compared
and geographic diversity to form the
internal investments and expand our
to 2015. Even excluding the impact of
offering to maintain our leadership
foreign currencies and the net impact
of the Remy acquisition, net sales
increased approximately 5% compared
to 2015. Our organic growth came in
towards the high end of our guidance
range and we produced solid operating
performance. We reported U.S. GAAP
operating income of $226 million, which
included approximately $890 million
of pretax expenses related to non-
comparable items. This generated U.S.
GAAP net earnings of $0.55 per diluted
share, which included the $(2.72) per
diluted share related to non-comparable
items, which are detailed in the 10-K.
Several of our facilities won safety,
training, and “Great Place to Work”
awards. Our facility in El Salto, Mexico
won the State of Jalisco’s Safety and
Health Award, our Emissions Systems
facility in Chungju, South Korea
received the prestigious Minister of
Employment and Labor Award and
our Powertrain Technical Center in
Auburn Hills, Michigan received a
Michigan Works! Impact Award, both in
recognition of our current and new
employee training programs that en-
courage innovation and cultivate talent.
Uses of Cash | Millions of Dollars
Customer Diversity Worldwide | 2016 Sales
'12
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$407
$296
$418 $57
$226
$563
$116
$111
$140
Capital Expenditures
Dividends
M&A Activity
Share Repurchase
$577
$117
$1,200
$350
$501 $113
$288
7% Other Americas
3% Commercial Vehicle
3% Asian OEMs
6% FCA
8% Ford
5% GM
6% Other Europe
4% Commercial Vehicle
1% Porsche
1% Jaguar/Landrover
1% FCA
position. On behalf of the Company,
I’d like to personally thank our global
finance leadership team for their ongoing
sound stewardship that continually
ensures our robust financial health,
which in turn allows us to succeed.
2016: Building upon our success
Looking back, I would characterize our
2016 operating performance as very
strong. The primary reason for that
assessment is our ability to deliver on
our promises and meet or exceed the
expectations we placed on ourselves,
which is extremely important for all
stakeholders. Not only did we meet or
exceed our top- and bottom-line finan-
cial expectations, we also implemented
a robust forecasting methodology, set
expectations, and delivered on them.
We were able to accomplish all of
this in spite of the significant macro
environment headwinds we faced.
In summary, our 2016 U.S. GAAP net
sales increased more than 13% to ap-
proximately $9 billion when compared
to 2015. Even excluding the impact of
foreign currencies and the net impact
of the Remy acquisition, net sales
increased approximately 5% compared
to 2015. Our organic growth came in
towards the high end of our guidance
range and we produced solid operating
performance. We reported U.S. GAAP
operating income of $226 million, which
included approximately $890 million
of pretax expenses related to non-
comparable items. This generated U.S.
GAAP net earnings of $0.55 per diluted
share, which included the $(2.72) per
diluted share related to non-comparable
items, which are detailed in the 10-K.
Several of our facilities won safety,
training, and “Great Place to Work”
awards. Our facility in El Salto, Mexico
won the State of Jalisco’s Safety and
Health Award, our Emissions Systems
facility in Chungju, South Korea
received the prestigious Minister of
Employment and Labor Award and
our Powertrain Technical Center in
Auburn Hills, Michigan received a
Michigan Works! Impact Award, both in
recognition of our current and new
employee training programs that en-
courage innovation and cultivate talent.
Our success in 2016 was not solely financial.
We are grateful that our customers and industry
experts chose to recognize BorgWarner for
our innovative, high-quality products; excellent
job development and safety programs; and our
industry-leading customer service.
Customer Diversity Worldwide | 2016 Sales
7% Other Americas
3% Commercial Vehicle
3% Asian OEMs
6% FCA
8% Ford
5% GM
6% Other Europe
4% Commercial Vehicle
1% Porsche
1% Jaguar/Landrover
1% FCA
GM 2%
Ford 1%
VW/Audi 1%
Other China 9%
Hyundai 8%
Other Asia 6%
Ford 3%
VW/Audi 11%
Daimler 5%
Renault/Nissan 4%
BMW 3%
PSA 2%
Asia
EX. C HINA
14%
China
Americas
Europe
13%
33%
40%
2016 STOCKHOLDERS LETTER AND ANNUAL REPORT ON FORM 10-K 3 4
...whether it’s in electrics, whether it’s in
hybrids, or combustion power products,
BorgWarner is and will continue to be
the leader in that space.
Electric Drive Moldule (eDM)
eGearDrive® Transmission
Our campus in Ramos-Arizpe, Mexico
won two awards from The Great Place
to Work® Institute as one of the 100
Best Companies to Work for in Mexico.
In addition, several of our facilities
were recognized for their excellence by
our customers. Our facility in Itatiba,
Brazil, received Ford’s Q1 Award, its
highest designation for suppliers,
in recognition of consistently good
performance in quality, delivery,
robust operating systems, material
management, and compliance with
environmental system requirements.
Our facility in San Luis Potosi, Mexico,
was awarded Toyota Group’s
prestigious Excellence in Quality
Award for achieving an impressive
year-long record of 100% on-time
delivery and zero plant rejections.
Of course, 2016 was also our first
full year with former Remy operations
as part of the business. Following
the completion of the acquisition
in December 2015, we have worked
closely with the Remy team to
integrate, collaborate, and share
best practices. Perhaps this is best
exemplified by the November 2016
launch of the electric drive module
(eDM) with integrated eGearDrive®
transmission. Production is expected
to begin in summer 2017 for two pure
electric vehicles from a major Chinese
automaker. The fact that teams from
Remy and BorgWarner were able to
combine resources and bring this
product to market in less than a year
is a real testament to the collaboration
efforts and the strength of the expertise
across both teams. We believe our
eGearDrive® transmission exemplifies
the type of programs we expect to
produce going forward and why the
BorgWarner and Remy teams are an
impressive combination.
Consistent growth and
robust backlog
Earlier this year, we issued another
strong net new business backlog,
which we expect to drive a compound
annual organic growth rate of five-
to-seven percent from 2016 through
2019. For the years 2017 through
2019, we provided a range of $1.35
billion to $1.95 billion in our three-year
backlog, which is approximately 20%
higher at the midpoint versus our prior
three-year backlog. This represents a
meaningful increase and highlights our
confidence in the growth outlook.
This information also highlights the
strong balance and future diversity of
our business across Asia, the Americas,
and Europe, which are expected to
account for approximately 40%, 39%,
and 21% of the total net new business
backlog over the three-year period,
respectively. Approximately 32%
of the net new business backlog is
expected in China with approximately
$260
$240
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$100
2011
2012
2013
2014
2015
2016
2 0 1 6 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K 5
Our campus in Ramos-Arizpe, Mexico
won two awards from The Great Place
to Work® Institute as one of the 100
Best Companies to Work for in Mexico.
In addition, several of our facilities
were recognized for their excellence by
our customers. Our facility in Itatiba,
Brazil, received Ford’s Q1 Award, its
highest designation for suppliers,
in recognition of consistently good
performance in quality, delivery,
robust operating systems, material
management, and compliance with
environmental system requirements.
Our facility in San Luis Potosi, Mexico,
was awarded Toyota Group’s
prestigious Excellence in Quality
Award for achieving an impressive
year-long record of 100% on-time
delivery and zero plant rejections.
Of course, 2016 was also our first
full year with former Remy operations
as part of the business. Following
the completion of the acquisition
in December 2015, we have worked
closely with the Remy team to
integrate, collaborate, and share
best practices. Perhaps this is best
exemplified by the November 2016
launch of the electric drive module
(eDM) with integrated eGearDrive®
transmission. Production is expected
to begin in summer 2017 for two pure
electric vehicles from a major Chinese
automaker. The fact that teams from
Remy and BorgWarner were able to
combine resources and bring this
product to market in less than a year
is a real testament to the collaboration
efforts and the strength of the expertise
across both teams. We believe our
eGearDrive® transmission exemplifies
the type of programs we expect to
produce going forward and why the
BorgWarner and Remy teams are an
impressive combination.
Consistent growth and
robust backlog
Earlier this year, we issued another
strong net new business backlog,
which we expect to drive a compound
annual organic growth rate of five-
to-seven percent from 2016 through
2019. For the years 2017 through
2019, we provided a range of $1.35
billion to $1.95 billion in our three-year
backlog, which is approximately 20%
higher at the midpoint versus our prior
three-year backlog. This represents a
meaningful increase and highlights our
confidence in the growth outlook.
This information also highlights the
strong balance and future diversity of
our business across Asia, the Americas,
and Europe, which are expected to
account for approximately 40%, 39%,
and 21% of the total net new business
backlog over the three-year period,
respectively. Approximately 32%
of the net new business backlog is
expected in China with approximately
25% with the North American domestic
OEMs. Our top customers in the
backlog include OEMs from all three
major regions, meaning our business
will not become overly reliant on any
one region.
The updated forecasting process we
have implemented is working well
and has helped us navigate through
significant end-market volatility,
including changes in launch timing,
volumes, and conditions in certain
end markets and subsectors. With a
multitude of external factors impacting
our business, I am very proud that our
2017 and 2018 backlog numbers remain
unchanged at the start of the year. It is
clear the process we put in place last
year has significantly reduced the
variability in the announcement and
led to stability in the data this year.
As a result of the Remy acquisition
that we completed near the end of
2015, the backlog includes programs
Total Stockholder Return
$100 invested on 12/31/11 in stock or index, including reinvestment
of dividends. Fiscal year ending December 31.
$260
$240
$220
$200
$180
$160
$140
$120
$100
BorgWarner Inc.
Peer Group
S&P 500
SIC Code Index
2011
2012
2013
2014
2015
2016
6
related to rotating electric components
for 2017 as we remain committed
capabilities, no one team or company
including starters, alternators, and
to being a mid- to high-single digit
is omniscient and we will continue
electric motors. One of the reasons
organic growth company.
for acquiring Remy was their ability
to become a major contributor to our
backlog, as well as our future growth,
and we are now seeing that start to
come to fruition.
We have also provided healthy guidance
for the full year 2017, with net sales
expected to be between approximately
$8.8 billion and $9 billion, which implies
organic sales growth of 3.5% to 6.0%,
excluding certain items such as the
impact of weaker foreign currencies
and continued margin improvement.
In turn, this should produce free cash
flow within a range of $450 million to
$500 million. We are pleased with our
projections and the overall outlook
Balanced approach to capital
deployment
Our board of directors unanimously
believes that a balanced approach to
capital deployment provides the best
overall return for our shareholders. In
keeping with that approach, we expect
to return cash via our quarterly dividend,
which currently stands at $0.14 per
share of common stock and was last
paid on March, 15, 2017. In addition, we
plan to repurchase approximately $100
million of our shares during 2017.
While we have faith in our tremendous
internal research and development
to explore ways to supplement our
organic growth via strategic acquisitions.
In particular, we will look to acquire
innovative technologies that will
complement and combine well with
our existing resources to ensure we
remain at the forefront of the industry.
Current position bodes well
for the future
The need for advanced propulsion
technology continues to grow rapidly
in combustion, hybrid, and electric. In
turn, the continued strong adoption rate
of our technology will continue to drive
the consistent growth in our overall
business. As we look toward the longer-
The Drivetrain Segment harnesses a legacy of more than
100 years as an industry innovator in transmission and all-wheel drive technology. The group is
The Engine Segment develops air management strategies and
products to optimize engines for fuel efficiency, reduced emissions and enhanced performance.
leveraging its understanding of powertrain clutching technology to develop interactive control
BorgWarner’s expertise in engine timing systems, boosting systems, ignition systems, air and noise
systems and strategies for all types of torque management.
management, cooling and controls is the foundation for this collaboration in development.
Sales in Millions of Dollars
DualTronic™
Transmission
Clutch Modules
GenerationV
All-Wheel Drive
Sales in Millions of Dollars
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$2,299 M
$2,447 M
$2,631 M
$2,557 M
$3,524 M
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All-Wheel Drive
Transfer Cases
Transmission
One-Way Clutches
Transmission
Control Modules
Transmission
Friction Products
Rotating Electrics
Electric Motors
and Transmissions
2 0 1 6 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K 7
for 2017 as we remain committed
capabilities, no one team or company
term, we expect approximately 20% of
propulsion evolution occurs. However, a
to being a mid- to high-single digit
is omniscient and we will continue
all light vehicles to be either hybrid
key difference is that BorgWarner is
organic growth company.
to explore ways to supplement our
or electric during the next decade, and
becoming involved much earlier in
Balanced approach to capital
deployment
Our board of directors unanimously
believes that a balanced approach to
capital deployment provides the best
overall return for our shareholders. In
keeping with that approach, we expect
to return cash via our quarterly dividend,
which currently stands at $0.14 per
share of common stock and was last
paid on March, 15, 2017. In addition, we
plan to repurchase approximately $100
million of our shares during 2017.
While we have faith in our tremendous
internal research and development
organic growth via strategic acquisitions.
BorgWarner is on track to generate
the process and is not only shaping
In particular, we will look to acquire
revenues that reflect the industry. In
the propulsion architecture, but also
innovative technologies that will
the near term, our portion of electric
influencing the overall vehicle architecture.
complement and combine well with
and hybrid revenue is growing, and we
Our teams have earned trusted
our existing resources to ensure we
are aligned to move with the market’s
partnerships with customers. We
remain at the forefront of the industry.
future propulsion mix. In fact, as I
leverage these relationships to gain a
Current position bodes well
for the future
The need for advanced propulsion
technology continues to grow rapidly
in combustion, hybrid, and electric. In
turn, the continued strong adoption rate
of our technology will continue to drive
the consistent growth in our overall
business. As we look toward the longer-
write this, we are engaged with every
deeper understanding of the challenges
major OEM regarding hybrid and
our customers face and then develop
electric vehicle development.
the next solution. The significant amount
Our teams are working on many
advanced programs and remain very
active and aggressive in the space, ex-
of collaboration speaks to the high level
of expertise we provide and the regard
with which they hold our people.
pecting to build upon the new business
During the next decade, we expect
wins we have already announced in 2017.
hybrid and electric vehicles to become
It is important to note that the cycle
a much larger proportion of the overall
for development remains consistent at
market. The crucial inflection point
approximately three-to-four years as the
is approximately five years from now
The Engine Segment 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.
GenerationV
All-Wheel Drive
Sales in Millions of Dollars
Regulated Two-Stage
Turbocharger
Engine Timing
Transmission
One-Way Clutches
Transmission
Friction Products
Electric Motors
and Transmissions
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$4,913M
$5,022M
$5,706M
$5,500M
$5,590M
Exhaust Gas
Recirculation
Cooling Systems
Cam Torque
Actuated Variable
Cam Timing
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.
8
Estimated 2023
Average Content
Per Vehicle
$285
$225
$215
Participation Rate
53%
42%
29%
when we believe meaningful changes
in the mix will accelerate rapidly in the
subsequent years. The consistent theme
we hear from OEMs is that balance
across all three architectures will be im-
portant. In other words, while each fleet
and program will have different mixes
and combinations, the need for balance
across combustion, hybrid, and electric
propulsion systems remains strong.
Always at the forefront
In closing, there are few challenges today
as important as creating solutions that
support a cleaner, more energy-efficient
world. Our focus on propulsion system
diversity matches the vehicle mobility
trends we are seeing across the
globe, and our deep product portfolio
means we are well positioned to meet
the future propulsion needs of our
global customer base. As BorgWarner
evolves into its next phase of growth,
as it has many times in its 90-year
history of innovation, technological
leadership will continue to be a key
differentiator as we build upon our
strengths and forge new frontiers at
the forefront of propulsion.
Our financial strength and discipline
will continue to underpin our success
as we remain focused on maintain-
ing our long-term profitable growth
trajectory. We are confident in our
ability to execute our plan and deliver
our goal of mid- to high-single digit
organic growth. Thank you for your
ongoing support of BorgWarner, I look
forward to reporting on our successful
progress in the years ahead.
Sincerely,
James Verrier
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 1-12162
BorgWarner Inc.
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
Incorporation or organization
13-3404508
(I.R.S. Employer Identification No.)
3850 Hamlin Road,
Auburn Hills, Michigan 48326
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248) 754-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on
which registered
New York Stock Exchange
Securities registered Pursuant to Section 12(g) of the Act: None
__________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K
Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
No
The aggregate market value of the voting common stock of the registrant held by stockholders (not including voting common stock held by directors and
executive officers of the registrant) on June 30, 2016 (the last business day of the most recently completed second fiscal quarter) was approximately $6.3
billion.
Yes
As of February 3, 2017, the registrant had 212,690,967 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.
Portions of the BorgWarner Inc. Proxy Statement for the 2017 Annual Meeting of Stockholders
Document
Part of Form 10-K into
which incorporated
Part III
BORGWARNER INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2016
INDEX
PART I.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II.
Market for 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
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
PART III.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV.
Page No.
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2
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Statements contained in this Form 10-K (including Management's Discussion and Analysis of Financial
Condition and Results of Operations) may contain forward-looking statements as contemplated by the 1995
Private Securities Litigation Reform Act (the “Act”) that are based on management's current outlook,
expectations, estimates and projections. Words such as "anticipates," "believes," "continues," "could,"
"designed," "effect," "estimates," "evaluates," "expects," "forecasts," "goal," "initiative," "intends," "outlook,"
"plans," "potential," "project," "pursue," "seek," "should," "target," "when," "would," and 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.
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:
fluctuations in domestic or foreign vehicle production; the continued use by original equipment manufacturers
of outside suppliers, the ability to achieve anticipated benefits from, and to successfully integrate,
acquisitions, fluctuations in demand for vehicles containing our products; changes in general economic
conditions; and the other risks noted under Item 1A, “Risk Factors,” and in other reports that we file with
the Securities and Exchange Commission. We do not undertake any obligation to update or announce
publicly any updates to or revision to any of the forward-looking statements in this Form 10-K to reflect any
change in our expectations or any change in events, conditions, circumstances, or assumptions underlying
the statements.
This section and the discussions contained in Item 1A, "Risk Factors," and in Item 7, subheading "Critical
Accounting Policies" in this report, are intended to provide meaningful cautionary statements for purposes
of the safe harbor provisions of the Act. This should not be construed as a complete list of all of the economic,
competitive, governmental, technological and other factors that could adversely affect our expected
consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not
currently known to us or that we currently believe are immaterial also may impair our business, operations,
liquidity, financial condition and prospects.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with accounting principles generally accepted in the United
States of America (“GAAP”), this report includes non-GAAP financial measures. The Company believes
these non-GAAP financial measures provide additional information that is useful to investors in
understanding the underlying performance and trends of the Company. Readers should be aware that non-
GAAP financial measures have inherent limitations and should be cautious with respect to the use of such
measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together
with GAAP measures, to assist in the evaluation of our operating performance or financial condition. We
ensure that these measures are calculated using the appropriate GAAP or regulatory components in their
entirety and that they are computed in a manner intended to facilitate consistent period-to-period
3
comparisons. The Company's method of calculating these non-GAAP measures may differ from methods
used by other companies. These non-GAAP measures should not be considered in isolation or as a substitute
for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements. Where
non-GAAP financial measures are used, the most directly comparable GAAP or regulatory financial measure,
as well as the reconciliation to the most directly comparable GAAP or regulatory financial measure, can be
found in this report.
4
ITEM 1. BUSINESS
PART I
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a Delaware corporation incorporated
in 1987. We are a global product leader in clean and efficient technology solutions for combustion, hybrid
and electric vehicles. Our products help improve vehicle performance, propulsion 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 Europe, the Americas and Asia and is an original equipment supplier to every
major automotive OEM in the world.
Financial Information About Reporting Segments
Refer to Note 19, “Reporting Segments and Related Information,” to the Consolidated Financial
Statements in Item 8 of this report for financial information about the Company's reporting segments.
Narrative Description of Reporting Segments
The Company reports its results under two reporting segments: Engine and Drivetrain. Net sales by
reporting segment for the years ended December 31, 2016, 2015 and 2014 are as follows:
(millions of dollars)
Engine
Drivetrain
Inter-segment eliminations
Net sales
Year Ended December 31,
2016
5,590.1 $
3,523.7
(42.8)
9,071.0 $
2015
5,500.0 $
2,556.7
(33.5)
8,023.2 $
2014
5,705.9
2,631.4
(32.2)
8,305.1
$
$
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 $737 million,
$650 million and $694 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Engine
The Engine Segment develops and manufactures products to improve fuel economy, reduce emissions
and enhance performance. Increasingly stringent regulation of, and consumer demand for, better fuel
economy and emissions performance are driving demand for the Engine Segment's products in gasoline
and diesel engines and alternative powertrains. The Engine Segment's technologies include: turbochargers,
timing systems, emissions systems, thermal systems, thermostats, diesel cold start and gasoline ignition
technology.
Turbochargers provide several benefits including increased power for a given engine size, improved
fuel economy and reduced emissions. The Engine Segment has benefited from the growth in turbocharger
demand around the world for both diesel and gasoline engines. The Engine Segment provides turbochargers
for light, commercial and off-highway applications for diesel and gasoline engine manufacturers in the
Americas, Europe and Asia. The Engine Segment also designs and manufactures turbocharger actuators
using integrated electronics to precisely control turbocharger speed and pressure ratio.
5
Sales of turbochargers for light vehicles represented approximately 28%, 31% and 28% of total net sales
for the years ended December 31, 2016, 2015 and 2014, respectively. The Engine Segment currently
supplies turbochargers to many OEMs including BMW, Daimler, Fiat Chrysler Automobiles ("FCA"), Ford,
General Motors, Great Wall, Hyundai, Renault, Volkswagen and Volvo. The Engine Segment also supplies
turbochargers to several commercial vehicle and off-highway OEMs including Caterpillar, Daimler, Deutz,
John Deere, MAN, Navistar and Weichai.
The Engine Segment's turbocharger technologies include regulated two-stage turbocharging system,
known as R2S®, regulated 3-stage turbocharging systems known as R3S™, variable turbine geometry
("VTG") turbochargers for diesel engines and turbochargers for gasoline direct injected engines, all of which
may be found in numerous applications around the world. For example, the Engine Segment supplies its
award winning VTG turbocharger technology to VW, BMW, FCA, Hyundai, Volvo and Renault. Also, the
Engine Segment supplies its award winning R2S® turbocharger technology to Volkswagen for its high-
performing 2.0 liter diesel engine and its R3S™ turbocharger system, an industry first, to BMW for its high-
powered 3.0 diesel engine. Ford selected the Engine Segment's leading gasoline turbocharger technology
for its 1.5 liter, 1.6 liter and 2.0 liter four-cylinder EcoBoost engines, as did Volvo and JLR for its new four-
cylinder gasoline engines.
The Engine Segment's timing systems enable precise control of air and exhaust flow through the engine,
improving fuel economy and emissions. The Engine Segment'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 Engine Segment is a leading manufacturer of timing systems to OEMs around the world.
The Engine Segment's engine timing technology includes VCT with mid position lock, which allows a
greater range of camshaft positioning thereby enabling greater control over airflow and the opportunity to
improve fuel economy, reduce emissions and improve engine performance compared with conventional
VCT systems.
The Engine Segment's emissions systems products improve emissions performance and fuel economy.
Products include electric air pumps and exhaust gas recirculation ("EGR") modules, EGR coolers, EGR
tubes and EGR valves for gasoline and diesel applications, glow plugs and instant starting systems that
enhance combustion for diesel engines during cold starts, pressure sensor glow plugs that also monitor the
combustion process of a diesel engine and advanced ignition technology for gasoline engines, diesel cold
start systems and other gasoline ignition technologies.
On February 28, 2014, the Company acquired 100% of the equity interests in Gustav Wahler GmbH u.
Co. KG and its general partner ("Wahler"). Wahler was a producer of EGR valves, EGR tubes and
thermostats, and had operations in Germany, Brazil, the U.S., China and Slovakia. The Wahler acquisition
is expected to strengthen the Company's strategic position as a producer of complete EGR systems and
create additional market opportunities in both passenger and commercial vehicle applications.
The Engine Segment's thermal systems products are designed to optimize engine temperatures and
minimize parasitic horsepower losses, which improve engine efficiency, fuel economy and emissions
performance. Products include viscous fan drives that sense and respond to multiple cooling requirements,
polymer fans and coolant pumps.
The Company sold its spark plug businesses during the third quarter of 2012. The sale of this business
will allow the Company to continue to focus on expanding its core products of glow plugs, diesel cold start
systems and other gasoline ignition technologies.
6
Drivetrain
The Drivetrain Segment develops and manufactures mechanical products for automatic transmissions
and all-wheel drive ("AWD") vehicles and rotating electrical components for light and commercial vehicle
OEMs and the aftermarket. Precise controls, better response times and minimal parasitic losses, all of which
improve fuel economy and vehicle performance, are the core design features of the Drivetrain Segment's
mechanical product portfolio. The core design features of its rotating electrical components portfolio are
meeting the demands of increasing vehicle electrification, improved fuel efficiency, reduced weight, and
lowered electrical and mechanical noise. The Drivetrain Segment's mechanical products include friction,
mechanical and controls products for automatic transmissions and torque management products for AWD
vehicles, and its rotating electrical components include starter motors, alternators and electric motors for
hybrid and electric vehicles.
Friction and mechanical products for automatic transmissions 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 for automatic transmissions 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 Drivetrain Segment has led the globalization of today's dual clutch transmission ("DCT") technology
for over 10 years. BorgWarner's award-winning 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 driving experience of a manual gearbox.
The Drivetrain Segment established its industry-leading position in 2003 with the production launch of
its DualTronic® innovations with VW/Audi, followed by program launches with Ford and BMW. In 2007, the
Drivetrain Segment launched its first dual-clutch technology application in a Japanese transmission with
Nissan. 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 Company owns 66% of the joint venture. In 2013, the Drivetrain
Segment launched its first DCT application in a Chinese transmission with SAIC. The Drivetrain Segment
is working on several other DCT programs with OEMs around the world.
The Drivetrain Segment's torque management products include rear-wheel drive (“RWD”)-AWD transfer
case systems, FWD-AWD coupling systems and cross-axle coupling systems. The Drivetrain Segment's
focus is on developing electronically controlled torque management devices and systems that will benefit
fuel economy and vehicle dynamics.
Transfer cases are installed on RWD based light trucks, SUVs, cross-over utility vehicles, 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 Drivetrain
Segment's transfer case technology in the market today, including Torque On-Demand (TOD®), chain-
driven, gear-driven, Pre-Emptive, Part-Time, 1-speed and 2-speed transfer cases. The Drivetrain Segment's
transfer cases are featured on the Ford and Dodge Ram light-duty and heavy-duty trucks.
The Drivetrain Segment is involved in the AWD market for FWD based vehicles with couplings that use
electronically-controlled clutches to distribute power to the rear wheels as traction is required. The Drivetrain
Segment'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.
7
In 2015, the Company acquired Remy International, Inc. (“Remy”), a global market leader in the design,
manufacture, remanufacture and distribution of rotating electrical components for light and commercial
vehicles, OEMs and the aftermarket. Principal products include starter motors, alternators and hybrid electric
motors. The Company’s starter motors and alternators are used in gasoline, diesel, natural gas and
alternative fuel engines for light vehicle, commercial vehicle, industrial, construction and agricultural
applications. The product technology continues to evolve to meet the demands of increasing vehicle electrical
loads, improved fuel efficiency, reduced weight and lowered electrical and mechanical noise. The Company’s
hybrid electric motors are used in both light and commercial vehicles including construction, public transit
and agricultural applications. These include both pure electric applications as well as hybrid applications,
where the electric motors are combined with traditional gasoline or diesel propulsion systems. While the
market for these systems is in early stages of development, BorgWarner’s technology and capabilities are
ideally suited for this growing product category.
In 2016, the Company sold the Remy light vehicle aftermarket business, which sells remanufactured
and new starters, alternators and multi-line products to aftermarket customers, mainly retailers in North
America, and warehouse distributors in North America, South America and Europe. The sale of this business
allows the Company to focus on the rapidly developing original equipment manufacturer electrification trend
in propulsion systems.
The Company sells new starters, alternators and hybrid electric motors to OEMs globally for factory
installation on new vehicles, and remanufactured and new starters and alternators to heavy duty aftermarket
customers outside of Europe and to OEMs for original equipment service. As a leading remanufacturer,
BorgWarner obtains used starters and alternators, commonly referred to as cores, then disassembles,
cleans, combines them with new subcomponents and reassembles them into saleable, finished products,
which are tested to meet OEM requirements.
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 adds 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 and enables BorgWarner to offer global customers a broader range of AWD solutions to meet their
vehicle needs.
Joint Ventures
As of December 31, 2016, the Company had seven joint ventures in which it had a less-than-100%
ownership interest. Results from the five joint ventures in which the Company is the majority owner are
consolidated as part of the Company's results. Results from the two 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.
In August 2016, the Company sold its 60% ownership interest in Divgi-Warner Private Limited to the
joint venture partner. This former joint venture was formed in 1995 to develop and manufacture transfer
cases and synchronizer rings in India. As a result of the sale, the Company received cash proceeds of
approximately $5.4 million, net of capital gains tax and cash divested, which is classified as an investing
activity within the Condensed Consolidated Statement of Cash Flows.
8
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
Unconsolidated:
NSK-Warner
Products
Transmission
components
Turbo Energy Private Limited (b)
Turbochargers
Consolidated:
BorgWarner Transmission
Systems Korea Ltd. (c)
Transmission
components
Borg-Warner Shenglong
(Ningbo) Co. Ltd.
Fans and fan drives
BorgWarner TorqTransfer
Systems Beijing Co. Ltd.
Transfer cases
SeohanWarner Turbo Systems
Ltd.
Turbochargers
BorgWarner United Transmission
Systems Co. Ltd.
Transmission
components
________________
Year
organized
Percentage
owned by the
Company
Location
of
operation
Joint venture partner
Fiscal 2016 net sales
(millions of dollars)
(a)
1964
1987
1987
1999
2000
2003
2009
50%
Japan/
China
32.6%
India
NSK Ltd.
Sundaram Finance Limited;
Brakes India Limited
60%
Korea
NSK-Warner
70%
China
Ningbo Shenglong
Automotive Powertrain
Systems Co., Ltd.
80%
China
Beijing Automotive
Components Stock Co. Ltd.
71%
Korea
Korea Flange Company
66%
China
China Automobile
Development United
Investment Co., Ltd.
$
$
$
$
$
$
$
601.8
135.2
292.0
33.4
114.6
314.1
43.2
(a)
(b)
(c)
All sales figures are for the year ended December 31, 2016, except NSK-Warner and Turbo Energy Private Limited. NSK-
Warner’s sales are reported for the 12 months ended November 30, 2016. Turbo Energy Private Limited’s sales are
reported for the 12 months ended September 30, 2016.
The Company made purchases from Turbo Energy Private Limited totaling $28.9 million, $36.5 million and $36.5 million
for the years ended December 31, 2016, 2015 and 2014, respectively.
BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner Transmission Systems Korea Ltd.
This gives the Company an additional indirect effective ownership percentage of 20%, resulting in a total effective ownership
interest of 80%.
Financial Information About Geographic Areas
During the year ended December 31, 2016, approximately 75% 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 19, “Reporting Segments and Related Information,” to the Consolidated Financial
Statements in Item 8 of this report for financial information about geographic areas.
Product Lines and Customers
During the year ended December 31, 2016, approximately 81% of the Company's net sales were for
light-vehicle applications; approximately 9% were for commercial vehicle applications; approximately 4%
were for off-highway vehicle applications; and approximately 6% were to distributors of aftermarket
replacement parts.
The Company’s worldwide net sales to the following customers (including their subsidiaries) were
approximately as follows:
Customer
Ford
Volkswagen
Year Ended December 31,
2016
2015
2014
15%
13%
15%
15%
13%
17%
No other single customer accounted for more than 10% of our consolidated net sales in any of the years
presented.
9
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 businesses are assigned to serve specific customers for one or more businesses'
products. Our account executives spend the majority of their time in direct contact with customers' purchasing
and engineering employees and are responsible for servicing existing business and for identifying and
obtaining new business. Because of their close relationship with customers, 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, sales and marketing employees of our Engine and
Drivetrain reporting segments often work together to explore cross-development opportunities where
appropriate.
Seasonality
Our operations are directly related to the automotive industry. Consequently, we may experience
seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months
when many customer plants typically close for model year changeovers or vacations. Historically, model
changeovers or vacations have generally resulted in lower sales volume in the third quarter.
Research and Development
The Company conducts advanced Engine and Drivetrain research at the reporting segment level. This
advanced engineering function looks to leverage know-how and expertise across product lines to create
new Engine and Drivetrain systems and modules that can be commercialized. 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 businesses 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 continue 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.
10
(millions of dollars)
Gross R&D expenditures
Customer reimbursements
Net R&D expenditures
Year Ended December 31,
2016
2015
2014
$
$
417.8 $
(74.6)
343.2 $
386.2 $
(78.8)
307.4 $
392.8
(56.6)
336.2
Net R&D expenditures as a percentage of net sales were 3.8%, 3.8% and 4.0% for the years ended
December 31, 2016, 2015 and 2014, 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 6,500 active domestic and foreign patents and patent applications pending
or under preparation, and receives royalties from licensing patent rights to others. While it considers its
patents on the whole to be important, the Company does not consider any single patent, any group of related
patents or any single license essential to its operations in the aggregate or to the operations of any of the
Company's business groups individually. The expiration of the patents individually and in the aggregate is
not expected to have a material effect on the Company's financial position or future operating results. The
Company owns numerous trademarks, some of which are valuable, but none of which are essential to its
business in the aggregate.
The Company owns the “BorgWarner” and “Borg-Warner Automotive” trade names and trademarks,
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.
11
The Company’s major competitors by product type follow:
Product Type: Engine
Turbochargers:
Cummins Turbo Technology
IHI
Names of Competitors
Honeywell
Mitsubishi Heavy Industries (MHI)
Bosch Mahle Turbo Systems
Emissions systems:
Timing devices and chains:
Thermal systems:
Mahle
Denso
Bosch
Eldor
Denso
Iwis
Horton
Mahle
T.RAD
Pierburg
NGK
Schaeffler Group
Tsubaki Group
Usui
Xuelong
Product Type: Drivetrain
Torque transfer:
GKN Driveline
Rotating electrical machines:
Transmission systems:
Denso
Bosch
Bosch
Dynax
Names of Competitors
JTEKT
Magna Powertrain
Valeo
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."
Workforce
As of December 31, 2016, the Company had a salaried and hourly workforce of approximately 27,000
(as compared with approximately 30,000 at December 31, 2015), of which approximately 6,100 were in the
U.S. Approximately 17% 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.
We have a domestic collective bargaining agreement for one facility in New York, which expires in
September 2020.
12
Raw Materials
The Company uses a variety of raw materials in the production of its automotive products including
aluminum, copper, nickel, plastic resins, steel and certain alloy elements. Manufacturing operations for each
of the Company's operating segments are dependent upon natural gas, fuel oil and electricity.
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, rationalize the supply base, mitigate risk and collaborate on its 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 2017 and beyond. Refer to Note 10, “Financial Instruments,” of the Consolidated Financial
Statements in Item 8 of this report for information related to the Company's hedging activities.
For 2017, 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
Corporate Governance Committee Charter; the Company's Corporate Governance Guidelines; the
Company's Code of Ethical Conduct; and the Company's Code of Ethics for CEO and Senior Financial
Officers. You may also obtain a copy of any of the foregoing documents, free of charge, if you submit a
written request to Investor Relations, 3850 Hamlin Road, Auburn Hills, Michigan 48326. The public may
read and copy materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100
F Street, NE, Washington, DC, 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding issuers that file electronically
with the SEC at http://www.sec.gov.
13
Executive Officers of the Company
Set forth below are the names, ages, positions and certain other information concerning the executive
officers of the Company as of February 9, 2017.
Name
James R. Verrier
Ronald T. Hundzinski
Anthony D. Hensel
Tonit Calaway
Stefan Demmerle
Brady D. Ericson
Joseph F. Fadool
John J. Gasparovic
Robin Kendrick
Frederic B. Lissalde
Thomas J. McGill
Joel Wiegert
Age Position with the Company
54
58
58
President and Chief Executive Officer
Vice President and Chief Financial Officer
Vice President and Controller
48
52
45
50
59
52
49
50
43
Vice President, Human Resources
Vice President
Vice President
Vice President
Vice President, General Counsel and Secretary
Vice President
Vice President
Vice President and Treasurer
Vice President
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.
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.
Mr. Hensel has been Vice President and Controller of the Company since December 2016. From May
2009 through November 2016, he was Vice President of Internal Audit of the Company.
Ms. Calaway has been Vice President and Chief Human Resource Officer of the Company since August
2016. Prior to this role, she was Vice President of Human Resources of Harley-Davidson Inc. and President
of The Harley-Davidson Foundation since February 2010 to July 2016.
Dr. Demmerle has been Vice President of the Company and President and General Manager of
BorgWarner PDS (USA) Inc. (formerly known as BorgWarner TorqTransfer Systems Inc.) since September
2012 and President and General Manager of BorgWarner PDS (Indiana) Inc. (formerly known as Remy
International, Inc.) since December 2015. From July 2010 to September 2012, he was Vice President,
Engine Control Electronics at Continental Automotive Systems.
Mr. Ericson has been Chief Strategy Officer of the Company since January 2017. He was Vice President
of the Company and President and General Manager of BorgWarner Emissions Systems LLC from March
2014 until December 2016, during which time BorgWarner BERU Systems GmbH was combined with
BorgWarner Emissions Systems Inc. He was Vice President of the Company and President and General
Manager of BorgWarner BERU Systems GmbH and Emissions Systems Inc. from September 2011 until
March 2014.
Mr. Fadool has been Vice President of the Company and President and General Manager of BorgWarner
Emissions Systems LLC and BorgWarner Thermal Systems Inc. since January 2017. He was Vice President
of the Company and President and General Manager of BorgWarner Ithaca LLC (d/b/a BorgWarner Morse
Systems) from July 2015 until December 2016. From May 2012 to July 2015, he was the Vice President of
14
the Company and President and General Manager of BorgWarner Morse TEC Inc. He was Vice President
of the Company and President and General Manager of BorgWarner TorqTransfer Systems Inc. from June
2011 until September 2012.
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 LLC since September 2011.
Mr. Lissalde has been Vice President of the Company and President and General Manager of BorgWarner
Turbo Systems LLC since May 2013. From May 2011 until May 2013 he was Vice President of the Company
and President and General Manager of BorgWarner Turbo Systems Passenger Car Products.
Mr. McGill has been Vice President and Treasurer of the Company since May 2012. He was Vice
President of Finance of BorgWarner Turbo Systems Inc. from April 2010 until May 2012.
Mr. Wiegert has been President and General Manager of BorgWarner Ithaca LLC (d/b/a BorgWarner
Morse Systems) since January 2017. He was President and General Manager of BorgWarner Thermal
Systems Inc. from September 2016 until December 2016. From July 2015 to August 2016, he was Vice
President and General Manager, Americas, Aftermarket and Global Integration Leader for BorgWarner PDS
(USA) Inc. From January 2012 to July 2015, he was Vice President and General Manager, Asia and Americas
for BorgWarner Turbo Systems Inc.
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 adversely affected.
Conditions in the automotive industry may adversely affect our business.
Risks related to our industry
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 an adverse effect on our sales
to OEMs.
15
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, 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. A number of our competitors are larger than us and some competitors have greater
financial and other resources than we do. 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 are a permanent component of our business. To maintain
our profit margins, we seek price reductions from our suppliers, improved production processes to increase
manufacturing efficiency, updated product designs to reduce costs and we develop new products, the
benefits of which support stable or increased prices. Our ability to pass through increased raw material
costs to our OEM customers is limited, with cost recovery often less than 100% and often on a delayed
basis. Inability to reduce costs in an amount equal to annual price reductions, increases in raw material
costs, and increases in employee wages and benefits could have an adverse effect on our business.
We continue to face volatile costs of commodities used in the production of our products.
The Company uses a variety of commodities (including aluminum, copper, nickel, plastic resins, steel,
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 or lessening 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
16
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 enforcement 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 or enforce these rights, could adversely affect our business and
our competitive position.
We are subject to business continuity risks associated with increasing centralization of our
information technology (IT) systems.
To improve efficiency and reduce costs, we have regionally centralized the information systems that
support our business processes such as invoicing, payroll and general management operations. If the
centralized systems are disrupted or disabled, key business processes could be interrupted, which could
adversely affect our business.
A failure of our information technology infrastructure could adversely impact our business and
operations.
We rely on the capacity, reliability and security of our IT systems and infrastructure. IT systems are
vulnerable to disruptions, including those resulting from natural disasters, cyber-attacks or failures in third-
party-provided services. Disruptions and attacks on our IT systems pose a risk to the security of our systems
and our ability to protect our networks and the confidentiality, availability and integrity of our third-party data.
As a result, such attacks or disruptions could potentially lead to the inappropriate disclosure of confidential
information, including our intellectual property, improper use of our systems and networks, manipulation
and destruction of data, production downtimes and both internal and external supply shortages. This could
cause significant damage to our reputation, affect our relationships with our customers and suppliers, lead
to claims against the Company and ultimately adversely affect our business.
Our business success depends on attracting and retaining qualified personnel.
Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and
diverse management team and workforce worldwide. Any unplanned turnover or inability to attract and
retain key employees in numbers sufficient for our needs could adversely affect our business.
Part of our workforce is unionized which could subject us to work stoppages.
As of December 31, 2016, approximately 17% of our U.S. workforce was unionized. We have a domestic
collective bargaining agreement for one facility in New York, which expires in September 2020. 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.
17
Changes in interest rates and asset returns could increase our pension funding obligations and
reduce our profitability.
We have unfunded obligations under certain of our defined benefit pension and other postretirement
benefit plans. The valuation of our future payment obligations under the plans and the related plan assets
are subject to significant adverse changes if the credit and capital markets cause interest rates and projected
rates of return to decline. Such declines could also require us to make significant additional contributions
to our pension plans in the future. Additionally, a material deterioration in the funded status of the plans
could significantly increase our pension expenses and reduce profitability in the future.
We also sponsor post-employment medical benefit plans in the U.S. that are unfunded. If medical costs
continue to increase or actuarial assumptions are modified, this could have adverse effect on our business.
We are subject to extensive environmental regulations.
Our operations are subject to laws governing, among other things, emissions to air, discharges to waters
and the generation, handling, storage, transportation, treatment and disposal of waste and other materials.
The operation of automotive parts manufacturing plants entails risks in these areas, and we cannot assure
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 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 interpretations of existing environmental,
health and safety laws and regulations or any new such laws and regulations that may be adopted in the
future. Costs associated with failure to comply with such laws and regulations could have an adverse effect
on our business.
We have liabilities related to environmental, product warranties, 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 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 customers and 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. While the
Company maintains insurance for certain risks, the amount of insurance may not be adequate to cover all
insured claims and liabilities. The incurring of significant liabilities for which there is no, or insufficient,
insurance coverage could adversely affect our business.
18
We have faced, and in the future expect to face, substantial numbers of asbestos-related claims.
The costs of resolving those claims is inherently uncertain and could have a material adverse
effect on our results of operations, financial position, and cash flows.
We have in the past been named in a significant number of lawsuits each year alleging injury related to
exposure to asbestos in certain of our historical products. We no longer manufacture, distribute, or sell
products that contain asbestos, and we vigorously defend against asbestos-related claims. Over 80 percent
of claims asserted against us in recent years have been resolved with no payment to the claimant.
Notwithstanding these factors, we project that a substantial number of asbestos-related claims are likely to
be asserted against us in the future. We have estimated the indemnity and defense costs relating to the
asbestos-related claims that have been asserted against us but not yet resolved, as well as those asbestos-
related claims that we estimate are likely to be asserted against us in the future. Our estimate of future
asbestos-related claims that may be asserted against us is based on assumptions as to the likely rates of
occurrence of asbestos-related disease in the U.S. population in the future and the number of asbestos-
related claims asserted as a result. Furthermore, our estimates are based on a number of assumptions
derived from our historical experience in resolving asbestos-related claims, including:
•
•
•
•
the number and type of future asbestos-related claims that will be asserted against us;
the number of future asbestos-related claims asserted against us that will result in a payment
by us;
the average payment necessary to resolve such claims; and
the costs of defending such claims.
If our actual experience, as noted above, in receiving and resolving asbestos-related claims in the future
differs significantly from these assumptions, then our expenditures to resolve such claims may be significantly
higher or lower than the estimates contained in our financial statements, and, if higher, could have an adverse
impact on our results of operations, financial position, or cash flows that is greater than we have estimated.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Other
Matters - Contingencies - Asbestos-Related Liability”.
While we have certain insurance coverage available respecting asbestos-related claims asserted against
us, most of that insurance coverage is the subject of pending litigation. The insurance that is at issue in the
litigation is subject to various uncertainties, including: the assertion of defenses or the development of facts
which we are not presently aware, changes in the case law, and future financial viability of remaining insurers.
This insurance coverage is additionally subject to claims from other co-insured parties. We currently project
that our remaining insurance coverage for current and future asbestos-related claims will cover only a portion
of the amounts that we estimate we ultimately may pay to resolve such claims. The resolution of the insurance
coverage litigation, and the number and amount of claims on our insurance from co-insured parties, may
increase or decrease the amount of insurance coverage available to us for asbestos-related claims from
the estimates contained in our financial statements.
Compliance with and changes in laws could be costly and could affect operating results. In addition,
government disruptions could negatively impact our ability to conduct our business.
We have operations in multiple countries that can be impacted by expected and unexpected changes
in the legal and business environments in which we operate. Compliance related issues in certain countries
associated with laws such as the Foreign Corrupt Practices Act and other anti-corruption laws could also
adversely affect our business.
Changes that could impact the legal environment include new legislation, new regulations, new policies,
investigations and legal proceedings and new interpretations of existing legal rules and regulations, in
particular, changes in import and export control laws or exchange control laws, additional restrictions on
doing business in countries subject to sanctions, and changes in laws in countries where we operate or
19
intend to operate. In addition, government disruptions, such as government shutdowns, may delay or halt
the granting and renewal of permits, licenses and other items required by us and our customers to conduct
our business.
Changes in tax laws or tax rates taken by taxing authorities and tax audits could adversely affect
our business.
Changes in tax laws or tax rates, the resolution of tax assessments or audits by various tax authorities,
and the inability to fully utilize our tax loss carryforwards and tax credits could adversely affect our operating
results. In addition, we may periodically restructure our legal entity organization.
If taxing authorities were to disagree with our tax positions in connection with any such restructurings,
our effective tax rate could be materially affected. Our tax filings for various periods are subject to audit by
the tax authorities in most jurisdictions where we conduct business. We have received tax assessments
from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding
these matters. These audits may result in assessment of additional taxes that are resolved with the authorities
or through the courts. We believe these assessments may occasionally be based on erroneous and even
arbitrary interpretations of local tax law. Resolution of any tax matters involves uncertainties and there are
no assurances that the outcomes will be favorable.
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, or other factors: (a) the failure to develop
new products that will be purchased by our customers; (b) technology changes rendering our products
obsolete; and (c) a reversal of the trend of supplying systems (which allows us to increase content per
vehicle) instead of components.
We expect to continue to pursue business ventures, acquisitions, and strategic alliances that leverage
our technology capabilities, enhance our customer base, geographic representation, and scale to
complement our current businesses and we regularly evaluate potential growth opportunities, some of which
could be material. While we believe that such transactions are an integral part of our long-term strategy,
there are risks and uncertainties related to these activities. Assessing a potential growth opportunity involves
extensive due diligence. However, the amount of information we can obtain about a potential growth
opportunity may be limited, and we can give no assurance that past or future business ventures, acquisitions,
and strategic alliances will positively affect our financial performance or will perform as planned. We may
not be able to successfully assimilate or integrate companies that we have acquired or acquire in the future,
including their personnel, financial systems, distribution, operations and general operating procedures. The
integration of companies that we have acquired or acquire in the future may be more difficult, time consuming
or costly than expected. Revenues following the acquisition of a company may be lower than expected,
customer loss and business disruption (including, without limitation, difficulties in maintaining relationships
with employees, customers, or suppliers) may be greater than expected and the retention of key employees
at the acquired company may not be achieved. We may also encounter challenges in achieving appropriate
internal control over financial reporting in connection with the integration of an acquired company. If we fail
to assimilate or integrate acquired companies successfully, our business, reputation and operating results
could be adversely affected. Likewise, our failure to integrate and manage acquired companies successfully
may lead to future impairment of any associated goodwill and intangible asset balances. Failure to execute
our growth strategy could adversely affect our business.
20
We are subject to risks related to our international operations.
We have manufacturing and technical facilities in many regions including Europe, Asia, and the Americas.
For 2016, approximately 75% of our consolidated net 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,
insufficient infrastructures, social unrest, political instability and disputes, and international terrorism.
Compliance with multiple and potentially conflicting laws and regulations of various countries is challenging,
burdensome and expensive.
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. Significant foreign currency fluctuations and the associated translation of those foreign
currencies could adversely affect our business. Additionally, significant changes in currency exchange rates,
particularly the Euro, Korean Won and Chinese Renminbi, could cause fluctuations in the reported results
of our businesses’ operations that could negatively affect our results of operations.
Our business in China is subject to aggressive competition and is sensitive to economic, political
and market conditions.
Maintaining a strong position in the Chinese market is a key component of our global growth strategy.
The automotive supply market in China is highly competitive, with competition from many of the largest
global manufacturers and numerous smaller domestic manufacturers. As the Chinese market evolves, we
anticipate that market participants will act aggressively to increase or maintain their market share. Increased
competition may result in price reductions, reduced margins and our inability to gain or hold market share.
In addition, our business in China is sensitive to economic, political and market conditions that drive sales
volume in China. If we are unable to maintain our position in the Chinese market or if vehicle sales in China
decrease, our business and financial results could be adversely affected.
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 and our cost of borrowing or the
interest rate for any subsequently issued debt would likely increase.
Our revolving credit agreement includes an increase in interest rates if the ratings for our debt are
downgraded. The interest costs on our revolving credit agreement are based on a rating grid agreed to in
our credit agreement. Further, an increase in the level of our indebtedness and related interest costs may
increase our vulnerability to adverse general economic and industry conditions and may affect our ability
to obtain additional financing.
We could incur additional restructuring charges as we continue to execute actions in an effort
to improve future profitability and competitiveness and may not achieve the anticipated savings
and benefits from these actions.
21
We have and may continue to initiate restructuring actions designed to improve future profitability and
competitiveness, enhance treasury management flexibility or create an optimal legal entity structure. We
may not realize anticipated savings or benefits from past or future actions in full or in part or within the time
periods we expect. We are also subject to the risks of labor unrest, negative publicity and business disruption
in connection with our actions. Failure to realize anticipated savings or benefits from our actions could have
an adverse effect on our business.
We rely on sales to major customers.
Risks related to our customers
We rely on sales to OEMs around the world of varying credit quality and manufacturing demands. 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 a variety of factors including non-renewal of purchase orders, a customer's financial
hardship or other unforeseen reasons, it could adversely affect our business.
Some of our sales are concentrated. Our worldwide sales in 2016 to Ford and Volkswagen constituted
approximately 15% and 13% of our 2016 consolidated net sales, respectively.
We are sensitive to the effects of our major customers’ labor relations.
All three of our primary North American customers, Ford, Fiat Chrysler Automobiles 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 at one or more of our
customers could have an adverse effect 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, cyber attacks, 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 could adversely affect our customer relations and business.
22
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 advance 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. 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 legal claims, health care
benefits, pension benefits, stockholder and bondholder registration and other services. These service
providers contribute to the efficient conduct of the Company's business. Insolvency of one or more of these
service providers could adversely affect our business.
We are subject to possible insolvency of financial counterparties.
The Company engages in numerous financial transactions and contracts including insurance policies,
letters of credit, credit line agreements, financial derivatives, and investment management agreements
involving various counterparties. The Company is subject to the risk that one or more of these counterparties
may become insolvent and therefore be unable to meet its obligations under such contracts.
A variety of other factors could adversely affect our business.
Other risks
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 fire, flood or other 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
2016 fiscal year that remain unresolved.
23
Item 2. Properties
As of December 31, 2016, the Company had 62 manufacturing, assembly, and technical
locations worldwide. In addition to its 16 U.S. locations, the Company had nine locations in China; seven
locations in each of Germany and South Korea; four locations in each of India and Mexico; three locations
in each of Brazil and Japan; and one location in each of France, Hungary, Ireland, Italy, Poland, Portugal,
Spain, Sweden, and the United Kingdom. Individual locations may design or manufacture for both operating
segments. 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 (d)
Cadillac, Michigan
Dixon, Illinois
El Salto Jalisco, Mexico
Fletcher, North Carolina
Itatiba, Brazil
Ithaca, New York
Marshall, Michigan
Piracicaba, Brazil
Ramos, Mexico
DRIVETRAIN(a)
Americas
Anderson, Indiana (b)
Bellwood, Illinois
Brusque, Brazil (b)
Frankfort, Illinois
Irapuato, Mexico
Laredo, Texas (b)
Livonia, Michigan
Melrose Park, Illinois (b)
Pendleton, Indiana (b)
San Luis Potosi, Mexico (b)
Seneca, South Carolina
Water Valley, Mississippi
Europe
Arcore, Italy
Bradford, England
Asia
Aoyama, Japan
Chennai, India (b)
Kirchheimbolanden, Germany
Chungju-City, South Korea
Ludwigsburg, Germany
Markdorf, Germany
Muggendorf, Germany
Oberboihingen, Germany
Oroszlany, Hungary (d)
Rzeszow, Poland (d)
Tralee, Ireland
Viana de Castelo, Portugal
Vigo, Spain
Jiangsu, China (b)
Kakkalur, India
Manesar, India
Nabari City, Japan
Ningbo, China (b) (c)
Pune, India
Pyongtaek, South Korea (b) (c)
Europe
Arnstadt, Germany
Heidelberg, Germany
Asia
Beijing, China (b)
Dae-Gu, South Korea (b)
Landskrona, Sweden (b)
Dalian, China (b)
Tulle, France
Eumsung, South Korea
Fukuroi City, Japan
Jingzhou City, China (b)
Kyungsangman, South Korea
Ochang, South Korea (b)
Shanghai, China (b)
Tianjin, China (b)
Wuhan, China (b)
________________
(a)
(b)
(c)
(d)
The table excludes joint ventures owned less than 50% and administrative offices.
Indicates leased land rights or a leased facility.
City has 2 locations: a wholly owned subsidiary and a joint venture.
Location serves both segments.
24
Item 3. Legal Proceedings
The Company is subject to a number of claims and judicial and administrative proceedings (some of
which involve substantial amounts) arising out of the Company’s business or relating to matters for which
the Company may have a contractual indemnity obligation. See Note 14, "Contingencies," to the
Consolidated Financial Statements in Item 8 of this report 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 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 3, 2017, there were 1,738 holders of record of Common Stock.
On July 24, 2013 the Company announced the reinstatement of its quarterly dividend. Cash dividends
declared and paid per share, adjusted for the stock split in December 2013, were as follows:
Dividend amount
$
0.53 $
0.52 $
0.51 $
0.25 $
—
2016
2015
2014
2013
2012
While the Company currently expects that comparable quarterly cash dividends will continue to be paid
in the future, 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 2015 and 2016 were:
Quarter Ended
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
High
Low
$
$
$
$
$
$
$
$
63.01 $
62.08 $
57.65 $
45.53 $
42.25 $
39.93 $
36.12 $
41.86 $
50.46
56.84
38.89
39.82
28.23
27.69
28.52
33.64
25
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 (as selected by the Company) and companies within Standard Industrial Code (“SIC”) 3714
- Motor Vehicle Parts.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among BorgWarner Inc., the S&P 500 Index,
SIC 3714 Motor Vehicle Parts and a Peer Group
___________
*$100 invested on 12/31/2011 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2017 S&P, a division of S&P Global. All rights reserved.
BWA, S&P 500 and Peer Group data are from Capital IQ; SIC Code Index data are from Research Data
Group
BorgWarner Inc.(1)
S&P 500(2)
SIC Code Index(3)
Peer Group(4)
________________
December 31,
2011
2012
2013
2014
2015
2016
$
100.00 $
112.36 $
176.31 $
174.80 $
138.93 $
128.74
100.00
100.00
100.00
116.00
122.82
124.61
153.58
182.71
195.73
174.60
205.67
234.30
177.01
207.80
208.94
198.18
239.48
244.27
(1) BorgWarner Inc.
(2) S&P 500 — Standard & Poor’s 500 Total Return Index
(3) Standard Industrial Code (“SIC”) 3714-Motor Vehicle Parts
(4) Selected Peer Group Companies — Consists of the following companies:
American Axle & Manufacturing Holdings, Inc., Autoliv, Inc., Gentex Corporation, Johnson Controls, Inc., Lear Corporation,
Magna International Inc., Meritor, Inc., Modine Manufacturing Company, Tenneco Inc. and Visteon Corporation
26
Purchase of Equity Securities
In February 2015, the Company's Board of Directors authorized the purchase of up to $1.0 billion of the
Company's common stock over three years. The Company's Board of Directors has authorized the purchase
of up to 69.6 million shares of the Company's common stock in the aggregate. As of December 31, 2016,
the Company had repurchased 67,343,100 shares in the aggregate 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 and
10b-18 plans to facilitate share repurchases. Repurchased shares will be deemed common stock held in
treasury and may subsequently be reissued for general corporate purposes.
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 and the BorgWarner Inc. 2014 Stock Incentive Plan provide 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 that are
registered pursuant to Section 12 of the Exchange Act during the quarter ended December 31, 2016:
Issuer Purchases of Equity Securities
Period
Total number of
shares purchased
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 under the
plans or programs
Month Ended October 31, 2016
Common Stock Repurchase Program
Employee transactions
Month Ended November 30, 2016
Common Stock Repurchase Program
Employee transactions
Month Ended December 31, 2016
Common Stock Repurchase Program
Employee transactions
Equity Compensation Plan Information
467,225
213
$
$
471,412
$
— $
70,935
$
— $
35.09
35.19
35.00
—
38.07
—
467,225
—
471,412
—
70,935
—
2,799,337
2,327,925
2,256,990
As of December 31, 2016, 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
Weighted average exercise
price of outstanding options,
restricted common stock,
warrants and rights
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
Plan category
(a)
(b)
(c)
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
37.49
—
—
5,693,856
—
5,693,856
1,902,030
$
— $
1,902,030
$
27
Item 6. Selected Financial Data
(in millions, except share and per share data)
Operating results
Net sales
Operating income (a)
Net earnings attributable to BorgWarner Inc. (a)
Earnings per share — basic (b)
Earnings per share — diluted (b)
Net R&D expenditures
Capital expenditures, including tooling outlays
Depreciation and amortization
Year Ended December 31,
2016
2015
2014
2013
2012
$ 9,071.0
$ 8,023.2
$ 8,305.1
$ 7,436.6
$ 7,183.2
$
$
$
$
$
$
$
225.9
118.5
0.55
0.55
$
$
$
$
939.7
609.7
2.72
2.70
$
$
$
$
963.7
655.8
2.89
2.86
$
$
$
$
855.2
624.3
2.73
2.70
$
$
$
$
752.9
500.9
2.22
2.09
343.2
$
307.4
$
336.2
$
303.2
$
265.9
500.6
391.4
$
$
577.3
320.2
$
$
563.0
330.4
$
$
417.8
299.4
$
$
407.4
288.6
Number of employees
27,000
30,000
22,000
19,700
19,100
Financial position
Cash
Total assets (c)
Total debt (c)
$
443.7
$
577.7
$
797.8
$
939.5
$
715.7
$ 8,834.7
$ 8,825.7
$ 7,225.2
$ 6,913.7
$ 6,397.0
$ 2,219.5
$ 2,550.3
$ 1,337.2
$ 1,219.3
$ 1,063.4
Common share information
Cash dividend declared and paid per share (b)
Market prices of the Company's common stock (b)
High
Low
$
$
$
Weighted average shares outstanding (thousands) (b)
0.53
$
0.52
$
0.51
$
0.25
$
—
42.25
27.69
$
$
63.01
38.89
$
$
67.38
50.24
$
$
56.45
35.22
$
$
43.73
30.09
Basic
Diluted
214,374
215,328
224,414
225,648
227,150
228,924
228,600
231,337
225,304
242,754
________________
(a) 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 ended December 31, 2016, 2015 and 2014.
(b) Amounts have been adjusted for the two-for-one stock split that was effected through a stock dividend on December 16, 2013.
(c) Amounts have been adjusted for the retrospective adoption of the Accounting Standard Update ("ASU") No. 2015-03,
"Simplifying the Presentation of Debt Issuance Costs." Refer to Note 1, “Summary of Significant Accounting Policies,” to the
Consolidated Financial Statements in Item 8 of this report for more information.
28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a global product leader in clean
and efficient technology solutions for combustion, hybrid and electric vehicles. Our products help improve
vehicle performance, propulsion 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 Europe, the
Americas 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 chains, emissions systems and thermal systems. The
Drivetrain segment's products include transmission components and systems, AWD torque transfer systems
and rotating electrical devices.
RESULTS OF OPERATIONS
A summary of our operating results for the years ended December 31, 2016, 2015 and 2014 is as follows:
(millions of dollars, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other expense, net
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
Net earnings attributable to BorgWarner Inc.
Earnings per share — diluted
Year Ended December 31,
2016
9,071.0 $
7,137.9
1,933.1
817.5
889.7
225.9
(42.9)
(6.3)
84.6
190.5
30.3
160.2
41.7
118.5 $
0.55 $
2015
8,023.2 $
6,320.1
1,703.1
662.0
101.4
939.7
(40.0)
(7.5)
60.4
926.8
280.4
646.4
36.7
609.7 $
2.70 $
2014
8,305.1
6,548.7
1,756.4
698.9
93.8
963.7
(47.3)
(5.5)
36.4
980.1
292.6
687.5
31.7
655.8
2.86
$
$
$
29
Non-comparable items impacting the Company's earnings per diluted share and net earnings
The Company's earnings per diluted share were $0.55, $2.70 and $2.86 for the years ended December
31, 2016, 2015 and 2014, respectively. The non-comparable items presented below are calculated after tax
using the corresponding effective tax rate and the weighted average number of diluted shares for each of
the years then ended. The Company believes the following table is useful in highlighting non-comparable
items that impacted its earnings per diluted share:
Non-comparable items:
Asbestos-related charge
Loss on divestiture
Merger and acquisition expense
Restructuring expense
Intangible asset impairment
Contract expiration gain
Pension settlement loss
Gain on previously held equity interest
Tax adjustments
$
Total impact of non-comparable items per share — diluted:
$
Year Ended December 31,
2016
2015
2014
(2.05) $
(0.48)
(0.11)
(0.10)
(0.04)
0.02
—
—
0.04
(2.72) $
— $
—
(0.08)
(0.27)
—
—
(0.07)
0.05
0.04
(0.33) $
—
—
—
(0.33)
(0.04)
—
(0.01)
—
—
(0.38)
A summary of non-comparable items impacting the Company’s net earnings for the years ended
December 31, 2016, 2015 and 2014 is as follows:
Year ended December 31, 2016:
•
•
In the fourth quarter of 2016, the Company determined that its best estimate of the aggregate liability
both for asbestos-related claims asserted but not yet resolved and potential asbestos-related claims
not yet asserted, including an estimate for defense costs, is $879.3 million as of December 31, 2016.
The Company recorded a charge of $703.6 million before tax ($440.6 million after tax) in Other
Expense, representing the difference in the total liability from what was previously accrued, consulting
fees, less available insurance coverage. Refer to Note 14, "Contingencies," to the Consolidated
Financial Statements in Item 8 of this report for more information.
In October 2016, the Company sold the Remy light vehicle aftermarket business associated with
the 2015 Remy International, Inc. ("Remy") acquisition and recorded a loss on divestiture of $127.1
million. Refer to Note 18, "Recent Transactions," to the Consolidated Financial Statements in Item
8 of this report for more information.
• The Company recorded $23.7 million transition and realignment expenses associated with the Remy
acquisition, including certain costs related to the sale of Remy light vehicle aftermarket business.
• The Company incurred restructuring expense of $26.9 million primarily related to continuation of
prior year actions in both the Drivetrain and Engine segments. The Drivetrain segment charges
represent other expenses and employee termination benefits associated with three labor unions at
separate facilities in Western Europe for approximately 450 employees, as well as restructuring of
the 2015 Remy acquisition. The Engine segment charges primarily relate to the restructuring of the
2014 Gustav Wahler GmbH u. Co. KG and its general partner ("Wahler") acquisition. These expenses
included $10.6 million related to employee termination benefits and $16.3 million of other expenses
including $3.1 million related to winding down certain operations in North America. Both the Drivetrain
and Engine restructuring actions are designed to improve the future profitability and competitiveness
of each segment.
• The Company recorded intangible asset impairment losses of $12.6 million related to Engine segment
Etatech’s ECCOS intellectual technology due to the discontinuance of interest from potential
customers during the fourth quarter of 2016 that significantly lowered the commercial feasibility of
the product line.
30
• The Company recorded $6.2 million gain associated with the release of certain Remy light vehicle
aftermarket liabilities related to the expiration of a customer contract.
• The Company recorded tax benefits of $263.0 million, $22.7 million, $8.6 million, $6.0 million and
$4.4 million primarily related to asbestos-related charge, loss on divestiture, other one-time tax
adjustments, restructuring expense and intangible asset impairment loss, respectively, as well as a
tax expense of $2.2 million related to a gain associated with the release of certain Remy light vehicle
aftermarket liabilities due to the expiration of a customer contract.
Year ended December 31, 2015:
• The Company incurred restructuring expense of $65.7 million, associated with both the Drivetrain
and Engine segments and a global realignment plan. The Drivetrain segment charges mostly
represent expenses associated with severance agreements with three labor unions at separate
facilities in Western Europe for approximately 450 employees, as well as restructuring of the 2015
Remy acquisition. The Engine segment charges primarily relate to the restructuring of the 2014
Wahler acquisition. These expenses included $41.5 million related to employee termination benefits
and $11.7 million of other expenses. Both the Drivetrain and Engine restructuring actions are
designed to improve the future profitability and competitiveness of each segment. Also included in
the restructuring amount above is $12.5 million related to a global realignment plan intended to
enhance treasury management flexibility by creating a legal entity structure that better aligns with
the Company's business strategy.
• The Company incurred a non-cash settlement loss of $25.7 million related to a lump-sum pension
de-risking disbursement made to an insurance company to unconditionally and irrevocably guarantee
all future payments to certain participants that were receiving payments from the U.S. pension plan.
• The Company recorded $21.8 million for merger and acquisition expenses primarily related to the
Remy acquisition. This amount includes $13.0 million related to investment banker fees and $8.8
million related to professional fees.
• The Company recorded a $10.8 million gain on the previously held equity interest in BERU Diesel
Start Systems Pvt. Ltd. ("BERU Diesel") as a result of acquiring the remaining 51% of this joint
venture.
• The Company recorded tax benefits of $9.9 million, $9.0 million, $3.8 million and $3.7 million primarily
related to foreign tax incentives and tax settlements, the pension settlement loss, merger and
acquisition expense and restructuring expense, respectively.
Year ended December 31, 2014:
• The Company incurred restructuring expense of $90.8 million, primarily associated with both the
Drivetrain and Engine segments. The Drivetrain segment charges primarily represent a continuation
of expenses associated with the first quarter 2014 finalization of severance agreements with three
labor unions at separate facilities in Western Europe for approximately 350 employees. The Engine
segment charges primarily relate to the restructuring of the Wahler acquisition. These expenses
included $57.9 million related to employee termination benefits and $20.9 million of other expenses.
Additionally, the Company also recorded restructuring charges of $12.0 million related to a global
realignment plan intended to enhance treasury management flexibility by creating a legal entity
structure that better aligns with the Company's business strategy. Both the Drivetrain and Engine
restructuring actions are designed to improve the future profitability and competitiveness of each
segment.
• The Company incurred intangible asset impairment losses of $10.3 million related to the Engine
segment, primarily driven by the decision to discontinue the use of an unamortized trade name.
• The Company incurred a settlement loss of $3.1 million related to lump-sum payments made to
former employees of the Company to discharge its obligation under the U.S pension plan.
31
• The Company recorded tax benefits of $15.3 million, $0.4 million and $1.1 million related to
restructuring expense, intangible asset impairment losses and the pension settlement loss,
respectively.
Net Sales
Net sales for the year ended December 31, 2016 totaled $9,071.0 million, a 13.1% increase from the
year ended December 31, 2015. Excluding the impact of weakening foreign currencies, and the 2015 Remy
acquisition, net sales increased 5.2%.
Net sales for the year ended December 31, 2015 totaled $8,023.2 million, a 3.4% decrease from the
year ended December 31, 2014. Excluding the impact of weakening foreign currencies, primarily the Euro,
the 2014 Wahler acquisition, the 2015 BERU Diesel acquisition and the 2015 Remy acquisition, net sales
increased 4.3%.
The following table details our results of operations as a percentage of net sales:
(percentage of net sales)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other expense, net
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
Year Ended December 31,
2016
2015
2014
100.0%
100.0%
100.0%
78.7
21.3
9.0
9.8
2.5
(0.5)
(0.1)
0.9
2.2
0.3
1.9
0.5
78.8
21.2
8.3
1.2
11.7
(0.5)
(0.1)
0.8
11.5
3.5
8.0
0.4
78.9
21.1
8.4
1.1
11.6
(0.6)
(0.1)
0.5
11.8
3.5
8.3
0.4
Net earnings attributable to BorgWarner Inc.
1.4%
7.6%
7.9%
Cost of sales as a percentage of net sales was 78.7%, 78.8% and 78.9% in the years ended December
31, 2016, 2015 and 2014, respectively. The Company's material cost of sales was approximately 55% of
net sales in the years ended December 31, 2016, 2015 and 2014. The Company's remaining cost to convert
raw material to finished product, which includes direct labor and manufacturing overhead, had continued
to improve during the years ended December 31, 2016 and 2015 compared to 2014. Gross profit as a
percentage of net sales was 21.3%, 21.2% and 21.1% in the years ended December 31, 2016, 2015 and
2014, respectively. Included in the 2016 gross profit and gross margin is a $6.2 million gain associated with
the release of certain Remy light vehicle aftermarket liabilities related to the expiration of a customer contract.
Selling, general and administrative expenses (“SG&A”) was $817.5 million, $662.0 million and $698.9
million or 9.0%, 8.3% and 8.4% of net sales for the years ended December 31, 2016, 2015 and 2014,
respectively. Excluding the impact of the 2015 acquisition of Remy, SG&A and SG&A as a percentage of
net sales were $696.0 million and 8.5% for the year ended December 31, 2016.
Research and development ("R&D") costs, net of customer reimbursements, was $343.2 million, or
3.8% of net sales, in the year ended December 31, 2016, compared to $307.4 million, or 3.8% of net sales,
and $336.2 million, or 4.0% of net sales, in the years ended December 31, 2015 and 2014, respectively.
We will continue to invest in a number of cross-business R&D programs, as well as a number of other key
32
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 expense, net was $889.7 million, $101.4 million and $93.8 million for the years ended December
31, 2016, 2015 and 2014, respectively. This line item is primarily comprised of items discussed within the
subtitle "Non-comparable items impacting the Company's earnings per diluted share and net earnings"
above.
Equity in affiliates' earnings, net of tax was $42.9 million, $40.0 million and $47.3 million in the years
ended December 31, 2016, 2015 and 2014, respectively. This line item is driven by the results of our 50%-
owned Japanese joint venture, NSK-Warner, and our 32.6%-owned Indian joint venture, Turbo Energy
Private Limited (“TEL”). The increase in the year ended December 31, 2016 compared to 2015 and 2014
is primarily driven by higher earnings from NSK-Warner as a result of improved business conditions in Asia.
Refer to Note 5, "Balance Sheet Information," to the Consolidated Financial Statements in Item 8 of this
report for further discussion of NSK-Warner.
Interest expense and finance charges were $84.6 million, $60.4 million and $36.4 million in the years
ended December 31, 2016, 2015 and 2014, respectively. The increase in interest expense for the year
ended December 31, 2016 compared with the years ended December 31, 2015 and 2014 was primarily
due to the Company's March and November 2015 issuances of senior notes.
Provision for income taxes The provision for income taxes resulted in an effective tax rate of 15.9%
for the year ended December 31, 2016, compared with rates of 30.3% and 29.9% for the years ended
December 31, 2015 and 2014, respectively.
The effective tax rate of 15.9% for the year ended December 31, 2016 includes tax benefits of $263.0
million, $22.7 million, $8.6 million, $6.0 million and $4.4 million associated with an asbestos-related charge,
loss on divestiture, other one-time tax adjustments, restructuring expense and intangible asset impairment
loss, respectively, as well as a tax expense of $2.2 million related to a gain associated with the release of
certain Remy light vehicle aftermarket liabilities due to the expiration of a customer contract. Excluding the
impact of these non-comparable items, the Company's annual effective tax rate associated with ongoing
operations for 2016 was 30.9%.
The effective tax rate of 30.3% for the year ended December 31, 2015 includes tax benefits of $9.0
million, $3.8 million and $3.7 million related to the pension settlement loss, merger and acquisition expense
and restructuring expense discussed in Note 3, "Other Expense, Net," to the Consolidated Financial
Statements in Item 8 of the report. Additionally, the effective tax rate includes a tax benefit of $9.9 million
primarily related to foreign tax incentives and tax settlements. Excluding the impact of these non-comparable
items, the Company's annual effective tax rate associated with ongoing operations for 2015 was 29.8%.
The effective tax rate of 29.9% for the year ended December 31, 2014 includes tax benefits of $15.3
million, $0.4 million and $1.1 million related to restructuring expense, intangible asset impairment losses
and the pension settlement loss discussed in Note 3, "Other Expense, Net," to the Consolidated Financial
Statements in Item 8 of this report. Excluding the impact of these non-comparable items, the Company's
annual effective tax rate associated with ongoing operations for 2014 was 28.5%.
Net earnings attributable to the noncontrolling interest, net of tax of $41.7 million for the year ended
December 31, 2016 increased by $5.0 million and $10.0 million compared to the years ended December
31, 2015 and 2014, respectively. The increase during the year ended December 31, 2016 compared to the
years ended December 31, 2015 and 2014 was primarily related to higher sales and earnings by the
Company's joint ventures.
33
Results By Reporting Segment
The Company's business is comprised of two reporting segments: Engine and Drivetrain. These
segments are strategic business groups, which are managed separately as each represents a specific
grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return on invested
capital ("ROIC") of its business initiatives. ROIC is comprised of Adjusted EBIT after deducting notional
taxes compared to the projected average capital investment required. Adjusted EBIT is comprised of earnings
before interest, income taxes and noncontrolling interest (“EBIT") adjusted for restructuring, goodwill
impairment charges, affiliates' earnings and other items not reflective of 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 by Reporting Segment
(millions of dollars)
Engine
Drivetrain
Inter-segment eliminations
Net sales
$
$
Year Ended December 31,
2015
5,500.0 $
2,556.7
(33.5)
8,023.2 $
2016
5,590.1 $
3,523.7
(42.8)
9,071.0 $
2014
5,705.9
2,631.4
(32.2)
8,305.1
Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest ("Adjusted EBIT")
(millions of dollars)
Engine
Drivetrain
Adjusted EBIT
Asbestos-related charge
Loss on divestiture
Restructuring expense
Merger and acquisition expense
Intangible asset impairment
Contract expiration gain
Pension settlement loss
Gain on previously held equity interest
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
Year Ended December 31,
2015
2014
2016
$
934.1 $
900.7 $
354.5
1,288.6
703.6
127.1
26.9
23.7
12.6
(6.2)
—
—
132.1
(6.3)
84.6
190.5
30.3
160.2
41.7
294.6
1,195.3
—
—
65.7
21.8
—
—
25.7
(10.8)
113.2
(7.5)
60.4
926.8
280.4
646.4
36.7
924.0
303.3
1,227.3
—
—
90.8
—
10.3
—
3.1
—
112.1
(5.5)
36.4
980.1
292.6
687.5
31.7
655.8
Net earnings attributable to BorgWarner Inc.
$
118.5 $
609.7 $
34
The Engine segment's net sales for the year ended December 31, 2016 increased $90.1 million, or
1.6%, and segment Adjusted EBIT increased $33.4 million, or 3.7%, from the year ended December 31,
2015. Excluding the impact of weakening foreign currencies, primarily the Euro, Chinese Renminbi and
Korean Won, net sales increased 3.1% from the year ended December 31, 2015 primarily due to higher
sales of light vehicle turbochargers and engine timing systems, including variable cam timing, partially
offset by weak aftermarket and commercial vehicle markets around the world. The segment Adjusted EBIT
margin was 16.7% for the year ended December 31, 2016, up from 16.4% in the year ended December
31, 2015.
The Engine segment's net sales for the year ended December 31, 2015 decreased $205.9 million, or
3.6%, and segment Adjusted EBIT decreased $23.3 million, or 2.5%, from the year ended December 31,
2014. Excluding the impact of weakening foreign currencies, primarily the Euro, the 2014 Wahler acquisition
and the 2015 BERU Diesel acquisition, net sales increased 6.7% from the year ended December 31, 2014
primarily due to higher sales of turbochargers, partially offset by weak commercial vehicle markets around
the world. The segment Adjusted EBIT margin was 16.4% for the year ended December 31, 2015, up from
16.2% in the year ended December 31, 2014.
The Drivetrain segment's net sales for the year ended December 31, 2016 increased $967.0 million,
or 37.8%, and segment Adjusted EBIT increased $59.9 million, or 20.3%, from the year ended December
31, 2015. Excluding the impact of weakening foreign currencies, primarily the Euro, Chinese Renminbi and
Korean Won, and the 2015 Remy acquisition, net sales increased 9.9% from the year ended December 31,
2015 primarily due to higher sales of all-wheel drive systems. The segment Adjusted EBIT margin was
10.1% in the year ended December 31, 2016, compared to 11.5% in the year ended December 31, 2015.
The Adjusted EBIT margin decrease was primarily due to the 2015 acquisition of Remy.
The Drivetrain segment's net sales for the year ended December 31, 2015 decreased $74.7 million, or
2.8%, and segment Adjusted EBIT decreased $8.7 million, or 2.9%, from the year ended December 31,
2014. Excluding the impact of weakening foreign currencies, primarily the Euro, and the 2015 Remy
acquisition, net sales decreased 0.8% from the year ended December 31, 2014 primarily due to lower sales
of transmission components in Europe. The segment Adjusted EBIT margin was 11.5% in the year ended
December 31, 2015, compared to 11.5% in the year ended December 31, 2014.
Corporate represents headquarters' expenses not directly attributable to the individual segments and
equity in affiliates' earnings. This net expense was $132.1 million, $113.2 million and $112.1 million for the
years ended December 31, 2016, 2015 and 2014, respectively. The increase of Corporate expenses in 2016
is primarily due to costs associated with the onboarding and severance of talent, compliance costs and
various other corporate investment initiatives.
Outlook
Our overall outlook for 2017 is positive. The Company expects modest global production growth and
net new business-related sales growth in 2017 due to rapid adoption of BorgWarner products around the
world. This growth is expected to be partially offset by a stronger U.S. dollar, which would reduce the U.S.
dollar value of its foreign currency-denominated sales.
The Company maintains a positive long-term outlook for its global business and is committed to new
product development and strategic capital investments to enhance its product leadership strategy. The
several trends that are driving our long-term growth are expected to continue, including the increased
turbocharger adoption in North American and Asia, 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. Our long-term growth is also expected to benefit from the adoption of product offerings for
hybrid and electric vehicles.
35
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains various liquidity sources including cash and cash equivalents and the unused
portion of our multi-currency revolving credit agreement. At December 31, 2016, the Company had $443.7
million of cash, of which $437.1 million of cash was 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 uses its U.S. liquidity primarily for various corporate purposes, including but not limited to,
debt service, share repurchases, dividend distributions and other corporate expenses.
The Company has a $1 billion multi-currency revolving credit facility which includes a feature that allows
the Company's borrowings to be increased to $1.25 billion. The facility provides for borrowings through June
30, 2019. The Company has one key financial covenant as part of the credit agreement which is a debt to
EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") ratio. The Company was in
compliance with the financial covenant at December 31, 2016 and expects to remain compliant in future
periods. At December 31, 2016 and December 31, 2015, the Company had no outstanding borrowings
under this facility.
The Company's commercial paper program allows the Company to issue short-term, unsecured
commercial paper notes up to a maximum aggregate principal amount outstanding of $1 billion. Under this
program, the Company may issue notes from time to time and will use the proceeds for general corporate
purposes. At December 31, 2016 and 2015, the Company had outstanding borrowings of $50.8 million and
$215.0 million, respectively, under this program, which is classified in the Consolidated Balance Sheets in
Notes payable and other short-term debt.
The total current combined borrowing capacity under the multi-currency revolving credit facility and
commercial paper program cannot exceed $1 billion.
In addition to the credit facility, the Company's universal shelf registration has an unlimited amount of
various debt and equity instruments that could be issued.
On February 10, 2016, April 27, 2016 and July 26, 2016, the Company’s Board of Directors declared
quarterly cash dividends of $0.13 per share of common stock. On November 9, 2016, the Company's Board
of Directors declared quarterly cash dividends of $0.14 per share of common stock. These dividends were
paid in the 12 months ended December 31, 2016.
The Company's net debt to net capital ratio was 35.0% at December 31, 2016 versus 35.2% at December
31, 2015.
From a credit quality perspective, the Company has a credit rating of BBB+ from both Standard & Poor's
and Fitch Ratings and Baa1 from Moody's. The current outlook from Standard & Poor's and Fitch Ratings
is stable. During the first quarter of 2016, Moody's revised its outlook from stable to negative. None of the
Company's debt agreements require accelerated repayment in the event of a downgrade in credit ratings.
36
Capitalization
(millions of dollars)
Notes payable and short-term debt
Long-term debt
Total debt
Less: cash
Total debt, net of cash
Total equity
Total capitalization
Total debt, net of cash, to capital ratio
December 31,
2016
2015
$
175.9
$
441.4
2,043.6
2,219.5
443.7
1,775.8
3,301.9
2,108.9
2,550.3
577.7
1,972.6
3,631.5
$ 5,077.7
$ 5,604.1
35.0%
35.2%
Balance sheet debt decreased by $330.8 million and cash decreased by $134.0 million compared with
December 31, 2015. The $196.8 million decrease in balance sheet debt (net of cash) was primarily due to
the repayment of the Company's $150 million 5.75% Senior Notes and other short term borrowings.
Total equity decreased by $329.6 million in the year ended December 31, 2016 as follows:
(millions of dollars)
Balance, January 1, 2016
Net earnings
Purchase of treasury stock
Stock-based compensation
Business divestiture
Other comprehensive loss
Dividends declared to BorgWarner stockholders
Dividends declared to noncontrolling stockholders
Balance, December 31, 2016
Operating Activities
$
3,631.5
160.2
(274.8)
46.2
(4.8)
(117.0)
(113.4)
(26.0)
$
3,301.9
Net cash provided by operating activities was $1,035.7 million, $867.9 million and $801.8 million in the
years ended December 31, 2016, 2015 and 2014, respectively. The increase for the year ended December
31, 2016 compared with the year ended December 31, 2015 primarily reflects higher net earnings adjusted
for non-cash charges to operations and improved working capital resulting from inventory management
initiatives and product mix change. The increase for the year ended December 31, 2015 compared with the
year ended December 31, 2014 primarily reflects improved working capital, partially offset by lower net
earnings adjusted for non-cash charges to operations.
37
Investing Activities
Net cash used in investing activities was $404.2 million, $1,759.1 million and $665.1 million in the years
ended December 31, 2016, 2015 and 2014, respectively. The decrease in the year ended December 31,
2016 compared with the year ended December 31, 2015 is primarily due to lower capital expenditures,
including tooling outlays, the 2016 sale of Divgi-Warner and Remy light vehicle aftermarket business and
the 2015 acquisition of Remy and BERU Diesel. The increase in the year ended December 31, 2015
compared with the year ended December 31, 2014 is primarily driven by the 2015 acquisitions of Remy and
BERU Diesel and higher capital expenditures, partially offset by the 2014 acquisition of Wahler and a gain
on the settlement of net investment hedges in 2015. Year over year capital spending decrease of $76.7
million during the year ended December 31, 2016 is due to lower spending on new buildings and building
expansions. Year over year capital spending increase of $14.3 million during the year ended December 31,
2015 was primarily due to higher spending levels required to meet increased program launches worldwide.
Financing Activities
Net cash used in financing activities was $733.8 million for the year ended December 31, 2016, net cash
provided by financing activities was $736.6 million for the year ended December 31, 2015 and net cash
used in financing activities was $201.7 million for the year ended December 31, 2014. The decrease in the
year ended December 31, 2016 compared with the year ended December 31, 2015 is primarily driven by
lower debt borrowings and higher debt repayments, partially offset by lower treasury stock purchases. The
increase in the year ended December 31, 2015 compared with the year ended December 31, 2014 is
primarily driven by the $1 billion issuance of senior notes in March 2015 and the €500 million issuance of
senior notes in November 2015, partially offset by the decrease in notes payable, treasury stock purchases
and dividend payments.
The Company's significant contractual obligation payments at December 31, 2016 are as follows:
(millions of dollars)
Total
2017
2018-2019
2020-2021
After 2021
Other postretirement employee benefits, excluding
pensions (a)
$ 159.7 $
14.8 $
26.3 $
23.0 $
Defined benefit pension plans (b)
Notes payable and long-term debt
Projected interest payments
Non-cancelable operating leases
Capital spending obligations
Income tax payments (c)
Total
42.1
2,230.7
953.3
55.1
85.3
244.7
3.2
175.9
83.1
24.1
85.3
244.7
7.5
153.2
146.5
14.4
—
—
7.8
254.2
121.1
12.8
—
—
95.6
23.6
1,647.4
602.6
3.8
—
—
$ 3,770.9 $ 631.1 $ 347.9 $ 418.9 $ 2,373.0
________________
(a) Other postretirement employee benefits, excluding pensions, include anticipated future payments to cover retiree medical
and life insurance benefits. Refer to Note 11, "Retirement Benefit Plans," to the Consolidated Financial Statements in Item 8
of this report for disclosures related to the Company’s other postretirement employee 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 2021” column is for unfunded plans and
includes estimated payments through 2026. Refer to Note 11, "Retirement Benefit Plans," to the Consolidated Financial
Statements in Item 8 of this report for disclosures related to the Company’s pension benefits.
(c) Refer to Note 4, "Income Taxes," to the Consolidated Financial Statements in Item 8 of this report 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 universal 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.
38
Asbestos-related Liability
During 2016 and 2015, the Company had paid indemnity and related defense costs totaling $45.3 million
and $54.7 million, respectively. These gross payments are before tax benefits and any insurance receipts.
Indemnity and defense costs are incorporated into the Company's operating cash flows and will continue
to be in the future.
Refer to Note 14, "Contingencies," to the Consolidated Financial Statements in Item 8 of this report for
more information regarding costs and assumptions for asbestos-related liability.
Off Balance Sheet Arrangements
The Company has certain leases that are recorded as operating leases. Types of operating leases
include leases on facilities, an airplane, vehicles and certain office equipment. The total expected future
cash outlays for non-cancelable operating lease obligations at December 31, 2016 is $55.1 million. Refer
to Note 16, "Leases and Commitments," to the Consolidated Financial Statements in Item 8 of this report
for more information on operating leases, including future minimum payments.
Pension and Other Postretirement Employee 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, 2016, all
legal funding requirements had been met. The Company contributed $19.7 million, $19.3 million and $53.4
million to its defined benefit pension plans in the years ended December 31, 2016, 2015 and 2014,
respectively. The Company expects to contribute a total of $15 million to $25 million into its defined benefit
pension plans during 2017. Of the $15 million to $25 million in projected 2017 contributions, $3.2 million
are contractually obligated, while any remaining payments would be discretionary.
The funded status of all pension plans was a net unfunded position of $187.4 million and $178.3 million
at December 31, 2016 and 2015, respectively. Of these amounts, $77.5 million and $64.3 million at December
31, 2016 and 2015, 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 employee 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 employee benefits had an unfunded status of $119.9 million and
$145.3 million at December 31, 2016 and 2015, 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.
Refer to Note 11, "Retirement Benefit Plans," to the Consolidated Financial Statements in Item 8 of this
report 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
39
Company's environmental and asbestos liability contingencies are discussed separately below. The
Company's management does not expect that an adverse outcome 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, although it could be material to the results of operations in a particular
quarter.
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
continued. On December 5, 2016, the Court granted the Company’s Motion for Summary Judgment and
ordered dismissal of the retirees’ Complaint with prejudice. No appeal was filed on behalf of the retirees
and the time to file an appeal has expired.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by the United States Environmental Protection Agency and
certain state environmental agencies and private parties as potentially responsible parties (“PRPs”) at
various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation
and Liability Act (“Superfund”) and equivalent state laws and, as such, may presently be liable for the cost
of clean-up and other remedial activities at 27 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or in the aggregate, will have a material
adverse effect on its results of operations, financial position or cash flows. Generally, this is because either
the estimates of the maximum potential liability at a site are not material or the liability will be shared with
other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.
40
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
$6.3 million and $5.4 million at December 31, 2016 and at December 31, 2015, respectively. 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 (“Kuhlman Electric”), 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. The Company previously settled or obtained dismissals of various lawsuits that were
filed against Kuhlman Electric and others, including the Company, on behalf of plaintiffs alleging personal
injury relating to alleged environmental contamination at its Crystal Springs, Mississippi plant. The
Company filed a lawsuit against Kuhlman Electric and a related entity challenging the validity of the indemnity
and the defendants filed counterclaims (the “Indemnity Action”) and a related lawsuit. On September 28,
2015, the parties entered into a confidential settlement agreement that, among other things, released and
terminated all of BorgWarner’s indemnity obligations. Pursuant to the settlement agreement, the parties
voluntarily dismissed the Indemnity Action on September 29, 2015 and the related lawsuit was dismissed
on October 13, 2015. The Company continues to pursue insurance coverage actions for reimbursement of
amounts it spent under the indemnity. The Company may in the future become subject to further legal
proceedings.
Asbestos-related Liability
Like many other industrial companies that have historically operated in the United States, the Company,
or parties that 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
these claims generally relate to a few types of automotive products that were manufactured over 30 years
ago and contained encapsulated asbestos. The nature of the fibers, the encapsulation of the asbestos,
and the manner of the products’ use all lead the Company to believe that these products were and are highly
unlikely to cause harm. Furthermore, the useful life of nearly all of these products expired many years ago.
As of December 31, 2016 and 2015, the Company had approximately 9,400 and 10,100 pending
asbestos-related claims, respectively. The decrease in the number of pending claims is primarily a result
of the Company’s continued efforts to obtain dismissal of dormant claims. It is probable that additional
asbestos-related claims will be asserted against the Company in the future. The Company vigorously
defends against these claims, and has been successful in obtaining the dismissal of the majority of the
claims asserted against it without any payment. The Company likewise expects that the vast majority of
the pending asbestos-related claims in which it has been named (or has an obligation to indemnify a party
which has been named), and asbestos-related claims that may be asserted in the future, will result in no
payment being made by the Company or its insurers. In 2016, of the approximately 2,800 claims resolved,
352 (13%) resulted in payment being made to a claimant by or on behalf of the Company. In 2015, of the
approximately 5,300 claims resolved, 349 (7%) resulted in payment being made to a claimant by or on
behalf of the Company. The comparatively large number of claims resolved in 2015 reflected the Company’s
efforts to dismiss large numbers of inactive or otherwise unmeritorious claims in order to be better positioned
to evaluate remaining and future claims, while the smaller number of total claims resolved in 2016 reflects
in part the outcome of those efforts.
Through December 31, 2016 and 2015, the Company had accrued and paid $477.7 million and $432.7
million in indemnity (including settlement payments) and defense costs in connection with asbestos-related
claims, respectively. During 2016 and 2015, the Company had paid indemnity and related defense costs
totaling $45.3 million and $54.7 million, respectively. These gross payments are before tax benefits and
41
any insurance receipts. Indemnity and defense costs are incorporated into the Company's operating cash
flows and will continue to be in the future.
The Company reviews, on an ongoing basis, its own experience in handling asbestos-related claims
and trends affecting asbestos-related claims in the U.S. tort system generally, for the purposes of assessing
the value of pending asbestos-related claims and the number and value of those that may be asserted in
the future, as well as potential recoveries from the Company’s insurers with respect to such claims and
defense costs. As of December 31, 2015, the Company also recorded an estimated liability of $108.5 million
for asbestos-related claims asserted but not yet resolved and their associated defense costs. The Company
further stated that, as of that date, its ultimate liability could not be reasonably estimated in excess of the
amounts it had then accrued for claims that had been resolved and the estimated liability for claims asserted
but not yet resolved and their associated defense costs. The inability to arrive at a reasonable estimate of
the liability for potential asbestos-related claims that may be asserted in the future was based on, among
other factors, the volatility in the number and type of asbestos claims that may be asserted, changes in
asbestos-related litigation in the United States, the significant number of co-defendants that have filed for
bankruptcy, the magnitude and timing of co-defendant bankruptcy trust payments, the inherent uncertainty
of future disease incidence and claiming patterns against the Company, and the impact of tort reform
legislation that may be enacted at the state or federal levels.
The Company has continued efforts to evaluate these factors and, if possible, arrive at a reasonable
estimate of the number and value of potential future asbestos-related claims. In recent years, there have
been more observable trends in the Company’s claims data that would indicate that claiming patterns against
the Company have stabilized. Concurrently, in recent years, the Company has made enhancements to the
management and analysis of asbestos-related claims, including specifically: the engagement of new
National Coordinating Counsel with significant asbestos litigation experience and a global presence, the
engagement of several new local counsel panels; outsourcing administration and claims handling to a third
party; implementing various improvements in the processing of asbestos-related claims so as to allow the
Company’s management to have greater real-time insight into the handling of individual asbestos-related
claims; and increasing audits and compliance reviews of counsel handling asbestos-related claims. This
process has as of the end of 2016 resulted in improvements in both the quantity and the quality of the
information available to the Company’s management respecting individual asbestos-related claims and their
handling and disposition. This process has also resulted, in the Company’s view, in an increased ability to
reasonably forecast the aggregate number of potential future asbestos-related claims that may be asserted
against the Company.
The Company has further engaged in a sustained effort to obtain the dismissal of thousands of dormant
asbestos-related product liability claims, which has resulted in a reduction in the number of its pending
claims by 48 percent over the past few years. Legislative and judicial developments affecting the U.S. tort
system generally, including medical criteria legislation, procedural reforms, and docket control measures
relating to so-called unimpaired claims, have also stabilized certain aspects of the Company’s defense
efforts respecting asbestos-related claims and allowed the Company greater insight into the number and
value of potential future claims in recent years.
As part of its review and assessment of asbestos-related claims, the Company hired a third party
consultant in the third quarter of 2016 to further assist in the analysis of potential future asbestos-related
claims. The consultant’s work utilized the updated data and analysis resulting from the Company’s claim
review process and included the development of an estimate of the potential value of asbestos-related
claims asserted but not yet resolved as well as the number and potential value of asbestos-related claims
not yet asserted. The Company determined based on the factors described above, including the analysis
and input of the consultant, that its best estimate of the aggregate liability both for asbestos-related claims
asserted but not yet resolved and potential asbestos-related claims not yet asserted, including an estimate
for defense costs, is $879.3 million as of December 31, 2016. This liability reflects the actuarial central
estimate, which is intended to represent an expected value of the most probable outcome. This estimate
42
is not discounted to present value and includes an estimate of liability for potential future claims not yet
asserted through December 31, 2059 with a runoff through 2067. The Company currently believes that
December 31, 2067 is a reasonable assumption as to the last date on which it is likely to have resolved all
asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood
of incidence of asbestos-related disease in the U.S. population generally.
In developing the estimate of liability for potential future claims, the third-party consultant projected a
potential number of future claims based on the Company’s historical claim filings and patterns and compared
that to anticipated levels of unique plaintiff asbestos-related claims asserted in the U.S. tort system against
all defendants. The consultant also utilized assumptions based on the Company’s historical proportion of
claims resolved without payment, historical settlement costs for those claims that result in a payment, and
historical defense costs. The liabilities were then estimated by multiplying the pending and projected future
claim filings by projected payments rates and average settlement amounts and then adding an estimate for
defense costs.
The Company’s estimate of the indemnity and defense costs for asbestos-related claims asserted but
not yet resolved and potential claims not yet asserted is its best estimate of such costs. That estimate is
subject to numerous uncertainties. These include future legislative or judicial changes affecting the U.S.
tort system, bankruptcy proceedings involving one or more co-defendants, the impact and timing of payments
from bankruptcy trusts that presently exist and those that may exist in the future, disease emergence and
associated claim filings, the impact of future settlements or significant judgments, changes in the medical
condition of claimants, changes in the treatment of asbestos-related disease, and any changes in settlement
or defense strategies. The amount recorded at December 31, 2016 for asbestos-related claims is based on
currently available information and assumptions that the Company believes are reasonable. Any amounts
that are reasonably possible of occurring in excess of amounts recorded are believed to not be significant.
The various assumptions utilized in arriving at the Company’s estimate the number of future claims that
may be asserted, the percentage of claims that may result in a payment, the average cost to resolve such
claims, and potential defense costs - may also change over time, and the Company’s actual liability for
asbestos-related claims asserted but not yet resolved and those not yet asserted may be higher or lower
than the estimate provided herein as a result of such changes.
The Company has certain insurance coverage applicable to asbestos-related claims. Prior to June
2004, the settlement and defense costs associated with all asbestos-related claims were paid by the
Company's primary layer insurance carriers under a series of interim funding arrangements. 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 Cook County court has issued a number of interim rulings and discovery is
continuing in this proceeding. The Company is vigorously pursuing the litigation against all carriers that are
parties to it, as well as pursuing settlement discussions with its carriers where appropriate. The Company
has entered into settlement agreements with certain of its insurance carriers, resolving such insurance
carriers’ coverage disputes through the carriers’ agreement to pay specified amounts to the Company, either
immediately or over a specified period.
Through December 31, 2016 and 2015, the Company had received $270.0 million and $263.9 million
in cash and notes from insurers, respectively, on account of indemnity and defense costs respecting
asbestos-related claims. The Company additionally recorded assets as of December 31, 2015 in the amount
of (i) $168.8 million , representing the difference between the $432.7 million in defense and indemnity costs
paid by the Company as of December 31, 2015 for asbestos-related claims and the $263.9 million received
from insurers prior to that date, and (ii) $108.5 million, representing the then-estimated amount of asbestos-
related claims asserted but not yet resolved for which the Company believes it has insurance coverage. In
each case, such amounts were expected to be fully recovered.
43
The Company continues to have additional excess insurance coverage available for potential future
asbestos-related claims. In connection with the Company’s ongoing review of its asbestos-related claims,
the Company also reviewed the amount of its potential insurance coverage for such claims, taking into
account the remaining limits of such coverage, the number and amount of claims on our insurance from co-
insured parties, ongoing litigation against the Company’s insurers described above, potential remaining
recoveries from insolvent insurers, the impact of previous insurance settlements, and coverage available
from solvent insurers not party to the coverage litigation. Based on that review, the Company estimates as
of December 31, 2016 that it has $386.4 million in aggregate insurance coverage available with respect to
asbestos-related claims already satisfied by the Company but not yet reimbursed by the insurers, asbestos-
related claims asserted but not yet resolved, and asbestos-related claims not yet asserted, in each case
together with their associated defense costs. In each case, such amounts are expected to be fully recovered.
However, the resolution of the insurance coverage litigation, and the number and amount of claims on our
insurance from co-insured parties, may increase or decrease the amount of insurance coverage available
to us for asbestos-related claims from the estimates discussed above.
As a result of all of the foregoing estimates of asbestos-related liabilities and related insurance assets,
the Company in the fourth quarter of 2016 recorded a charge of $703.6 million before tax, or $440.6 million
after tax, resulting from the difference in the total liability from what was previously accrued, consulting fees,
less available insurance coverage.
The amounts recorded in the Consolidated Balance Sheets respecting asbestos-related claims are as
follows:
(millions of dollars)
Assets:
Non-current assets
Total insurance assets
Liabilities:
Accounts payable and accrued expenses
Other non-current liabilities
Total accrued liabilities
CRITICAL ACCOUNTING POLICIES
December 31,
2016
2015
$
$
$
$
386.4 $
386.4 $
277.3
277.3
51.7 $
827.6
47.7
60.8
879.3 $
108.5
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.
44
Concentration of 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 changing 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 affect future operating results.
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 cost
of sales. Manufacturing overhead is comprised of indirect materials, indirect labor, factory 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. In assessing long-lived assets for an impairment loss, assets are grouped
with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities. In assessing long-lived assets for impairment, management
generally considers individual facilities the lowest level for which identifiable cash flows are largely
independent. 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. Events
and conditions that could result in impairment in the value of our long-lived assets include changes in the
industries in which we operate, particularly the impact of a downturn in the global economy, as well as
competition and advances in technology, adverse changes in the regulatory environment, or other factors
leading to reduction in expected long-term sales or profitability.
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 consideration
of other factors, including recent acquisition or divestiture activity, the Company performs a quantitative,
"step one," goodwill impairment analysis. In addition, the Company may test goodwill in between annual
test dates if an event occurs or circumstances change that could more-likely-than-not reduce the fair value
of a reporting unit below its carrying value.
45
During the fourth quarter of 2016, the Company performed a qualitative analysis on each reporting unit,
except for the reporting unit with recent acquisition and divestiture activities, and determined it was more-
likely-than-not the fair value exceeded the carrying value of these reporting units. For the reporting unit with
acquisition and divestiture activities, 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 the estimated fair value are
reasonable. Different assumptions could materially affect the estimated fair value. The primary assumptions
affecting the Company's December 31, 2016 goodwill quantitative, "step one," impairment review are as
follows:
• Discount rate: The Company used a 10% weighted average cost of capital (“WACC”) as the
discount rate for future cash flows. The WACC is intended to represent a rate of return that would
be expected by a market participant.
• Operating income margin: The Company 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 models:
• 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
2016 indicated the Company's goodwill assigned to the reporting unit that was quantitatively assessed was
not impaired and contained a fair value substantially higher than the reporting unit's carrying value.
Additionally, sensitivity analyses were completed indicating a one percent increase in the discount rate or
a one percent decrease in the operating margin assumptions would not result in the carrying value exceeding
the fair value of the reporting unit quantitatively assessed.
Refer to Note 6, "Goodwill and Other Intangibles," to the Consolidated Financial Statements in Item 8
of this report for more information regarding goodwill.
46
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 the warranty accrual is appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the accrual. Our warranty provision as a percentage of net sales in 2016
increased is primarily related to the Company's fourth quarter 2015 acquisition of Remy:
(millions of dollars)
Net sales
Warranty provision
Year Ended December 31,
2016
2015
2014
$ 9,071.0
$ 8,023.2
$ 8,305.1
$
62.2
$
28.6
$
47.8
Warranty provision as a percentage of net sales
0.7%
0.4%
0.6%
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)
25 basis point decrease (income)/expense
25 basis point increase (income)/expense
December 31,
2016
2015
2014
$
$
(22.7) $
22.7 $
(20.1) $
20.1 $
(20.8)
20.8
At December 31, 2016, the total accrued warranty liability was $95.3 million. The accrual is represented
as $63.9 million in current liabilities and $31.4 million in non-current liabilities on our Consolidated Balance
Sheet.
Refer to Note 7, "Product Warranty," to the Consolidated Financial Statements in Item 8 of this report
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.
Asbestos The Company and certain of its subsidiaries along with numerous other companies are
named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing
materials. With the assistance of third party consultants, the Company estimates the liability and
corresponding insurance recovery for pending and future claims not yet asserted through December 31,
2059 with a runoff through 2067 and defense costs. This estimate is based on the Company's historical
claim experience and estimates of the number and resolution cost of potential future claims that may be
filed based on anticipated levels of unique plaintiff asbestos-related claims in the U.S. tort system against
all defendants. This estimate is not discounted to present value. The Company currently believes that
December 31, 2067 is a reasonable assumption as to the last date on which it is likely to have resolved all
asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood
of incidence of asbestos-related disease in the U.S. population generally. The Company assesses the
sufficiency of its estimated liability for pending and future claims and defense costs on an ongoing basis by
evaluating actual experience regarding claims filed, settled and dismissed, and amounts paid in settlements.
In addition to claims and settlement experience, the Company considers additional quantitative and
qualitative factors such as changes in legislation, the legal environment, and the Company's defense strategy.
47
The Company continues to have additional excess insurance coverage available for potential future
asbestos-related claims. In connection with the Company’s ongoing review of its asbestos-related claims,
the Company also reviewed the amount of its potential insurance coverage for such claims, taking into
account the remaining limits of such coverage, the number and amount of claims on our insurance from co-
insured parties, ongoing litigation against the Company’s insurers, potential remaining recoveries from
insolvent insurers, the impact of previous insurance settlements, and coverage available from solvent
insurers not party to the coverage litigation.
Refer to Note 14, "Contingencies," to the Consolidated Financial Statements in Item 8 of this report for
more information regarding management's judgments applied in the recognition and measurement of
asbestos-related assets and liabilities.
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 $6.3 million at December 31, 2016.
Refer to Note 14, "Contingencies," to the Consolidated Financial Statements in Item 8 of this report 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 employee benefits, such as retiree health care, is dependent on certain assumptions used
by actuaries in calculating such amounts. Certain assumptions, including the expected long-term rate of
return on plan assets, discount rate, rates of increase in compensation and health care costs trends are
described in Note 11, "Retirement Benefit Plans," to the Consolidated Financial Statements in Item 8 of this
report. The effects of any modification to those assumptions are either recognized immediately or amortized
over future periods in accordance with GAAP.
In accordance with GAAP, actual results that differ from assumptions used are accumulated and generally
amortized over future periods. The primary assumptions affecting the Company's accounting for employee
benefits under ASC Topics 712 and 715 as of December 31, 2016 are as follows:
• Expected long-term rate of return on plan assets: The expected long-term rate of return is used in
the calculation of net periodic benefit cost. The required use of the expected long-term rate of return on
plan assets may result in recognized returns that are greater or less than the actual returns on those
plan assets in any given year. Over time, however, the expected long-term rate of return on plan assets
is designed to approximate actual earned long-term returns. The expected long-term rate of return for
pension assets has been determined based on various inputs, including historical returns for the different
asset classes held by the Company's trusts and its asset allocation, as well as inputs from internal and
external sources regarding expected capital market return, inflation and other variables. The Company
also considers the impact of active management of the plans' invested assets. In determining its pension
expense for the year ended December 31, 2016, the Company used long-term rates of return on plan
assets ranging from 1.5% to 6.75% outside of the U.S. and 6.7% in the U.S.
48
Actual returns on U.S. pension assets were 5.9%, 0.1% and 10.3% for the years ended December 31,
2016, 2015 and 2014, respectively, compared to the expected rate of return assumption of 6.7% for the
same years ended.
Actual returns on U.K. pension assets were 22.0%, 1.0% and 16.5% for the years ended December 31,
2016, 2015 and 2014, respectively, compared to the expected rate of return assumption of 6.75% for
the same years ended.
Actual returns on German pension assets were 8.6%, 5.1% and 14.5% for the years ended December
31, 2016, 2015 and 2014, respectively, compared to the expected rate of return assumption of 6.6% for
the same years ended.
• Discount rate: At December 31, 2015, the Company changed the method used to estimate the service
and interest components of net periodic benefit cost for pension and other postretirement benefits for
plans that utilize a yield curve approach. This change compared to the previous method resulted in
different service and interest components of net periodic benefit cost (credit). Historically, the Company
estimated these service and interest cost components utilizing a single weighted-average discount rate
derived from the yield curve used to measure the benefit obligation at the beginning of the period. The
Company elected to utilize a full yield curve approach in the estimation of these components by applying
the specific spot rates along the yield curve used in the determination of the benefit obligation to the
relevant projected cash flows. The Company made this change to provide a more precise measurement
of service and interest costs by improving the correlation between projected benefit cash flows to the
spot yield curve rates. The change in the service and interest costs going forward is not expected to be
significant. The Company has accounted for this change as a change in accounting estimate.
The discount rate is used to calculate pension and postretirement employee benefit obligations (“OPEB”).
The Company used discount rates ranging from 0.33% to 9.50% to determine its pension and other
benefit obligations as of December 31, 2016, including weighted average discount rates of 3.94% in the
U.S., 2.25% outside of the U.S., and 3.61% 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).
• 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, 2016, the Company used health care cost trend rates of 6.79%,
declining to an ultimate trend rate of 5% by the year 2022.
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 2017 pre-tax pension expense:
(millions of dollars)
One percentage point decrease in discount rate
One percentage point increase in discount rate
One percentage point decrease in expected return on assets
One percentage point increase in expected return on assets
________________
49
Impact on U.S. 2017
pre-tax pension
(expense)/income
Impact on Non-U.S.
2017 pre-tax pension
(expense)/income
$
$
$
$
— * $
— * $
(2.2)
2.2
$
$
(8.0)
8.0
(3.9)
3.9
* A one percentage point increase or decrease in the discount rate would have a negligible impact on the Company’s U.S. 2017
pre-tax pension expense.
The following table illustrates the sensitivity to a change in the discount rate assumption related to the
Company’s U.S. OPEB interest expense:
(millions of dollars)
One percentage point decrease in discount rate
One percentage point increase in discount rate
Impact on 2017 pre-
tax OPEB interest
(expense)/income
$
$
(0.8)
0.8
The sensitivity to a change in the discount rate assumption related to the Company's total 2017 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)
Effect on other postretirement employee benefit obligation
Effect on total service and interest cost components
One Percentage Point
Increase
Decrease
$
$
7.9 $
0.3 $
(7.0)
(0.3)
Refer to Note 11, "Retirement Benefit Plans," to the Consolidated Financial Statements in Item 8 of this
report 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 to pay assessments, if any, which may
be proposed by the taxing authorities. At December 31, 2016, the Company has recorded a liability for its
50
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.
Refer to Note 4, "Income Taxes," to the Consolidated Financial Statements in Item 8 of this report for
more information regarding income taxes.
New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") No. 2017-04, "Simplifying the Test for Goodwill Impairment." It eliminates Step 2 from the
goodwill impairment test and an entity should recognize an impairment charge for the amount by which the
carrying amount of goodwill exceeds the reporting unit's fair value, not to exceed the carrying amount of
goodwill. This guidance is effective for annual and any interim impairment tests in fiscal years beginning
after December 15, 2019. The Company does not expect this guidance to have any impact on its Consolidated
Financial Statements.
In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-01, "Clarifying the
Definition of a Business." It revises the definition of a business and provides a framework to evaluate when
an input and a substantive process are present in an acquisition to be considered a business. This guidance
is effective for annual periods beginning after December 15, 2017. The Company does not expect this
guidance to have any impact on its Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18, "Restricted Cash." It requires that amounts
generally described as restricted cash and restricted cash equivalents should be included with cash and
cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2017. The Company does not expect this guidance to have a material impact on its
Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash
Payments." It provides guidance on eight specific cash flow issues with the objective of reducing the existing
diversity in practice in how they are classified in the statement of cash flows. This guidance is effective for
interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted,
provided that all of the amendments are adopted in the same period. The Company does not expect this
guidance to have a material impact on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment
Accounting." Under this guidance, the areas of simplification involve several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as
either equity or liabilities, impact on earnings per share and classification on the statement of cash flows.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2016 and
the Company will adopt this guidance in the first quarter of 2017. Upon the adoption of the guidance, all of
the tax effects of share-based payments will be recorded in the income statement. The impact to the
Consolidated Financial Statements will be dependent upon the underlying vesting or exercise activity and
related future stock prices. The Company is currently evaluating the other impacts this guidance will have
on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Under this guidance, lessees
will be required to recognize a right-of-use asset and a lease liability for all operating leases defined under
previous GAAP. This guidance is effective for interim and annual reporting periods beginning after December
15, 2018. The Company is currently evaluating the impact this guidance will have on its Consolidated
Financial Statements.
51
In September 2015, the FASB issued ASU No. 2015-16, "Simplifying the Accounting for Measurement-
Period Adjustments." Under this guidance, an acquirer is required to recognize adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustment
amounts are determined. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2015. The Company adopted this guidance in the first quarter of 2016 and recorded fair value
adjustments related to the Remy acquisition based on new information obtained during the measurement
period primarily related to warranty, inventory, and deferred taxes. These adjustments have resulted in a
decrease in goodwill of $12.1 million from the Company's initial estimate recorded in 2016.
In August 2015, the FASB issued ASU No. 2015-15, "Presentation and Subsequent Measurement of
Debt Issuance Costs Associated with Line-of-Credit Arrangements." Under this guidance, debt issuance
costs associated with line-of-credit arrangements would be deferred as an asset and amortized ratably over
the term, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2015 and
the Company adopted this guidance in the first quarter of 2016 with no impact on the Company's Consolidated
Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory." Under
this guidance, inventory should be measured at the lower of cost and net realizable value. Subsequent
measurement is unchanged for inventory measured using LIFO or the retail inventory method. This guidance
is effective for interim and annual reporting periods beginning after December 15, 2016. The Company does
not expect this guidance to have a material impact on its Consolidated Financial Statements.
In May 2015, the FASB issued ASU No. 2015-07, "Disclosures for Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent)." Under this guidance, investments measured at
net asset value, as a practical expedient for fair value, are excluded from the fair value hierarchy. This
guidance is effective for interim and annual reporting periods beginning after December 15, 2015 and the
Company adopted this guidance in the first quarter of 2016. The pension asset disclosure has been updated
retrospectively to reflect this guidance and there is no impact on the Company's Consolidated Financial
Statements.
In May 2014, the FASB amended the Accounting Standards Codification to add Topic 606, "Revenue
from Contracts with Customers," outlining a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and superseding most current revenue recognition
guidance. This guidance is effective for interim and annual reporting periods beginning after December 15,
2017. The Company anticipates changes to the revenue recognition of pre-production activities such as
customer owned tooling and engineering design & development recoveries, including the potential recording
of these items as revenue. Further, the Company is currently analyzing the impact of the new guidance on
its contracts and customer arrangements that include various pricing structures and cancellation clauses,
which could impact the timing of revenue recognition. The Company expects to adopt this guidance effective
January 1, 2018 utilizing the Modified Retrospective approach and is currently evaluating the impact that
the adoption of this guidance will have on its consolidated financial statements.
52
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, refer to Note 10, "Financial Instruments," to the
Consolidated Financial Statements in Item 8 of this report for information with respect to interest rate risk
and foreign currency exchange rate risk and commodity purchase price risk.
Interest Rate Risk
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates.
The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while
attempting to optimize 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, 2016, the amount
of debt with fixed interest rates was 98.5% of total debt. 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 $0.1 million, $2.1 million and $0.2
million in the years ended December 31, 2016, 2015 and 2014, 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 Renminbi, the Euro, the Hungarian Forint, the Japanese Yen, the Mexican Peso, the
Swedish Krona and the South Korean Won. We mitigate our foreign currency exchange rate risk by
establishing local production facilities and related supply chain participants in the markets we serve, by
invoicing customers in the same currency as the source of the products and by funding some of our
investments in foreign markets through local currency loans. Such non-U.S. Dollar debt was $82.1 million
and $144.6 million as of December 31, 2016 and 2015, respectively. We also monitor our foreign currency
exposure in each country and implement strategies to respond to changing economic and political
environments. The depreciation of the British Pound post the United Kingdom's 2016 vote to leave the
European Union is not expected to have a significant impact on the Company since net sales from the
United Kingdom represents less than 2% of the Company's net sales in 2016. 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, 2016 and
2015, the Company recorded a short-term deferred gain related to foreign currency derivatives of $6.7
million and $2.4 million, respectively, and short-term deferred loss related to foreign currency derivatives of
$1.1 million and $2.5 million, respectively.
The foreign currency translation adjustment losses of $109.1 million, $260.5 million and $(341.8) million
for the years ended December 31, 2016, 2015 and 2014, respectively, contained within our Consolidated
Statements of Comprehensive Income represent the foreign currency translational impacts of converting
our non-U.S. dollar subsidiaries financial statements to the Company’s reporting currency (U.S. Dollar).
The 2016 foreign currency translation adjustment loss was primarily due to the impact of a strengthening
53
U.S. dollar against the Euro and Chinese Renminbi, which increased other comprehensive loss by
approximately $60 million and $45 million, respectively. The 2015 foreign currency translation adjustment
loss was primarily due to the impact of a strengthening U.S. dollar, which increased approximately 10% in
relation to the Euro between December 31, 2014 and 2015. This 10% change in the Euro increased other
comprehensive loss by approximately $220 million. The 2014 foreign currency translation adjustment loss
was primarily due to the impact of the strengthening U.S. dollar, which increased approximately 12% in
relation to the Euro between December 31, 2013 and 2014. This 12% change in the Euro increased other
comprehensive loss by approximately $243 million.
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 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, 2016 and
2015, the Company had forward and option commodity contracts with a total notional value of $1.0 million
and $38.8 million, respectively. As of December 31, 2016 and 2015, the Company recorded a short-term
deferred loss related to commodity derivatives of $0.1 million and $2.1 million, respectively.
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.
54
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 Disclosures about Market Risk."
For information regarding interest rate risk, foreign currency exchange risk and commodity price risk,
refer to the Financial Instruments footnote. For information regarding the levels of indebtedness subject to
interest rate fluctuation, refer to the Notes Payable and Long-Term Debt footnote. For information regarding
the level of business outside the United States, which is subject to foreign currency exchange rate market
risk, refer to the Reporting Segments and Related Information footnote.
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
56
57
58
59
60
61
62
55
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of BorgWarner Inc.
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, 2016 and December 31, 2015,
and the results of their operations and their cash flows for each of the three years in the period ended December 31,
2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these financial statements, for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in 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.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, Michigan
February 9, 2017
56
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
ASSETS
Cash
Receivables, net
Inventories, net
Prepayments and other current assets
Total current assets
Property, plant and equipment, net
Investments and other long-term receivables
Goodwill
Other intangible assets, net
Other non-current assets
Total assets
LIABILITIES AND EQUITY
Notes payable and other short-term debt
Accounts payable and accrued expenses
Income taxes payable
Total current liabilities
Long-term debt
Other non-current liabilities:
Asbestos-related liabilities
Retirement-related liabilities
Other
Total other non-current liabilities
Commitments and contingencies
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: (2016 -
246,387,057; 2015 - 246,387,057); outstanding shares: (2016 - 212,262,965; 2015 -
219,324,821)
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
December 31,
2016
2015
$
443.7
$
577.7
1,689.3
1,665.0
641.2
137.4
723.6
168.9
2,911.6
3,135.2
2,501.8
502.2
1,702.2
463.5
753.4
2,448.1
460.9
1,757.7
543.8
480.0
$
8,834.7
$
8,825.7
$
175.9
$
441.4
1,847.3
68.6
2,091.8
1,866.4
49.4
2,357.2
2,043.6
2,108.9
827.6
294.1
275.7
1,397.4
60.8
312.9
354.4
728.1
—
2.5
—
—
2.5
—
1,104.3
4,215.2
(722.1)
1,109.7
4,210.1
(610.2)
Common stock held in treasury, at cost: (2016 - 34,124,092 shares; 2015 - 27,062,236 shares)
(1,381.6)
(1,158.4)
Total BorgWarner Inc. stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
3,218.3
83.6
3,301.9
3,553.7
77.8
3,631.5
$
8,834.7
$
8,825.7
See Accompanying Notes to Consolidated Financial Statements.
57
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share and per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other expense, net
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
Net earnings attributable to BorgWarner Inc.
Earnings per share — basic
Earnings per share — diluted
Weighted average shares outstanding (thousands):
Basic
Diluted
2016
$ 9,071.0
7,137.9
1,933.1
Year Ended December 31,
2015
$ 8,023.2
6,320.1
1,703.1
2014
$ 8,305.1
6,548.7
1,756.4
817.5
889.7
225.9
(42.9)
(6.3)
84.6
190.5
30.3
160.2
41.7
118.5
0.55
0.55
$
$
$
662.0
101.4
939.7
(40.0)
(7.5)
60.4
926.8
280.4
646.4
36.7
609.7
2.72
2.70
$
$
$
698.9
93.8
963.7
(47.3)
(5.5)
36.4
980.1
292.6
687.5
31.7
655.8
2.89
2.86
$
$
$
214,374
215,328
224,414
225,648
227,150
228,924
Dividends declared per share
$
0.53
$
0.52
$
0.51
See Accompanying Notes to Consolidated Financial Statements.
58
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of dollars)
Net earnings attributable to BorgWarner Inc.
Other comprehensive (loss) income
Foreign currency translation adjustments
Hedge instruments*
Defined benefit postretirement plans*
Other*
Year Ended December 31,
2016
2015
2014
$
118.5
$
609.7
$
655.8
(109.1)
(260.5)
(341.8)
7.0
(8.2)
(1.6)
(3.7)
37.4
0.2
17.7
(45.8)
0.3
Total other comprehensive (loss) income attributable to BorgWarner Inc.
(111.9)
(226.6)
(369.6)
Comprehensive income attributable to BorgWarner Inc.
Comprehensive loss attributable to the noncontrolling interest
Comprehensive income
____________________________________
* Net of income taxes.
6.6
(5.1)
383.1
(5.1)
286.2
(3.9)
$
1.5
$
378.0
$
282.3
See Accompanying Notes to Consolidated Financial Statements.
59
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of dollars)
OPERATING
Net earnings
Adjustments to reconcile net earnings to net cash flows from operations:
Year Ended December 31,
2015
2014
2016
$
160.2
$
646.4
$
687.5
Non-cash charges (credits) to operations:
Asbestos-related charge
Loss on divestiture
Depreciation and amortization
Restructuring expense, net of cash paid
Gain on previously held equity interest
Pension settlement loss
Stock-based compensation expense
Deferred income tax (benefit) provision
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 assets and liabilities
Net cash provided by operating activities
INVESTING
Capital expenditures, including tooling outlays
Proceeds from sale of businesses, net of cash divested
Proceeds from asset disposals and other
Payments for businesses acquired, including restricted cash, net of cash acquired
Proceeds from settlement of net investment hedges
Net cash used in investing activities
FINANCING
Net (decrease) increase in notes payable
Additions to long-term debt, net of debt issuance costs
Repayments of long-term debt, including current portion
Repayments of accounts receivable securitization facility
Proceeds from interest rate swap termination
Payments for purchase of treasury stock
Proceeds from (payments for) stock-based compensation items
Dividends paid to BorgWarner stockholders
Dividends paid to noncontrolling stockholders
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Net decrease in cash
Cash at beginning of year
Cash at end of year
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest
Income taxes, net of refunds
Non-cash investing transactions
Liabilities assumed from business acquired
Non-cash financing transactions
Debt assumed from business acquired
703.6
127.1
391.4
12.0
—
—
43.6
(268.9)
(17.0)
1,152.0
(137.5)
(36.5)
8.8
134.9
(14.2)
(71.8)
1,035.7
(500.6)
85.8
10.6
—
—
(404.2)
(129.1)
4.6
(193.6)
—
8.9
(288.0)
6.7
(113.4)
(29.9)
(733.8)
(31.7)
(134.0)
577.7
—
—
320.2
36.3
(10.8)
25.7
40.2
13.3
(21.9)
1,049.4
(81.8)
(52.9)
(9.4)
23.1
34.6
(95.1)
867.9
(577.3)
—
4.7
(1,199.6)
13.1
(1,759.1)
(316.7)
1,569.2
(29.8)
—
—
(349.8)
3.7
(116.7)
(23.3)
736.6
(65.5)
(220.1)
797.8
$
$
$
$
$
443.7
$
577.7
$
100.3
300.5
$
$
— $
— $
70.2
183.8
31.1
10.9
$
$
$
$
—
—
330.4
45.8
—
3.1
32.1
42.3
(5.2)
1,136.0
(248.7)
(39.7)
12.7
129.1
(28.7)
(158.9)
801.8
(563.0)
—
8.4
(110.5)
—
(665.1)
493.2
130.5
(431.6)
(110.0)
—
(139.9)
(6.7)
(116.1)
(21.1)
(201.7)
(76.7)
(141.7)
939.5
797.8
49.5
229.7
3.2
40.3
See Accompanying Notes to Consolidated Financial Statements.
60
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Number of shares
BorgWarner Inc. stockholder's equity
(in millions of dollars, except share data)
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, 2014
246,421,893
(18,489,037) $
2.5
$
1,121.9
$
(727.2) $
3,177.4
$
(14.0) $
Dividends declared
Stock incentive plans
Net issuance for executive stock plan
—
—
—
Net issuance of restricted stock
(31,273)
Purchase of treasury stock
Net earnings
Other comprehensive loss
—
—
—
—
283,090
336,883
326,074
(2,417,547)
—
—
—
—
—
—
—
—
—
—
5.4
(13.3)
(1.6)
—
—
—
—
11.5
24.7
(1.3)
(139.9)
—
—
(116.1)
—
—
—
—
655.8
—
—
—
—
—
—
—
(369.6)
Balance, December 31, 2014
246,390,620
(19,960,537) $
2.5
$
1,112.4
$
(832.2) $
3,717.1
$
(383.6) $
Dividends declared
Stock incentive plans
Net issuance for executive stock plan
—
—
—
—
439,653
—
Net issuance of restricted stock
(3,563)
532,951
Purchase of treasury stock
Net earnings
Other comprehensive loss
—
—
—
(8,074,303)
—
—
—
—
—
—
—
—
—
—
(1.8)
2.4
(3.3)
—
—
—
—
18.6
—
18.2
(363.0)
—
—
(116.7)
—
—
—
—
609.7
—
—
—
—
—
—
—
(226.6)
Balance, December 31, 2015
246,387,057
(27,062,236) $
2.5
$
1,109.7
$
(1,158.4) $
4,210.1
$
(610.2) $
Dividends declared
Stock incentive plans
Net issuance for executive stock plan
Net issuance of restricted stock
Purchase of treasury stock
Business divestiture
Net earnings
Other comprehensive loss
—
—
—
—
—
—
—
—
—
793,230
—
414,464
(8,269,550)
—
—
—
—
—
—
—
—
—
—
—
—
(19.4)
12.8
1.2
—
—
—
—
—
32.4
—
19.2
(274.8)
—
—
—
(113.4)
—
—
—
—
—
118.5
—
—
—
—
—
—
—
—
(111.9)
Balance, December 31, 2016
246,387,057
(34,124,092) $
2.5
$
1,104.3
$
(1,381.6) $
4,215.2
$
(722.1) $
71.8
(24.9)
—
—
—
—
31.7
(3.9)
74.7
(28.5)
—
—
—
—
36.7
(5.1)
77.8
(26.0)
—
—
—
—
(4.8)
41.7
(5.1)
83.6
See Accompanying Notes to Consolidated Financial Statements.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a global product leader in clean and
efficient technology solutions for combustion, hybrid and electric vehicles. Our products help improve vehicle
performance, propulsion 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 Europe, the
Americas 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 In the first quarter of 2016, the Company retrospectively adopted Accounting
Standard Update ("ASU") No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which resulted
in the reduction of assets and liabilities by approximately $16 million in the Company's Condensed
Consolidated Balance Sheet as of December 31, 2015. Certain prior period amounts have been reclassified
to conform to current period presentation.
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.
Principles of consolidation The Consolidated Financial Statements include all majority-owned
subsidiaries with a controlling financial interest. All inter-company accounts and transactions have been
eliminated in consolidation. Investments in 20% to 50% owned affiliates are accounted for under the equity
method when the Company does not have a controlling financial interest.
Revenue recognition The Company recognizes revenue when title and risk of loss pass to the customer,
which is usually upon shipment of product. Although the Company may enter into long-term supply
agreements with its major customers, each shipment of goods is treated as a separate sale and the prices
are not fixed over the life of the agreements.
Cost of sales The Company includes materials, direct labor and manufacturing overhead within cost
of sales. Manufacturing overhead is comprised of indirect materials, indirect labor, factory 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. 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.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted cash Restricted cash as of December 31, 2015 related to amounts deposited with the paying
agent to settle shares of Remy International Inc. ("Remy") stock in connection with the acquisition of Remy
on November 10, 2015, that was not paid to the shareholders until the first half of 2016.
Receivables, net The Company factors certain receivables through third party financial institutions
without recourse. These are treated as a sale. The transactions are accounted for as a reduction in accounts
receivable as the agreements transfer effective control over and risk related to the receivables to the buyers.
The Company does not service any domestic accounts after the factoring has occurred. The Company does
not have any servicing assets or liabilities.
See the Balance Sheet Information footnote to the Consolidated Financial Statements for more
information on receivables, net.
Inventories, net Inventories are valued at the lower of cost or market. Cost of certain U.S. inventories
is determined using the last-in, first-out (“LIFO”) method, while other U.S. and foreign operations use the
first-in, first-out (“FIFO”) or average-cost methods. Inventory held by U.S. operations using the LIFO method
was $131.4 million and $122.2 million at December 31, 2016 and 2015, respectively. Such inventories, if
valued at current cost instead of LIFO, would have been greater by $15.2 million and $14.2 million at
December 31, 2016 and 2015, respectively.
See the Balance Sheet Information footnote 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 three to five 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 assets. Useful lives for buildings
range from 15 to 40 years and useful lives for machinery and equipment range from three to 12 years. For
income tax purposes, accelerated methods of depreciation are generally used.
See the Balance Sheet Information footnote to the Consolidated Financial Statements for more
information on property, plant and equipment, net.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impairment of long-lived assets, including definite-lived intangible assets The Company reviews
the carrying value of its long-lived assets, whether held for use or disposal, including other amortizing
intangible assets, when events and circumstances warrant such a review under Accounting Standards
Codification ("ASC") Topic 360. In assessing long-lived assets for an impairment loss, assets are grouped
with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities. In assessing long-lived assets for impairment, management
generally considers individual facilities the lowest level for which identifiable cash flows are largely
independent. 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 consideration
of other factors, including recent acquisition or divestiture activity, the Company performs a quantitative,
"step one," goodwill impairment analysis. In addition, the Company may test goodwill in between annual
test dates if an event occurs or circumstances change that could more-likely-than-not reduce the fair value
of a reporting unit below its carrying value.
See the Goodwill and Other Intangibles footnote 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 the warranty accrual 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.
See the Product Warranty footnote to the Consolidated Financial Statements for more information on
product warranties.
Other loss accruals and valuation allowances The Company has numerous other loss exposures,
such as customer claims, workers' compensation claims, litigation and recoverability of assets. Establishing
loss accruals or valuation allowances for these matters requires the use of estimates and judgment in regard
to the risk exposure and ultimate realization. The Company estimates losses under the programs using
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consistent and appropriate methods, however, changes to its assumptions could materially affect the
recorded accrued liabilities for loss or asset valuation allowances.
Asbestos The Company and certain of its subsidiaries along with numerous other companies are
named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing
materials. With the assistance of third party consultants, the Company estimates the liability and
corresponding insurance recovery for pending and future claims not yet asserted through December 31,
2059 with a runoff through 2067 and defense costs. This estimate is based on the Company's historical
claim experience and estimates of the number and resolution cost of potential future claims that may be
filed based on anticipated levels of unique plaintiff asbestos-related claims in the U.S. tort system against
all defendants. This estimate is not discounted to present value. The Company currently believes that
December 31, 2067 is a reasonable assumption as to the last date on which it is likely to have resolved all
asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood
of incidence of asbestos-related disease in the U.S. population generally. The Company assesses the
sufficiency of its estimated liability for pending and future claims and defense costs on an ongoing basis by
evaluating actual experience regarding claims filed, settled and dismissed, and amounts paid in settlements.
In addition to claims and settlement experience, the Company considers additional quantitative and
qualitative factors such as changes in legislation, the legal environment, and the Company's defense strategy.
The Company continues to have additional excess insurance coverage available for potential future
asbestos-related claims. In connection with the Company’s ongoing review of its asbestos-related claims,
the Company also reviewed the amount of its potential insurance coverage for such claims, taking into
account the remaining limits of such coverage, the number and amount of claims on our insurance from co-
insured parties, ongoing litigation against the Company’s insurers, potential remaining recoveries from
insolvent insurers, the impact of previous insurance settlements, and coverage available from solvent
insurers not party to the coverage litigation.
See the Contingencies footnote to the Consolidated Financial Statements for more information regarding
management's judgments applied in the recognition and measurement of asbestos-related assets and
liabilities.
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 the Contingencies footnote to the Consolidated Financial Statements for more information regarding
environmental contingencies.
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 the Financial Instruments footnote to the Consolidated Financial Statements for more information
on derivative financial instruments.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 the Accumulated Other Comprehensive Loss footnote to the Consolidated Financial Statements
for more information on accumulated other comprehensive loss.
Pensions and other postretirement employee defined benefits The Company's defined benefit
pension and other postretirement employee benefit plans are accounted for in accordance with ASC Topic
715. Disability, early retirement and other postretirement employee benefits are accounted for in accordance
with ASC Topic 712.
Pensions and other postretirement employee benefit costs and related liabilities and assets are
dependent upon assumptions used in calculating such amounts. These assumptions include discount rates,
expected returns on plan assets, health care cost trends, compensation and other factors. In accordance
with GAAP, actual results that differ from the assumptions used are accumulated and amortized over future
periods, and accordingly, generally affect recognized expense in future periods.
See the Retirement Benefit Plans footnote 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 the Income Taxes footnote to the Consolidated Financial Statements for more information regarding
income taxes.
New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") No. 2017-04, "Simplifying the Test for Goodwill Impairment." It eliminates Step 2 from the
goodwill impairment test and an entity should recognize an impairment charge for the amount by which the
carrying amount of goodwill exceeds the reporting unit's fair value, not to exceed the carrying amount of
goodwill. This guidance is effective for annual and any interim impairment tests in fiscal years beginning
after December 15, 2019. The Company does not expect this guidance to have any impact on its Consolidated
Financial Statements.
In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-01, "Clarifying the
Definition of a Business." It revises the definition of a business and provides a framework to evaluate when
an input and a substantive process are present in an acquisition to be considered a business. This guidance
is effective for annual periods beginning after December 15, 2017. The Company does not expect this
guidance to have any impact on its Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18, "Restricted Cash." It requires that amounts
generally described as restricted cash and restricted cash equivalents should be included with cash and
cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 15, 2017. The Company does not expect this guidance to have a material impact on its
Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash
Payments." It provides guidance on eight specific cash flow issues with the objective of reducing the existing
diversity in practice in how they are classified in the statement of cash flows. This guidance is effective for
interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted,
provided that all of the amendments are adopted in the same period. The Company does not expect this
guidance to have a material impact on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment
Accounting." Under this guidance, the areas of simplification involve several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as
either equity or liabilities, impact on earnings per share and classification on the statement of cash flows.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2016 and
the Company will adopt this guidance in the first quarter of 2017. Upon the adoption of the guidance, all of
the tax effects of share-based payments will be recorded in the income statement. The impact to the
Consolidated Financial Statements will be dependent upon the underlying vesting or exercise activity and
related future stock prices. The Company is currently evaluating the other impacts this guidance will have
on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Under this guidance, lessees
will be required to recognize a right-of-use asset and a lease liability for all operating leases defined under
previous GAAP. This guidance is effective for interim and annual reporting periods beginning after December
15, 2018. The Company is currently evaluating the impact this guidance will have on its Consolidated
Financial Statements.
In September 2015, the FASB issued ASU No. 2015-16, "Simplifying the Accounting for Measurement-
Period Adjustments." Under this guidance, an acquirer is required to recognize adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustment
amounts are determined. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2015. The Company adopted this guidance in the first quarter of 2016 and recorded fair value
adjustments related to the Remy acquisition based on new information obtained during the measurement
period primarily related to warranty, inventory, and deferred taxes. These adjustments have resulted in a
decrease in goodwill of $12.1 million from the Company's initial estimate recorded in 2016.
In August 2015, the FASB issued ASU No. 2015-15, "Presentation and Subsequent Measurement of
Debt Issuance Costs Associated with Line-of-Credit Arrangements." Under this guidance, debt issuance
costs associated with line-of-credit arrangements would be deferred as an asset and amortized ratably over
the term, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2015 and
the Company adopted this guidance in the first quarter of 2016 with no impact on the Company's Consolidated
Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory." Under
this guidance, inventory should be measured at the lower of cost and net realizable value. Subsequent
measurement is unchanged for inventory measured using LIFO or the retail inventory method. This guidance
is effective for interim and annual reporting periods beginning after December 15, 2016. The Company does
not expect this guidance to have a material impact on its Consolidated Financial Statements.
In May 2015, the FASB issued ASU No. 2015-07, "Disclosures for Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent)." Under this guidance, investments measured at
net asset value, as a practical expedient for fair value, are excluded from the fair value hierarchy. This
guidance is effective for interim and annual reporting periods beginning after December 15, 2015 and the
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company adopted this guidance in the first quarter of 2016. The pension asset disclosure has been updated
retrospectively to reflect this guidance and there is no impact on the Company's Consolidated Financial
Statements.
In May 2014, the FASB amended the Accounting Standards Codification to add Topic 606, "Revenue
from Contracts with Customers," outlining a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and superseding most current revenue recognition
guidance. This guidance is effective for interim and annual reporting periods beginning after December 15,
2017. The Company anticipates changes to the revenue recognition of pre-production activities such as
customer owned tooling and engineering design & development recoveries, including the potential recording
of these items as revenue. Further, the Company is currently analyzing the impact of the new guidance on
its contracts and customer arrangements that include various pricing structures and cancellation clauses,
which could impact the timing of revenue recognition. The Company expects to adopt this guidance effective
January 1, 2018 utilizing the Modified Retrospective approach and is currently evaluating the impact that
the adoption of this guidance will have on its consolidated financial statements.
NOTE 2
RESEARCH AND DEVELOPMENT COSTS
The Company's net Research & Development ("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.
The following table presents the Company’s gross and net expenditures on R&D activities:
(millions of dollars)
Gross R&D expenditures
Customer reimbursements
Net R&D expenditures
Year Ended December 31,
2016
2015
2014
$
$
417.8 $
386.2 $
(74.6)
(78.8)
343.2 $
307.4 $
392.8
(56.6)
336.2
Net R&D expenditures as a percentage of net sales were 3.8%, 3.8% and 4.0% for the years ended
December 31, 2016, 2015 and 2014, 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.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3
OTHER EXPENSE, NET
Items included in other expense, net consist of:
(millions of dollars)
Asbestos-related charge
Loss on divestiture
Restructuring expense
Merger and acquisition expense
Intangible asset impairment
Pension settlement loss
Gain on previously held equity interest
Other
Other expense, net
Year Ended December 31,
2016
2015
2014
$
$
703.6 $
127.1
26.9
23.7
12.6
—
—
(4.2)
889.7 $
— $
—
65.7
21.8
—
25.7
(10.8)
(1.0)
101.4 $
—
—
90.8
—
10.3
3.1
—
(10.4)
93.8
In the fourth quarter of 2016, the Company determined that its best estimate of the aggregate liability
both for asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet
asserted, including an estimate for defense costs, is $879.3 million as of December 31, 2016. The Company
recorded a charge of $703.6 million before tax ($440.6 million after tax) in Other Expense, representing the
difference in the total liability from what was previously accrued, consulting fees, less available insurance
coverage. See the Contingencies footnote to the Consolidated Financial Statements for further discussion.
During the fourth quarter of 2015, the Company acquired 100% of the equity interests in Remy. During
the year ended December 31, 2016 and 2015, the Company incurred $23.7 million and $21.8 million of
transition and realignment expenses and other professional fees associated with this transaction.
Additionally, in October 2016, the Company entered into a definitive agreement to sell the light vehicle
aftermarket business associated with Remy. This transaction closed in the fourth quarter of 2016 and the
Company recorded loss on divestiture of $127.1 million in the year ended December 31, 2016. See the
Recent Transactions footnote to the Consolidated Financial Statements for further discussion of this
transaction.
During the years ended December 31, 2016, 2015 and 2014, the Company recorded restructuring
expense of $26.9 million, $65.7 million and $90.8 million, respectively, primarily related to Drivetrain and
Engine segment actions designed to improve future profitability and competitiveness. The restructuring
expense also includes amounts related to a global realignment plan intended to enhance treasury
management flexibility. See the Restructuring footnote to the Consolidated Financial Statements for further
discussion of these expenses.
During the fourth quarter of 2016 and 2014, respectively, the Company recorded an intangible asset
impairment loss of $12.6 million related to Engine segment Etatech’s ECCOS intellectual technology and
$10.3 million related to Engine segment unamortized trade names. The ECCOS intellectual technology
impairment is due to the discontinuance of interest from potential customers during the fourth quarter of
2016 that significantly lowered the commercial feasibility of the product line.
During the fourth quarter of 2015, the Company settled approximately $48 million of its projected benefit
obligation by transferring approximately $48 million in plan assets through a lump-sum pension de-risking
disbursement made to an insurance company. This agreement unconditionally and irrevocably guarantees
all future payments to certain participants that were receiving payments from the U.S. pension plan. The
insurance company assumes all investment risk associated with the assets that were delivered as part of
this transaction. As a result, the Company recorded a non-cash settlement loss of $25.7 million related to
the accelerated recognition of unamortized losses. Additionally, during the third quarter of 2014, the Company
discharged certain U.S. pension plan obligations by making lump-sum payments to former employees of
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Company. As a result of this action, the Company recorded a settlement loss of $3.1 million in the U.S.
pension plan.
During the first quarter of 2015, the Company completed the purchase of the remaining 51% of BERU
Diesel Start Systems Pvt. Ltd. ("BERU Diesel") by acquiring the shares of its former joint venture partner.
As a result of this transaction, the Company recorded a $10.8 million gain on the previously held equity
interest in this joint venture. See the Recent Transactions footnote to the Consolidated Financial Statements
for further discussion of this acquisition.
NOTE 4
INCOME TAXES
Earnings before income taxes and the provision for income taxes are presented in the following table.
(millions of dollars)
Earnings before income taxes:
U.S.
Non-U.S.
Total
Provision for income taxes:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total provision for income taxes
$
$
$
Year Ended December 31,
2016
2015
2014
(724.7) $
915.2
190.5 $
125.6 $
801.2
926.8 $
218.8
761.3
980.1
37.4 $
32.5 $
6.1
251.7
295.2
(239.8)
(13.2)
(11.9)
(264.9)
(4.3)
228.3
256.5
31.8
2.6
(10.5)
23.9
$
30.3 $
280.4 $
25.7
3.9
220.8
250.4
66.2
(1.2)
(22.8)
42.2
292.6
The provision for income taxes resulted in an effective tax rate of 15.9%, 30.3% and 29.9% for the years
ended December 31, 2016, 2015 and 2014, respectively. An analysis of the differences between the effective
tax rate and the U.S. statutory rate for the years ended December 31, 2016, 2015 and 2014 is presented
below.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(millions of dollars)
Income taxes at U.S. statutory rate of 35%
Increases (decreases) resulting from:
State taxes, net of federal benefit
U.S. tax on non-U.S. earnings
Affiliates' earnings
Foreign rate differentials
Tax holidays
Withholding taxes
Tax credits
Reserve adjustments, settlements and claims
Valuation allowance adjustments
Non-deductible transaction costs
Provision to return and other one-time tax adjustments
Impact of transactions
Currency
Other foreign taxes
Partnership income
Other
Year Ended December 31,
2016
2015
2014
$
66.7 $
324.4 $
343.0
(10.6)
40.7
(15.0)
(93.3)
(25.5)
13.3
(3.2)
11.6
(2.7)
8.3
0.3
16.3
10.0
12.9
3.4
8.2
31.5
(14.0)
(92.6)
(21.2)
7.8
(3.2)
19.4
8.3
8.1
(5.1)
11.6
0.1
9.0
3.1
(2.9)
(15.0)
2.6
18.8
(16.2)
(84.1)
(23.6)
10.6
(3.9)
41.0
5.5
5.4
(8.8)
—
(0.2)
7.4
(0.3)
(4.6)
Provision for income taxes, as reported
$
30.3 $
280.4 $
292.6
The Company's provision for income taxes for the year ended December 31, 2016, includes tax benefits
of $263.0 million, $22.7 million, $8.6 million, $6.0 million and $4.4 million associated with an asbestos-related
charge, loss on divestiture, other one-time adjustments, restructuring expense and intangible asset
impairment loss, respectively, discussed in the Other Expense, Net footnote. Additionally, this rate includes
a tax expense of $2.2 million related to a gain associated with the release of certain Remy light vehicle
aftermarket liabilities due to the expiration of a customer contract.
The Company's provision for income taxes for the year ended December 31, 2015, includes tax benefits
of $9.0 million, $3.8 million and $3.7 million related to the pension settlement loss, merger and acquisition
expense and restructuring expense, respectively, discussed in the Other Expense, Net footnote. Additionally,
this rate includes a tax benefit of $9.9 million primarily related to foreign tax incentives and tax settlements.
The Company's provision for income taxes for the year ended December 31, 2014, includes tax benefits
of $15.3 million, $0.4 million and $1.1 million related to restructuring expense, intangible asset impairment
losses and the pension settlement loss, respectively, discussed in the Other Expense, Net footnote.
A roll forward of the Company's total gross unrecognized tax benefits for the years ended December
31, 2016 and 2015, respectively, is presented below. Of the total $88.6 million of unrecognized tax benefits
as of December 31, 2016, approximately $69.9 million of the total represents the amount that, if recognized,
would affect the Company's effective income tax rate in future periods. This amount differs from the gross
unrecognized tax benefits presented in the table due to the decrease in the U.S. federal income taxes which
would occur upon recognition of the state tax benefits and U.S. foreign tax credits included therein.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(millions of dollars)
Balance, January 1
Additions based on tax positions related to current year
Additions for tax positions of prior years
Additions from acquisitions
Reductions for closure of tax audits and settlements
Reductions for lapse in statute of limitations
Translation adjustment
Balance, December 31
2016
2015
$
127.3 $
16.1
1.6
—
(45.7)
(5.0)
(3.2)
60.4
20.7
6.7
53.4
(10.4)
(0.3)
(3.2)
$
91.1 $
127.3
Remy applied for a bilateral Advance Pricing Agreement ("APA") between the U.S. Internal Revenue
Service and South Korea National Tax Service covering the tax years 2007 through 2014. At December 31,
2015, the Company recorded an uncertain tax benefit and related U.S. foreign tax credits of approximately
$44.0 million. In the second quarter of 2016, the Company received the signed APA from the tax authorities
and reclassified the related uncertain tax benefit to a current tax payable, which the Company paid in the
third quarter of 2016.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax
expense. The amount recognized in income tax expense for 2016 and 2015 is $3.2 million and $2.3 million,
respectively. The Company has an accrual of approximately $16.0 million and $12.8 million for the payment
of interest and penalties at December 31, 2016 and 2015, respectively. The Company estimates that
payments of approximately $15.5 million will be made in the next 12 months for assessed tax liabilities from
certain taxing jurisdictions and has reclassified this amount to current in the balance sheet as shown in the
Balance Sheet Information footnote. Other possible changes within the next 12 months cannot be reasonably
estimated at this time.
The Company and/or one of its subsidiaries files income tax returns in the U.S. federal, various state
jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have more than
one taxpayer. The Company is no longer subject to income tax examinations by tax authorities in its major
tax jurisdictions as follows:
Tax jurisdiction
U.S. Federal
China
France
Germany
Hungary
Years no longer subject to audit
2012 and prior
2010 and prior
2013 and prior
2007 and prior
2008 and prior
Tax jurisdiction
Japan
Mexico
Poland
South Korea
Years no longer subject to audit
2015 and prior
2010 and prior
2011 and prior
2010 and prior
In the U.S., certain tax attributes created in years prior to 2012 were subsequently utilized. Even
though the U.S. federal statute of limitations has expired for years prior to 2012, the years in which these
tax attributes were created could still be subject to examination, limited to only the examination of the
creation of the tax attribute.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The gross components of deferred tax assets and liabilities as of December 31, 2016 and 2015 consist
of the following:
(millions of dollars)
Deferred tax assets:
Foreign tax credits
Employee compensation
Other comprehensive loss
Research and development capitalization
Net operating loss and capital loss carryforwards
Pension and other postretirement benefits
Asbestos-related
Other
Total deferred tax assets
Valuation allowance
Net deferred tax asset
Deferred tax liabilities:
Goodwill and intangible assets
Fixed assets
Other
Total deferred tax liabilities
Net deferred taxes
December 31,
2016
2015
$
139.5 $
41.3
66.3
145.1
71.5
38.8
263.0
128.9
894.4 $
(71.2)
823.2 $
(251.3)
(147.1)
(55.0)
(453.4) $
369.8 $
$
$
$
$
142.6
34.6
79.7
100.4
81.8
41.1
—
125.3
605.5
(71.0)
534.5
(259.2)
(115.5)
(66.4)
(441.1)
93.4
At December 31, 2016, certain non-U.S. subsidiaries have net operating loss carryforwards totaling
$134.7 million available to offset future taxable income. Of the total $134.7 million, $96.6 million expire at
various dates from 2017 through 2036 and the remaining $38.1 million have no expiration date. The Company
has a valuation allowance recorded against $72.9 million of the $134.7 million of non-U.S. net operating
loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling $817.8
million which are partially offset by a valuation allowance of $632.3 million. The state net operating loss
carryforwards expire at various dates from 2017 to 2037. Certain U.S. subsidiaries also have state tax credit
carryforwards of $14.8 million which are fully offset by a valuation allowance of $14.8 million. Certain non-
U.S. subsidiaries located in China, Korea and Poland had tax exemptions or tax holidays, which reduced
tax expense approximately $25.5 million and $21.2 million in 2016 and 2015, respectively. The U.S. has
foreign tax credit carryforwards of $139.5 million, which expire at various dates from 2018 through 2025.
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. The Company's
policy is to evaluate this assertion on a quarterly basis. At December 31, 2016, the Company's deferred tax
liability associated with unremitted foreign earnings was $38.5 million.
In connection with the acquisition of Remy in 2015, management executed a legal restructuring plan to
align the Remy and BorgWarner non-US businesses. This transaction resulted in a taxable gain in the U.S.,
which was partially offset by Remy tax attributes including a net operating loss carryforward of $68.4 million,
foreign tax credits of $93.6 million, and research and development credits of $6.9 million. The net impact
of this transaction with the filing of Remy’s final 2015 U.S. consolidated federal tax return resulted in a foreign
tax credit carryforward of $47.0 million. The net U.S. cash tax liability resulting from the transaction was
$8.4 million.
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 $3.9 billion in
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2016, 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, if any, is dependent on circumstances existing when
the repatriation occurs.
NOTE 5 BALANCE SHEET INFORMATION
Detailed balance sheet data is as follows:
(millions of dollars)
Receivables, net:
Customers
Other
Gross receivables
Bad debt allowance(a)
Total receivables, net
Inventories, net:
Raw material and supplies
Work in progress
Finished goods
FIFO inventories
LIFO reserve
Total inventories, net
Prepayments and other current assets:
Prepaid tooling
Prepaid taxes
Restricted cash
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
Property, plant & equipment, net
Investments and other long-term receivables:
Investment in equity affiliates
Other long-term receivables
Total investments and other long-term receivables
Other non-current assets:
Deferred income taxes
Asbestos insurance asset
Other
Total other non-current assets
74
December 31,
2016
2015
1,448.3 $
243.9
1,692.2
(2.9)
1,689.3 $
1,423.6
243.3
1,666.9
(1.9)
1,665.0
378.6 $
102.9
174.9
656.4
(15.2)
641.2 $
77.5 $
8.0
—
51.9
137.4 $
412.9
102.5
222.4
737.8
(14.2)
723.6
98.5
11.9
12.3
46.2
168.9
111.0 $
670.6
2,371.2
3.9
338.2
3,494.9
(1,137.5)
2,357.4
144.4
2,501.8 $
118.2
661.7
2,154.3
7.2
386.4
3,327.8
(1,036.8)
2,291.0
157.1
2,448.1
218.9 $
283.3
502.2 $
424.0 $
178.7
150.7
753.4 $
200.1
260.8
460.9
213.5
108.5
158.0
480.0
$
$
$
$
$
$
$
$
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(millions of dollars)
Accounts payable and accrued expenses:
Trade payables
Payroll and employee related
Product warranties
Customer related
Asbestos-related liability
Interest
Retirement related
Dividends payable to noncontrolling shareholders
Unrecognized tax benefits
Insurance
Severance
Derivatives
Other
Total accounts payable and accrued expenses
Other non-current liabilities:
Deferred income taxes
Deferred revenue
Product warranties
Other
Total other non-current liabilities
(a) Bad debt allowance:
Beginning balance, January 1
Provision
Write-offs
Business divestiture
Translation adjustment and other
Ending balance, December 31
December 31,
2016
2015
1,323.3 $
206.4
63.9
52.8
51.7
22.9
18.1
15.7
15.5
7.8
6.4
1.2
61.6
1,847.3 $
54.2 $
33.5
31.4
156.6
275.7 $
1,225.6
201.1
70.6
55.7
47.7
20.4
20.1
20.0
45.5
—
29.4
19.1
111.2
1,866.4
120.1
36.6
37.3
160.4
354.4
$
$
$
$
2016
2015
2014
$
(1.9) $
(3.2)
(2.3) $
(0.5)
0.2
2.0
—
0.7
—
0.2
(2.1)
(0.6)
0.3
—
0.1
$
(2.9) $
(1.9) $
(2.3)
As of December 31, 2016 and December 31, 2015, accounts payable of $85.3 million and $76.9 million,
respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the years ended December 31, 2016, 2015 and 2014 were $14.1 million,
$16.5 million and $13.5 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 Segment's South Korean subsidiary, BorgWarner Transmission Systems Korea
Ltd. Dividends from NSK-Warner were $34.3 million, $18.0 million and $45.1 million in calendar years ended
December 31, 2016, 2015 and 2014, respectively.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NSK-Warner has a fiscal year-end of March 31. The Company's equity in the earnings of NSK-Warner
consists of the 12 months ended November 30. Following is summarized financial data for NSK-Warner,
translated using the ending or periodic rates, as of and for the years ended November 30, 2016, 2015 and
2014 (unaudited):
(millions of dollars)
Balance sheets:
Cash and securities
Current assets, including cash and securities
Non-current assets
Current liabilities
Non-current liabilities
Total equity
(millions of dollars)
Statements of operations:
Net sales
Gross profit
Net earnings
November 30,
2016
2015
$
98.6 $
256.3
194.5
122.6
48.2
280.0
74.9
231.9
167.5
119.1
39.3
241.0
Year Ended November 30,
2016
2015
2014
$
601.8 $
519.0 $
134.1
71.7
118.6
73.3
546.4
124.5
80.3
NSK-Warner had no debt outstanding as of November 30, 2016 and 2015. Purchases by the Company
from NSK-Warner were $23.9 million, $23.0 million and $21.3 million for the years ended December 31,
2016, 2015 and 2014, 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 consideration of other factors, including recent acquisition or divestiture
activity, the Company performs a quantitative, "step one," goodwill impairment analysis. In addition, the
Company may test goodwill in between annual test dates if an event occurs or circumstances change that
could more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
During the fourth quarter of 2016, the Company performed a qualitative analysis on each reporting unit,
except for the reporting unit with recent acquisition and divestiture activities, and determined it was more-
likely-than-not the fair value exceeded the carrying value of these reporting units. For the reporting unit with
acquisition and divestiture activities, 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
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 the estimated fair value are
reasonable. Different assumptions could materially affect the estimated fair value. The primary assumptions
affecting the Company's December 31, 2016 goodwill quantitative, "step one," impairment review are as
follows:
• Discount rate: The Company used a 10% weighted average cost of capital (“WACC”) as the
discount rate for future cash flows. The WACC is intended to represent a rate of return that would
be expected by a market participant.
• Operating income margin: The Company 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 models:
• 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
2016 indicated the Company's goodwill assigned to the reporting unit that was quantitatively assessed was
not impaired and contained a fair value substantially higher than the reporting unit's carrying value.
Additionally, sensitivity analyses were completed indicating a one percent increase in the discount rate or
a one percent decrease in the operating margin assumptions would not result in the carrying value exceeding
the fair value of the reporting unit quantitatively assessed.
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 are
as follows:
(millions of dollars)
Gross goodwill balance, January 1
Accumulated impairment losses, January 1
Net goodwill balance, January 1
Goodwill during the year:
Acquisitions*
Divestitures**
Translation adjustment and other
Ending balance, December 31
2016
2015
Engine
Drivetrain
Engine
Drivetrain
1,338.2 $
921.5 $
1,362.0 $
345.7
(501.8)
(0.2)
(501.8)
(0.2)
836.4 $
921.3 $
860.2 $
345.5
$
$
—
—
(14.2)
(12.1)
(24.2)
(5.0)
11.6
—
(35.4)
584.7
—
(8.9)
$
822.2 $
880.0 $
836.4 $
921.3
________________
* Acquisitions relate to the Company's 2015 purchases of Remy and BERU Diesel and fair value adjustments in 2016 based on
new information obtained during the measurement period for Remy acquisition.
** Divestitures relate to the Company's 2016 disposition of Remy light vehicle aftermarket business and Divgi-Warner Private
Limited.
.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s other intangible assets, primarily from acquisitions, consist of the following:
December 31, 2016
December 31, 2015
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
(millions of dollars)
Amortized intangible assets:
Patented and unpatented technology $
Customer relationships
Miscellaneous
Total amortized intangible assets
In-process R&D
Unamortized trade names
108.1 $
481.4
5.3
594.8
3.8
51.0
41.5 $
66.6 $
128.7 $
42.4 $
141.2
3.4
186.1
—
—
186.1 $
340.2
1.9
408.7
3.8
51.0
490.3
5.6
624.6
14.6
66.1
116.1
3.0
161.5
—
—
86.3
374.2
2.6
463.1
14.6
66.1
Total other intangible assets
$
649.6 $
463.5 $
705.3 $
161.5 $
543.8
Amortization of other intangible assets was $40.4 million, $19.2 million and $27.2 million for the years
ended December 31, 2016, 2015 and 2014, respectively. The estimated useful lives of the Company's
amortized intangible assets range from three to 15 years. The Company utilizes the straight line method of
amortization recognized over the estimated useful lives of the assets. The estimated future annual
amortization expense, primarily for acquired intangible assets, is as follows: $36.9 million in 2017, $35.7
million in 2018, $35.2 million in 2019, $34.8 million in 2020 and $34.8 million in 2021.
A roll forward of the gross carrying amounts of the Company's other intangible assets is presented below:
(millions of dollars)
Beginning balance, January 1
Acquisitions*
Impairment**
Divestitures***
Translation adjustment
Ending balance, December 31
2016
2015
$
705.3 $
—
(23.9)
(19.9)
(11.9)
$
649.6 $
307.8
423.8
—
—
(26.3)
705.3
________________
* Acquisitions relate to the Company's 2015 purchases of Remy and BERU Diesel.
** Relates to the impairment of the Company's Etatech ECCOS intellectual technology in 2016.
*** Divestiture relates to the Company's sale of Remy light vehicle aftermarket business in 2016.
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
Impairment
Divestitures
Translation adjustment
Ending balance, December 31
2016
2015
$
161.5 $
40.4
(8.2)
(0.3)
(7.3)
$
186.1 $
156.7
19.2
—
—
(14.4)
161.5
78
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, 2016 and 2015 were as follows:
(millions of dollars)
Beginning balance, January 1
Provisions
Acquisitions
Dispositions
Payments
Translation adjustment
Ending balance, December 31
2016
2015
$
107.9 $
132.0
62.2
6.9
(9.1)
(70.1)
(2.5)
28.6
12.3
—
(54.7)
(10.3)
$
95.3 $
107.9
Acquisition activity in 2016 of $6.9 million relates to the Company's accrual for product issues that pre-
dated the Company's 2015 acquisition of Remy. Disposition activity in 2016 of $9.1 million relates to the
sale of the Remy light vehicle aftermarket business.
Acquisitions activity in 2015 of $12.3 million, relates to $29.4 million in warranty liability associated with
the Company's purchase of Remy, partially offset by $17.1 million related to a significant settled warranty
claim associated with a product issue that pre-dated the Company's 2014 acquisition of Gustav Wahler
GmbH u. Co. KG and its general partner ("Wahler"). Including the impact of the reversal of a corresponding
receivable, the Wahler settlement had an immaterial impact on the Consolidated Balance Sheet at December
31, 2015 and Consolidated Statement of Operations for the year ended December 31, 2015.
The Company’s warranty provision as a percentage of net sales has increased from 0.4% as of December
31, 2015 to 0.7% as of December 31, 2016. This change is primarily related to the Company’s fourth quarter
2015 acquisition of Remy. Furthermore, the Company's 2016 provision includes a $5.2 million warranty
reversal related to the expiration of a Remy light vehicle aftermarket customer contract.
The product warranty liability is classified in the Consolidated Balance Sheets as follows:
(millions of dollars)
Accounts payable and accrued expenses
Other non-current liabilities
Total product warranty liability
December 31,
2016
2015
$
$
63.9 $
31.4
70.6
37.3
95.3 $
107.9
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 8 NOTES PAYABLE AND LONG-TERM DEBT
As of December 31, 2016 and 2015, the Company had short-term and long-term debt outstanding as
follows:
(millions of dollars)
Short-term debt
Short-term borrowings
Long-term debt
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)
1.80% Senior notes due 11/7/22 (€500 million par value)
3.375% Senior notes due 03/15/25 ($500 million par value)
7.125% Senior notes due 02/15/29 ($121 million par value)
4.375% Senior notes due 03/15/45 ($500 million par value)
Term loan facilities and other
Total long-term debt
Less: current portion
Long-term debt, net of current portion
December 31,
2016
2015
156.5 $
280.7
— $
139.1
251.9
520.7
495.6
118.8
493.3
43.6
152.2
138.5
245.6
536.8
495.1
118.7
493.0
89.7
2,063.0 $
2,269.6
19.4
160.7
2,043.6 $
2,108.9
$
$
$
$
In July 2016, the Company terminated interest rate swaps which had the effect of converting $384 million
of fixed rate notes to variable rates. The gain on the termination is being amortized into interest expense
over the remaining terms of the notes. The value related to these swap terminations as of December 31,
2016 was $3.9 million and $1.3 million on the 4.625% and 8.00% notes, respectively, as an increase to the
notes. The value of these interest rate swaps as of December 31, 2015 was $1.9 million and $0.8 million
on the 4.625% and 8.00% notes, respectively, as a decrease to the notes.
The Company terminated fixed to floating interest rate swaps in 2009. The gain on the termination is
being amortized into interest expense over the remaining term of the note. The value related to this swap
termination at December 31, 2016 was $4.1 million on the 8.00% note as an increase to the note. The value
related to these swap terminations at December 31, 2015 was $2.4 million and $5.5 million on the 5.75%
and 8.00% notes, respectively, as an increase to the notes.
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2016 and
2015 was 2.3% and 1.3%, respectively. The weighted average interest rate on all borrowings outstanding,
including the effects of outstanding swaps, as of December 31, 2016 and 2015 was 3.8% and 3.6%,
respectively.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Annual principal payments required as of December 31, 2016 are as follows :
(millions of dollars)
2017
2018
2019
2020
2021
After 2021
Total payments
Less: unamortized discounts
Total
$
$
$
175.9
17.1
136.1
252.1
2.1
1,647.4
2,230.7
11.2
2,219.5
The Company's long-term debt includes various covenants, none of which are expected to restrict future
operations.
The Company has a $1 billion multi-currency revolving credit facility which includes a feature that allows
the Company's borrowings to be increased to $1.25 billion. The facility provides for borrowings through June
30, 2019. The Company has one key financial covenant as part of the credit agreement which is a debt to
EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") ratio. The Company was in
compliance with the financial covenant at December 31, 2016 and expects to remain compliant in future
periods. At December 31, 2016 and December 31, 2015, the Company had no outstanding borrowings
under this facility.
The Company's commercial paper program allows the Company to issue short-term, unsecured
commercial paper notes up to a maximum aggregate principal amount outstanding of $1 billion. Under this
program, the Company may issue notes from time to time and will use the proceeds for general corporate
purposes. At December 31, 2016 and 2015, the Company had outstanding borrowings of $50.8 million and
$215.0 million, respectively, under this program, which is classified in the Consolidated Balance Sheets in
Notes payable and other short-term debt.
The total current combined borrowing capacity under the multi-currency revolving credit facility and
commercial paper program cannot exceed $1 billion.
As of December 31, 2016 and 2015, the estimated fair values of the Company's senior unsecured notes
totaled $2,081.4 million and $2,197.6 million, respectively. The estimated fair values were $62.0 million and
$17.7 million higher than their carrying value at December 31, 2016 and 2015, 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 values of the Company's
multi-currency revolving credit facility and commercial paper program approximates 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 $32.3 million and $29.3 million at December 31, 2016
and 2015, respectively. The letters of credit typically act as guarantees of payment to certain third parties
in accordance with specified terms and conditions.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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;
Inputs, other than quoted prices in active markets, that are observable either directly or
Level 2:
indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting
entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of the following three valuation
techniques noted in ASC Topic 820:
A. Market approach: Prices and other relevant information generated by market transactions
involving identical or comparable assets, liabilities or a group of assets or liabilities, such as
a business.
B. Cost approach: Amount that would be required to replace the service capacity of an asset
C.
(replacement cost).
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).
82
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, 2016 and 2015:
(millions of dollars)
Assets:
Basis of fair value measurements
Quoted prices
in active
markets for
identical items
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Balance at
December 31,
2016
Valuation
technique
Commodity contracts
Foreign currency contracts
Other long-term receivables (insurance
settlement agreement note receivable)
Liabilities:
Foreign currency contracts
$
$
$
$
0.1 $
7.2 $
— $
— $
0.1 $
7.2 $
71.5 $
— $
71.5 $
1.1 $
— $
1.1 $
—
—
—
—
A
A
C
A
(millions of dollars)
Assets:
Foreign currency contracts
Other long-term receivables (insurance
settlement agreement note receivable)
Liabilities:
Foreign currency contracts
Commodity contracts
Interest rate swap contracts
Basis of fair value measurements
Balance at
December 31,
2015
Quoted prices
in active
markets for
identical items
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Valuation
technique
$
$
$
$
$
2.7 $
— $
2.7 $
81.2 $
— $
81.2 $
8.7 $
10.4 $
2.7 $
— $
— $
— $
8.7 $
10.4 $
2.7 $
—
—
—
—
—
A
C
A
A
A
The following tables classify the Company's defined benefit plan assets measured at fair value on a
recurring basis as of December 31, 2016 and 2015:
Basis of fair value measurements
Balance at
December 31,
2016
Quoted prices
in active
markets for
identical items
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Valuation
technique
Assets
measured
at NAV (a)
(millions of dollars)
U.S. Plans:
Fixed income securities
$
113.8 $
15.3 $
— $
Equity securities
Real estate and other
Non-U.S. Plans:
Fixed income securities
Equity securities
Real estate and other
$
$
94.2
21.5
37.2
13.1
—
0.5
229.5 $
65.6 $
0.5 $
183.4 $
190.8
19.6
— $
— $
87.1
—
—
—
$
393.8 $
87.1 $
— $
A
A
A
A
A
A
—
—
—
—
—
—
—
—
98.5
57.0
7.9
$
163.4
183.4
103.7
19.6
$
306.7
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Basis of fair value measurements
Balance at
December
31, 2015
Quoted prices
in active
markets for
identical items
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Valuation
technique
Assets
measured
at NAV (a)
(millions of dollars)
U.S. Plans:
Fixed income securities
$
117.4 $
14.3 $
— $
Equity securities
Real estate and other
Non-U.S. Plans:
Fixed income securities
Equity securities
Real estate and other
$
$
94.2
24.2
36.9
—
—
0.5
235.8 $
51.2 $
0.5 $
181.0 $
194.7
19.4
— $
— $
82.9
—
—
—
$
395.1 $
82.9 $
— $
A
A
A
A
A
A
—
—
—
—
—
—
—
—
103.1
57.3
23.7
$
184.1
181.0
111.8
19.4
$
312.2
________________
(a)
Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not
been classified in the fair value hierarchy. These amounts represent investments in commingled and managed funds which
have underlying assets in fixed income securities, equity securities, and other assets.
Refer to the Retirement Benefit Plans footnote to the Consolidated Financial Statements for more detail
surrounding the defined plan’s asset investment policies and strategies, target allocation percentages and
expected return on plan asset assumptions.
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 may 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, 2016 and 2015, the Company had no derivative contracts that contained credit risk related contingent
features.
The Company uses certain commodity derivative contracts to protect against commodity price changes
related to forecasted raw material and supplies purchases. The Company primarily utilizes forward and
option contracts, which are designated as cash flow hedges. At December 31, 2016 and 2015, the following
commodity derivative contracts were outstanding:
Commodity derivative contracts
Commodity
Copper
Volume hedged
December 31, 2016
Volume hedged
December 31, 2015
Units of measure
Duration
213.8
6,273.2
Metric Tons
Dec -17
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while
attempting to optimize its interest costs. The Company selectively uses interest rate swaps to reduce market
value risk associated with changes in interest rates (fair value hedges). In July 2016, the Company terminated
the following interest swaps which were outstanding at December 31, 2015.
(in millions)
Fixed to floating
Fixed to floating
Interest rate swap contracts
Hedge Type
Notional Amount
Duration
Fair value
Fair value
$
$
250.0
134.0
Sept - 20
Oct - 19
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. In
addition, the Company uses foreign currency forward contracts to hedge exposure associated with our net
investment in certain foreign operations (net investment hedges). The Company has also designated its
Euro denominated debt as a net investment hedge of the Company's investment in a European subsidiary.
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, 2016 and December 31,
2015, the following foreign currency derivative contracts were outstanding:
Foreign currency derivatives (in millions)
Notional in traded currency
December 31, 2016
Notional in traded currency
December 31, 2015
Duration
Functional currency
Traded currency
Chinese renminbi
Euro
Chinese renminbi
US dollar
Euro
Euro
Euro
Euro
Euro
Japanese yen
Japanese yen
Japanese yen
Korean won
Korean won
Korean won
Mexican peso
Swedish krona
US dollar
British pound
Hungarian forint
Japanese yen
Polish zloty
US dollar
Chinese renminbi
Korean won
US dollar
Euro
Japanese yen
US dollar
US dollar
Euro
Mexican peso
—
33.5
4.2
—
1,004.8
18.8
35.3
68.7
5,689.2
2.0
—
539.9
14.2
10.5
48.2
—
30.5
13.8
—
3,434.5
487.1
—
30.1
92.6
5,998.9
3.0
2.5
—
77.9
—
—
Dec - 16
Dec - 17
Dec - 17
Dec - 16
Dec - 17
Dec - 17
Dec - 17
Dec - 17
Dec - 17
Dec - 17
Dec - 16
Dec - 17
Dec - 17
Dec - 17
Dec - 17
469.0
Sept - 16
At December 31, 2016 and 2015, the following amounts were recorded in the Consolidated Balance
Sheets as being payable to or receivable from counterparties under ASC Topic 815:
Assets
Liabilities
(millions of dollars)
Location
Foreign currency
Commodity
Prepayments and other
current assets
Prepayments and other
current assets
Interest rate swaps
Other non-current assets
December 31,
2016
December 31,
2015
Location
December 31,
2016
December 31,
2015
$
$
$
7.2
0.1
$
$
Accounts payable and
accrued expenses
Accounts payable and
accrued expenses
2.7
—
— $
— Other non-current liabilities
$
$
$
1.1
$
— $
— $
8.7
10.4
2.7
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 comprehensive income
(loss) ("AOCI") and reclassified into income as the underlying operating 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, 2016 market rates.
(millions of dollars)
Foreign currency
Commodity
Net investment hedges
Foreign currency denominated debt
Total
Deferred gain (loss) in AOCI at
December 31, 2016
$
December 31, 2015
5.6 $
(0.1)
12.6
16.9 $
35.0 $
$
Gain (loss) expected to
be reclassified to income
in one year or less
(0.1) $
(2.1)
12.2
0.1
10.1 $
5.6
(0.1)
—
—
5.5
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)
Year Ended December 31,
Gain (loss) recognized in income
(ineffective portion)
Year Ended December 31,
(millions of dollars)
Location
2016
2015
Location
2016
2015
Foreign currency
Sales
Foreign currency
Cost of goods sold
Commodity
Cost of goods sold
Cross-currency swap
Interest
$
$
$
$
(0.1) $
1.4
$
(1.4) $
— $
(1.4) SG&A expense
7.2 SG&A expense
(0.1) Cost of goods sold
0.4
Interest expense
$
$
$
$
0.3
$
— $
(0.3) $
— $
(0.5)
0.2
—
—
(millions of dollars)
Income Statement Classification
Interest expense and finance charges
Year Ended December 31, 2016
Gain (loss) on swaps
Gain (loss) on
borrowings
$
8.5
$
(8.5)
At December 31, 2016, derivative instruments that were not designated as hedging instruments as
defined by ASC Topic 815 were immaterial.
NOTE 11 RETIREMENT BENEFIT PLANS
The Company sponsors various defined contribution savings plans, primarily in the U.S., that allow
employees to contribute a portion of their pre-tax and/or after-tax income in accordance with 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 $28.3 million, $28.0 million and $27.6 million in the years ended December 31, 2016, 2015 and
2014, respectively.
The Company has a number of defined benefit pension plans and other postretirement employee 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
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
benefit amount. The Company provides defined benefit pension plans in France, Germany, Ireland, Italy,
Japan, Mexico, Monaco, South Korea, Sweden, U.K. and the U.S. The other postretirement employee benefit
plans, which provide medical benefits, are unfunded plans. All pension and other postretirement employee
benefit plans in the U.S. have been closed to new employees. The measurement date for all plans is December
31.
During the fourth quarter of 2015, the Company settled approximately $48 million of its projected benefit
obligation by transferring approximately $48 million in plan assets through a lump-sum pension de-risking
disbursement made to an insurance company. This agreement unconditionally and irrevocably guarantees
all future payments to certain participants that were receiving payments from the U.S. pension plan. The
insurance company assumes all investment risk associated with the assets that were delivered as part of
this transaction. As a result, the Company recorded a non-cash settlement loss of $25.7 million related to
the accelerated recognition of unamortized losses.
During the third quarter of 2014, the Company discharged certain U.S. pension plan obligations by making
lump-sum payments to former employees of the Company. As a result of this action, the Company recorded
a settlement loss of $3.1 million in the U.S. pension plan.
The following table summarizes the expenses for the Company's defined contribution and defined benefit
pension plans and the other postretirement defined employee benefit plans.
(millions of dollars)
Defined contribution expense
Defined benefit pension expense
Other postretirement employee benefit expense
Total
Year Ended December 31,
2016
2015
2014
$
$
28.3 $
28.0 $
10.1
1.4
35.5
3.3
39.8 $
66.8 $
27.6
18.6
3.3
49.5
87
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
2016
2015
Change in projected benefit obligation:
Projected benefit obligation, January 1
$
300.7
$
508.5
$
306.2
$
527.8
$
145.3
$
169.7
Pension benefits
Year Ended December 31,
Other postretirement
employee benefits
2016
2015
Year Ended December 31,
Service cost
Interest cost
Plan participants’ contributions
Plan amendments
Settlement and curtailment
Actuarial (gain) loss
Currency translation
(Divestiture) Acquisition
Benefits paid
Projected benefit obligation, December 31
Change in plan assets:
Fair value of plan assets, January 1
Actual return on plan assets
Employer contribution
Plan participants’ contribution
Settlements
Currency translation
(Divestiture) Acquisition
Benefits paid
Fair value of plan assets, December 31
Funded status
Amounts in the Consolidated Balance Sheets
consist of:
Non-current assets
Current liabilities
Non-current liabilities
Net amount
Amounts in accumulated other comprehensive
loss consist of:
—
9.6
—
—
—
(5.7)
—
—
(22.1)
16.2
12.5
0.4
0.2
(1.3)
70.2
(45.3)
(12.8)
(20.4)
—
11.2
—
—
(48.1)
(12.1)
—
68.1
(24.6)
14.9
14.1
0.3
—
(4.7)
(9.0)
(42.9)
23.9
(15.9)
0.2
4.0
—
—
—
0.2
5.7
—
—
—
(14.4)
(16.8)
—
—
—
1.7
(15.2)
(15.2)
282.5
$
528.2
$
300.7
$
508.5
$
119.9
$
145.3
235.8
$
395.1
$
265.6
$
395.6
12.7
2.7
—
—
—
—
(21.7)
54.0
17.0
0.4
(1.3)
(40.8)
(10.2)
(20.4)
(0.6)
—
—
(48.1)
—
43.5
(24.6)
10.3
19.3
0.3
(2.5)
(30.8)
18.8
(15.9)
229.5
$
393.8
$
235.8
$
395.1
(53.0) $ (134.4) $
(64.9) $ (113.4) $
(119.9) $
(145.3)
— $
4.9
$
— $
9.4
$
— $
—
(0.1)
(52.9)
(3.5)
(135.8)
(0.3)
(64.6)
(3.0)
(119.8)
(14.5)
(105.4)
(16.8)
(128.5)
$
$
$
$
$
$
(53.0) $ (134.4) $
(64.9) $ (113.4) $
(119.9) $
(145.3)
Net actuarial loss
Net prior service (credit) cost
Net amount*
$
$
116.9
$
163.7
$
125.4
$
144.2
$
19.9
$
(7.4)
0.8
(8.2)
0.7
(19.2)
109.5
$
164.5
$
117.2
$
144.9
$
0.7
$
36.5
(24.0)
12.5
Total accumulated benefit obligation for all plans $
282.5
$
505.5
$
300.7
$
486.2
________________
*
AOCI shown above does not include our equity investee, NSK-Warner. NSK-Warner had an AOCI loss of $10.8 million and
$7.1 million at December 31, 2016 and 2015, respectively.
88
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)
Accumulated benefit obligation
Plan assets
Deficiency
Pension deficiency by country:
United States
Germany
Other
Total pension deficiency
December 31,
2016
2015
(594.0) $
(597.6)
423.3
431.0
(170.7) $
(166.6)
(53.0) $
(77.5)
(40.2)
(64.9)
(64.3)
(37.4)
(170.7) $
(166.6)
$
$
$
$
The weighted average asset allocations of the Company’s funded pension plans and target allocations
by asset category are as follows:
U.S. Plans:
Real estate and other
Fixed income securities
Equity securities
Non-U.S. Plans:
Real estate and other
Fixed income securities
Equity securities
December 31,
2016
2015
Target
Allocation
9%
50%
41%
12% 0% - 14%
53% 41% - 61%
35% 30% - 50%
100%
100%
5%
47%
48%
5%
0% - 6%
46% 43% - 53%
49% 46% - 56%
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. In each asset category,
separate portfolios are maintained for additional diversification. Investment managers are retained in 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, 2016 and
2015. A portion of pension assets is invested in common and commingled trusts.
In December 2014, the Company made a discretionary contribution of $30.2 million to its German pension
plans. The Company expects to contribute a total of $15 million to $25 million into its defined benefit pension
plans during 2017. Of the $15 million to $25 million in projected 2017 contributions, $3.2 million are
contractually obligated, while any remaining payments would be discretionary.
Refer to the Fair Value Measurements footnote to the Consolidated Financial Statements 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, 2016 and 2015.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See the table below for a breakout of net periodic benefit cost between U.S. and non-U.S. pension plans:
Pension benefits
Year Ended December 31,
Other postretirement
employee benefits
2016
2015
2014
Year Ended December 31,
US
Non-US
US
Non-US
US
Non-US
2016
2015
2014
(millions of dollars)
Service cost
Interest cost
$
— $
9.6
16.2
12.5
Expected return on plan assets
(15.0)
(24.3)
Settlements, curtailments and other
Amortization of unrecognized prior service
(credit) cost
Amortization of unrecognized loss
—
(0.8)
5.1
—
0.6
6.2
$
— $
11.2
(17.0)
25.7
(0.8)
6.3
14.9
14.1
(24.8)
(0.8)
0.1
6.6
$
— $
12.1
(17.6)
3.1
(0.8)
6.5
3.3
$
12.8
18.1
(21.1)
0.7
—
4.8
$
0.2
4.0
—
—
$
0.2
5.7
—
—
0.3
6.7
—
—
(4.9)
(5.7)
(6.4)
2.1
1.4
$
3.1
3.3
$
2.7
3.3
Net periodic (income) cost
$
(1.1) $
11.2
$
25.4
$
10.1
$
$
15.3
$
The estimated net loss for the defined benefit pension plans that will be amortized from accumulated
other comprehensive loss into net periodic benefit cost over the next fiscal year is $11.6 million. The estimated
net loss and prior service credit for the other postretirement employee benefit plans that will be amortized
from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $1.3
million and $4.1 million, respectively.
The Company's weighted-average assumptions used to determine the benefit obligations for its defined
benefit pension and other postretirement employee benefit plans as of December 31, 2016 and 2015 were
as follows:
(percent)
U.S. pension plans:
Discount rate
Rate of compensation increase
U.S. other postretirement employee benefit plans:
Discount rate
Rate of compensation increase
Non-U.S. pension plans:
Discount rate
Rate of compensation increase
December 31,
2016
2015
3.94
N/A
3.61
N/A
2.25
3.00
4.15
N/A
3.84
N/A
2.99
3.01
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s weighted-average assumptions used to determine the net periodic benefit cost for its
defined benefit pension and other postretirement employee benefit plans for the years ended December 31,
2016, 2015 and 2014 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,
2016
2015
2014
4.15
N/A
6.70
3.84
N/A
N/A
2.99
3.01
6.41
3.89
N/A
6.71
3.50
N/A
N/A
2.84
2.84
6.53
4.41
N/A
6.75
4.00
N/A
N/A
3.90
2.77
6.24
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.
The estimated future benefit payments for the pension and other postretirement employee benefits are
as follows:
(millions of dollars)
Year
2017
2018
2019
2020
2021
2022-2026
Pension benefits
U.S.
Non-U.S.
Other
postretirement
employee
benefits
$
22.8 $
17.7 $
19.8
19.7
19.6
19.3
89.8
18.7
17.3
19.1
19.5
110.7
14.8
13.7
12.6
12.1
11.0
39.6
The weighted-average rate of increase in the per capita cost of covered health care benefits is projected
to be 6.79% in 2017 for pre-65 and post-65 participants, decreasing to 5.0% by the year 2022. A one-
percentage point change in the assumed health care cost trend would have the following effects:
(millions of dollars)
Effect on other postretirement employee benefit obligation
Effect on total service and interest cost components
One Percentage Point
Increase
Decrease
$
$
7.9 $
0.3 $
(7.0)
(0.3)
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 12 STOCK-BASED COMPENSATION
Under the Company's 2004 Stock Incentive Plan ("2004 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. 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 generally 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 first anniversary date of the grant. In February 2014, the Company's Board of Directors replaced the
expired 2004 Plan by adopting the BorgWarner Inc. 2014 Stock Incentive Plan ("2014 Plan"). On April 30,
2014, the Company's stockholders approved the 2014 Plan. Under the 2014 Plan, approximately 8 million
shares are authorized for grant, of which approximately 5.7 million shares are available for future issuance
as of December 31, 2016.
Stock Options A summary of the plans’ shares under option at December 31, 2016, 2015 and 2014 is
as follows:
Shares
(thousands)
Weighted
average
exercise price
Weighted average
remaining
contractual life
(in years)
Aggregate intrinsic
value
(in millions)
Outstanding at January 1, 2014
Exercised
Outstanding at December 31, 2014
Exercised
Forfeited
Outstanding at December 31, 2015
Exercised
Outstanding at December 31, 2016
1,997 $
(283) $
1,714 $
(440) $
(7) $
1,267 $
(794) $
473 $
15.82
14.04
16.11
14.76
14.52
16.59
16.07
17.47
Options exercisable at December 31, 2016
473 $
17.47
2.6 $
$
1.7 $
$
0.9 $
$
0.1 $
0.1 $
80.0
13.8
66.5
19.2
33.7
14.4
10.4
10.4
Proceeds from stock option exercises for the years ended December 31, 2016, 2015 and 2014 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,
2016
2015
2014
$
$
12.7 $
6.5 $
0.3
10.3
13.0 $
16.8 $
4.0
12.9
16.9
Restricted Stock The value of restricted stock is determined by the market value of the Company’s
common stock at the date of grant. In 2016, restricted stock in the amount of 698,788 shares and 25,048
shares was granted to employees and non-employee directors, respectively. The value of the awards is
recognized as compensation expense ratably over the restriction periods. As of December 31, 2016, there
was $25.6 million of unrecognized compensation expense that will be recognized over a weighted average
period of approximately 2 years.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted stock compensation expense recorded in the Consolidated Statements of Operations is as
follows:
(millions of dollars, except per share data)
Restricted stock compensation expense
Restricted stock compensation expense, net of tax
Year Ended December 31,
2016
2015
2014
$
$
26.7 $
19.5 $
28.0 $
20.4 $
20.7
15.1
A summary of the status of the Company’s nonvested restricted stock for employees and non-employee
directors at December 31, 2016, 2015 and 2014 is as follows:
Nonvested at January 1, 2014
Granted
Vested
Forfeited
Nonvested at December 31, 2014
Granted
Vested
Forfeited
Nonvested at December 31, 2015
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Shares subject
to restriction
(thousands)
Weighted
average price
1,411 $
447 $
(530) $
(62) $
1,266 $
687 $
(588) $
(39) $
1,326 $
724 $
(551) $
(70) $
1,429 $
37.86
54.36
37.42
41.14
43.57
58.45
39.14
50.85
53.18
30.07
47.55
43.05
44.12
Total Shareholder Return Performance Share Plans The 2004 and 2014 Plans provide 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 relative to a peer group of automotive
companies.
The Company recognizes compensation expense relating to its performance share plans ratably over
the performance period. 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 common
stock issuances for the three-year measurement periods ended December 31, 2016, 2015 and 2014 were
as follows:
(millions of dollars, except share data)
Expense
Number of shares
Year Ended December 31,
2016
2015
2014
$
9.6 $
—
12.2 $
—
11.4
—
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Relative Revenue Growth Performance Share Plans In the second quarter of 2016, the Company
started a new performance share program to reward members of senior management based on the
Company's performance in terms of revenue growth relative to the vehicle market over three-year
performance periods. The value of this performance share is determined by the market value of the
Company’s common stock at the date of grant. The Company recognizes compensation expense relating
to its performance share plans over the performance period based on the number of shares expected to
vest at the end of each reporting period. Total compensation expense was $7.1 million for the year ended
December 31, 2016 with approximately 115,000 shares to be paid out in February 2017.
NOTE 13 ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the activity within accumulated other comprehensive loss during the
years ended December 31, 2016, 2015 and 2014:
(millions of dollars)
Foreign
currency
translation
adjustments
Hedge
instruments
Defined benefit
postretirement
plans
Other
Total
Beginning Balance, January 1, 2014
$
181.1
$
(16.0) $
(181.5) $
2.4
$
(14.0)
Comprehensive (loss) income before
reclassifications
Income taxes associated with comprehensive
(loss) income before reclassifications
Reclassification from accumulated other
comprehensive (loss) income
Income taxes reclassified into net earnings
(341.8)
—
—
—
26.7
(9.6)
0.6
—
(73.8)
23.3
6.8
(2.1)
0.3
—
—
—
(388.6)
13.7
7.4
(2.1)
Ending Balance December 31, 2014
$
(160.7) $
1.7
$
(227.3) $
2.7
$
(383.6)
Comprehensive (loss) income before
reclassifications
Income taxes associated with comprehensive
(loss) income before reclassifications
Reclassification from accumulated other
comprehensive (loss) income
Income taxes reclassified into net earnings
(260.5)
—
—
—
2.6
(1.6)
(6.1)
1.4
44.9
(14.3)
9.6
(2.8)
0.2
—
—
—
(212.8)
(15.9)
3.5
(1.4)
Ending Balance December 31, 2015
$
(421.2) $
(2.0) $
(189.9) $
2.9
$
(610.2)
Comprehensive (loss) income before
reclassifications
Income taxes associated with comprehensive
(loss) income before reclassifications
Reclassification from accumulated other
comprehensive (loss) income
Income taxes reclassified into net earnings
(109.1)
—
—
—
8.0
(0.7)
0.1
(0.4)
(11.4)
(1.6)
(114.1)
(2.6)
8.3
(2.5)
—
—
—
(3.3)
8.4
(2.9)
Ending Balance December 31, 2016
$
(530.3) $
5.0
$
(198.1) $
1.3
$
(722.1)
NOTE 14 CONTINGENCIES
In the normal course of business, the Company is party to various commercial and legal claims, actions
and complaints, including matters involving warranty claims, intellectual property claims, general liability
and various other risks. It is not possible to predict with certainty whether or not the Company will ultimately
be successful in any of these commercial and legal matters or, if not, what the impact might be. The
Company's environmental and asbestos liability contingencies are discussed separately below. The
Company's management does not expect that an adverse outcome 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, although it could be material to the results of operations in a particular
quarter.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
continued. On December 5, 2016, the Court granted the Company’s Motion for Summary Judgment and
ordered dismissal of the retirees’ Complaint with prejudice. No appeal was filed on behalf of the retirees
and the time to file an appeal has expired.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by the United States Environmental Protection Agency and
certain state environmental agencies and private parties as potentially responsible parties (“PRPs”) at
various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation
and Liability Act (“Superfund”) and equivalent state laws and, as such, may presently be liable for the cost
of clean-up and other remedial activities at 27 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or in the aggregate, will have a material
adverse effect on its results of operations, financial position or cash flows. Generally, this is because either
the estimates of the maximum potential liability at a site are not material or the liability will be shared with
other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.
Based on information available to the Company (which in most cases includes: an estimate of allocation
of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies,
will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state
environmental agencies concerning the scope of contamination and estimated remediation and consulting
costs; and remediation alternatives), the Company has an accrual for indicated environmental liabilities of
$6.3 million and $5.4 million at December 31, 2016 and at December 31, 2015, respectively. 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 (“Kuhlman Electric”), 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. The Company previously settled or obtained dismissals of various lawsuits that were
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
filed against Kuhlman Electric and others, including the Company, on behalf of plaintiffs alleging personal
injury relating to alleged environmental contamination at its Crystal Springs, Mississippi plant. The
Company filed a lawsuit against Kuhlman Electric and a related entity challenging the validity of the indemnity
and the defendants filed counterclaims (the “Indemnity Action”) and a related lawsuit. On September 28,
2015, the parties entered into a confidential settlement agreement that, among other things, released and
terminated all of BorgWarner’s indemnity obligations. Pursuant to the settlement agreement, the parties
voluntarily dismissed the Indemnity Action on September 29, 2015 and the related lawsuit was dismissed
on October 13, 2015. The Company continues to pursue insurance coverage actions for reimbursement of
amounts it spent under the indemnity. The Company may in the future become subject to further legal
proceedings.
Asbestos-related Liability
Like many other industrial companies that have historically operated in the United States, the Company,
or parties that 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
these claims generally relate to a few types of automotive products that were manufactured over 30 years
ago and contained encapsulated asbestos. The nature of the fibers, the encapsulation of the asbestos,
and the manner of the products’ use all lead the Company to believe that these products were and are highly
unlikely to cause harm. Furthermore, the useful life of nearly all of these products expired many years ago.
As of December 31, 2016 and 2015, the Company had approximately 9,400 and 10,100 pending
asbestos-related claims, respectively. The decrease in the number of pending claims is primarily a result
of the Company’s continued efforts to obtain dismissal of dormant claims. It is probable that additional
asbestos-related claims will be asserted against the Company in the future. The Company vigorously
defends against these claims, and has been successful in obtaining the dismissal of the majority of the
claims asserted against it without any payment. The Company likewise expects that the vast majority of
the pending asbestos-related claims in which it has been named (or has an obligation to indemnify a party
which has been named), and asbestos-related claims that may be asserted in the future, will result in no
payment being made by the Company or its insurers. In 2016, of the approximately 2,800 claims resolved,
352 (13%) resulted in payment being made to a claimant by or on behalf of the Company. In 2015, of the
approximately 5,300 claims resolved, 349 (7%) resulted in payment being made to a claimant by or on
behalf of the Company. The comparatively large number of claims resolved in 2015 reflected the Company’s
efforts to dismiss large numbers of inactive or otherwise unmeritorious claims in order to be better positioned
to evaluate remaining and future claims, while the smaller number of total claims resolved in 2016 reflects
in part the outcome of those efforts.
Through December 31, 2016 and 2015, the Company had accrued and paid $477.7 million and $432.7
million in indemnity (including settlement payments) and defense costs in connection with asbestos-related
claims, respectively. During 2016 and 2015, the Company had paid indemnity and related defense costs
totaling $45.3 million and $54.7 million, respectively. These gross payments are before tax benefits and
any insurance receipts. Indemnity and defense costs are incorporated into the Company's operating cash
flows and will continue to be in the future.
The Company reviews, on an ongoing basis, its own experience in handling asbestos-related claims
and trends affecting asbestos-related claims in the U.S. tort system generally, for the purposes of assessing
the value of pending asbestos-related claims and the number and value of those that may be asserted in
the future, as well as potential recoveries from the Company’s insurers with respect to such claims and
defense costs. As of December 31, 2015, the Company also recorded an estimated liability of $108.5 million
for asbestos-related claims asserted but not yet resolved and their associated defense costs. The Company
further stated that, as of that date, its ultimate liability could not be reasonably estimated in excess of the
amounts it had then accrued for claims that had been resolved and the estimated liability for claims asserted
but not yet resolved and their associated defense costs. The inability to arrive at a reasonable estimate of
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the liability for potential asbestos-related claims that may be asserted in the future was based on, among
other factors, the volatility in the number and type of asbestos claims that may be asserted, changes in
asbestos-related litigation in the United States, the significant number of co-defendants that have filed for
bankruptcy, the magnitude and timing of co-defendant bankruptcy trust payments, the inherent uncertainty
of future disease incidence and claiming patterns against the Company, and the impact of tort reform
legislation that may be enacted at the state or federal levels.
The Company has continued efforts to evaluate these factors and, if possible, arrive at a reasonable
estimate of the number and value of potential future asbestos-related claims. In recent years, there have
been more observable trends in the Company’s claims data that would indicate that claiming patterns against
the Company have stabilized. Concurrently, in recent years, the Company has made enhancements to the
management and analysis of asbestos-related claims, including specifically: the engagement of new
National Coordinating Counsel with significant asbestos litigation experience and a global presence, the
engagement of several new local counsel panels; outsourcing administration and claims handling to a third
party; implementing various improvements in the processing of asbestos-related claims so as to allow the
Company’s management to have greater real-time insight into the handling of individual asbestos-related
claims; and increasing audits and compliance reviews of counsel handling asbestos-related claims. This
process has as of the end of 2016 resulted in improvements in both the quantity and the quality of the
information available to the Company’s management respecting individual asbestos-related claims and their
handling and disposition. This process has also resulted, in the Company’s view, in an increased ability to
reasonably forecast the aggregate number of potential future asbestos-related claims that may be asserted
against the Company.
The Company has further engaged in a sustained effort to obtain the dismissal of thousands of dormant
asbestos-related product liability claims, which has resulted in a reduction in the number of its pending
claims by 48 percent over the past few years. Legislative and judicial developments affecting the U.S. tort
system generally, including medical criteria legislation, procedural reforms, and docket control measures
relating to so-called unimpaired claims, have also stabilized certain aspects of the Company’s defense
efforts respecting asbestos-related claims and allowed the Company greater insight into the number and
value of potential future claims in recent years.
As part of its review and assessment of asbestos-related claims, the Company hired a third party
consultant in the third quarter of 2016 to further assist in the analysis of potential future asbestos-related
claims. The consultant’s work utilized the updated data and analysis resulting from the Company’s claim
review process and included the development of an estimate of the potential value of asbestos-related
claims asserted but not yet resolved as well as the number and potential value of asbestos-related claims
not yet asserted. The Company determined based on the factors described above, including the analysis
and input of the consultant, that its best estimate of the aggregate liability both for asbestos-related claims
asserted but not yet resolved and potential asbestos-related claims not yet asserted, including an estimate
for defense costs, is $879.3 million as of December 31, 2016. This liability reflects the actuarial central
estimate, which is intended to represent an expected value of the most probable outcome. This estimate
is not discounted to present value and includes an estimate of liability for potential future claims not yet
asserted through December 31, 2059 with a runoff through 2067. The Company currently believes that
December 31, 2067 is a reasonable assumption as to the last date on which it is likely to have resolved all
asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood
of incidence of asbestos-related disease in the U.S. population generally.
In developing the estimate of liability for potential future claims, the third-party consultant projected a
potential number of future claims based on the Company’s historical claim filings and patterns and compared
that to anticipated levels of unique plaintiff asbestos-related claims asserted in the U.S. tort system against
all defendants. The consultant also utilized assumptions based on the Company’s historical proportion of
claims resolved without payment, historical settlement costs for those claims that result in a payment, and
historical defense costs. The liabilities were then estimated by multiplying the pending and projected future
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
claim filings by projected payments rates and average settlement amounts and then adding an estimate for
defense costs.
The Company’s estimate of the indemnity and defense costs for asbestos-related claims asserted but
not yet resolved and potential claims not yet asserted is its best estimate of such costs. That estimate is
subject to numerous uncertainties. These include future legislative or judicial changes affecting the U.S.
tort system, bankruptcy proceedings involving one or more co-defendants, the impact and timing of payments
from bankruptcy trusts that presently exist and those that may exist in the future, disease emergence and
associated claim filings, the impact of future settlements or significant judgments, changes in the medical
condition of claimants, changes in the treatment of asbestos-related disease, and any changes in settlement
or defense strategies. The amount recorded at December 31, 2016 for asbestos-related claims is based on
currently available information and assumptions that the Company believes are reasonable. Any amounts
that are reasonably possible of occurring in excess of amounts recorded are believed to not be significant.
The various assumptions utilized in arriving at the Company’s estimate the number of future claims that
may be asserted, the percentage of claims that may result in a payment, the average cost to resolve such
claims, and potential defense costs - may also change over time, and the Company’s actual liability for
asbestos-related claims asserted but not yet resolved and those not yet asserted may be higher or lower
than the estimate provided herein as a result of such changes.
The Company has certain insurance coverage applicable to asbestos-related claims. Prior to June
2004, the settlement and defense costs associated with all asbestos-related claims were paid by the
Company's primary layer insurance carriers under a series of interim funding arrangements. 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 Cook County court has issued a number of interim rulings and discovery is
continuing in this proceeding. The Company is vigorously pursuing the litigation against all carriers that are
parties to it, as well as pursuing settlement discussions with its carriers where appropriate. The Company
has entered into settlement agreements with certain of its insurance carriers, resolving such insurance
carriers’ coverage disputes through the carriers’ agreement to pay specified amounts to the Company, either
immediately or over a specified period.
Through December 31, 2016 and 2015, the Company had received $270.0 million and $263.9 million
in cash and notes from insurers, respectively, on account of indemnity and defense costs respecting
asbestos-related claims. The Company additionally recorded assets as of December 31, 2015 in the amount
of (i) $168.8 million, representing the difference between the $432.7 million in defense and indemnity costs
paid by the Company as of December 31, 2015 for asbestos-related claims and the $263.9 million received
from insurers prior to that date, and (ii) $108.5 million, representing the then-estimated amount of asbestos-
related claims asserted but not yet resolved for which the Company believes it has insurance coverage. In
each case, such amounts were expected to be fully recovered.
The Company continues to have additional excess insurance coverage available for potential future
asbestos-related claims. In connection with the Company’s ongoing review of its asbestos-related claims,
the Company also reviewed the amount of its potential insurance coverage for such claims, taking into
account the remaining limits of such coverage, the number and amount of claims on our insurance from co-
insured parties, ongoing litigation against the Company’s insurers described above, potential remaining
recoveries from insolvent insurers, the impact of previous insurance settlements, and coverage available
from solvent insurers not party to the coverage litigation. Based on that review, the Company estimates as
of December 31, 2016 that it has $386.4 million in aggregate insurance coverage available with respect to
asbestos-related claims already satisfied by the Company but not yet reimbursed by the insurers, asbestos-
related claims asserted but not yet resolved, and asbestos-related claims not yet asserted, in each case
together with their associated defense costs. In each case, such amounts are expected to be fully recovered.
However, the resolution of the insurance coverage litigation, and the number and amount of claims on our
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
insurance from co-insured parties, may increase or decrease the amount of insurance coverage available
to us for asbestos-related claims from the estimates discussed above.
As a result of all of the foregoing estimates of asbestos-related liabilities and related insurance assets,
the Company in the fourth quarter of 2016 recorded a charge of $703.6 million before tax, or $440.6 million
after tax, resulting from the difference in the total liability from what was previously accrued, consulting fees,
less available insurance coverage.
The amounts recorded in the Consolidated Balance Sheets respecting asbestos-related claims are as
follows:
(millions of dollars)
Assets:
Non-current assets
Total insurance assets
Liabilities:
Accounts payable and accrued expenses
Other non-current liabilities
Total accrued liabilities
NOTE 15 RESTRUCTURING
December 31,
2016
2015
$
$
$
$
386.4 $
386.4 $
277.3
277.3
51.7 $
827.6
47.7
60.8
879.3 $
108.5
In the fourth quarter of 2013, the Company initiated actions primarily in the Drivetrain segment designed
to improve future profitability and competitiveness. As a continuation of these actions, the Company finalized
severance agreements with three labor unions at separate facilities in Western Europe for approximately
450 employees. The Company recorded restructuring expense related to these facilities of $8.2 million,
$28.0 million and $61.8 million in the years ended December 31, 2016, 2015 and 2014, respectively. Included
in this restructuring expense are employee termination benefits of $3.0 million, $20.1 million and $50.6
million, respectively, and other expense of $5.2 million, $7.9 million and $11.2 million, respectively.
In the second quarter of 2014, the Company initiated actions to improve the future profitability and
competitiveness of Gustav Wahler GmbH u. Co. KG and its general partner ("Wahler"). The Company
recorded restructuring expense related to Wahler of $9.6 million, $11.6 million and $6.5 million in the years
ended December 31, 2016, 2015 and 2014, respectively. These restructuring expenses are primarily related
to employee termination benefits. These termination benefits relate to approximately 70 employees in
Germany and Brazil in 2015 and 95 employees in Germany, Brazil, China and the U.S. in 2014.
The Company recorded restructuring expense of $12.5 million and $12.0 million in the years ended
December 31, 2015 and 2014, respectively, related to a global realignment plan intended to enhance treasury
management flexibility by creating a legal entity structure that better aligns with the Company's business
strategy.
In the fourth quarter of 2015, the Company acquired 100% of the equity interests in Remy and initiated
actions to improve future profitability and competitiveness. The Company recorded restructuring expense
of $6.1 million and $10.1 million in the years ended December 31, 2016 and 2015, respectively. Included
in this restructuring expense is $3.1 million in the year ended December 31, 2016 related to winding down
certain operations in North America. Additionally, the Company recorded employee termination benefits of
$2.0 million and $10.1 million in the years ended December 31, 2016 and 2015, respectively, primarily
related to contractually required severance associated with Remy executive officers and other employee
termination benefits in Mexico. Cash payments for these restructuring activities are expected to be complete
by the end of 2017.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimates of restructuring expense are based on information available at the time such charges are
recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts
paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record
revisions of previous estimates by adjusting previously established accruals.
The following table displays a rollforward of the severance accruals recorded within the Company's
Consolidated Balance Sheet and the related cash flow activity for the years ended December 31, 2016 and
2015:
(millions of dollars)
Balance at January 1, 2015
Drivetrain
Engine
Total
$
41.9 $
2.0 $
Severance Accruals
Acquisition*
Provision
Cash payments
Translation adjustment
Balance at December 31, 2015
Provision
Cash payments
Translation adjustment
0.4
32.6
(46.0)
(3.6)
25.3
5.0
(26.9)
0.3
—
11.3
(9.0)
(0.2)
4.1
5.6
(6.9)
(0.1)
Balance at December 31, 2016
$
3.7 $
2.7 $
____________________________________
* Acquisition relates to the Company's 2015 purchase of Remy.
NOTE 16 LEASES AND COMMITMENTS
43.9
0.4
43.9
(55.0)
(3.8)
29.4
10.6
(33.8)
0.2
6.4
Certain assets are leased under long-term operating leases, including rent for facilities 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 $38.2 million, $31.9
million and $33.9 million in the years ended December 31, 2016, 2015 and 2014, respectively. The Company
does not have any material capital leases.
Future minimum operating lease payments at December 31, 2016 were as follows:
(millions of dollars)
2017
2018
2019
2020
2021
After 2021
$
24.1
8.0
6.4
6.5
6.3
3.8
Total minimum lease payments
$
55.1
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 17 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.
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:
Net earnings attributable to BorgWarner Inc.
Weighted average shares of common stock outstanding
Basic earnings per share of common stock
Diluted earnings per share:
Net earnings attributable to BorgWarner Inc.
Year Ended December 31,
2016
2015
2014
118.5 $
609.7 $
214.374
224.414
0.55 $
2.72 $
655.8
227.150
2.89
118.5 $
609.7 $
655.8
$
$
$
Weighted average shares of common stock outstanding
Effect of stock-based compensation
214.374
0.954
224.414
1.234
Weighted average shares of common stock outstanding including
dilutive shares
Diluted earnings per share of common stock
215.328
225.648
$
0.55 $
2.70 $
227.150
1.774
228.924
2.86
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 18 RECENT TRANSACTIONS
Divgi-Warner Private Limited.
In August 2016, the Company sold its 60% ownership interest in Divgi-Warner Private Limited ("Divgi-
Warner") to the joint venture partner. This former joint venture was formed in 1995 to develop and manufacture
transfer cases and synchronizer rings in India. As a result of the sale, the Company received cash proceeds
of approximately $5.4 million, net of capital gains tax and cash divested, which is classified as an investing
activity within the Condensed Consolidated Statement of Cash Flows. Furthermore, the Company wrote off
noncontrolling interest of $4.8 million as result of the sale and recognized a negligible gain in the year ended
December 31, 2016.
Remy International, Inc.
On November 10, 2015, the Company acquired 100% of the equity interests in Remy for $29.50 per
share in cash. The Company also settled approximately $361 million of outstanding debt. Remy was a global
market leading producer of rotating electrical components that had key technologies and operations in 10
countries. The cash paid, net of cash acquired, was $1,187.0 million.
The Remy acquisition is expected to strengthen the Company's position in the rapidly developing
powertrain electrification trend, with a complementary combination of technologies and global operations.
The operating results and assets are reported within the Company's Drivetrain reporting segment as of
the date of the acquisition. Remy's results from the date of acquisition through December 31, 2015 were
insignificant to the Company's Consolidated Statement of Operations. The Company paid $1,187.0 million,
which is recorded as an investing activity in the Company's Consolidated Statement of Cash Flows.
Additionally, the Company assumed retirement-related liabilities of $31.1 million and assumed debt of $10.9
million, which are reflected in the supplemental cash flow information on the Company's Consolidated
Statement of Cash Flows.
The following table summarizes the aggregated estimated fair value of the assets acquired and liabilities
assumed on November 10, 2015, the date of acquisition:
(millions of dollars)
Receivables, net
Inventories, net
Property, plant and equipment, net
Goodwill
Other intangible assets
Other assets and liabilities
Accounts payable and accrued expenses
Total consideration, net of cash acquired
Less: Assumed retirement-related liabilities
Less: Assumed debt
Cash paid, net of cash acquired
$
$
222.8
195.3
196.6
572.6
412.6
(207.8)
(163.1)
1,229.0
31.1
10.9
1,187.0
In connection with the acquisition, the Company capitalized $303.3 million for customer relationships,
$46.4 million for developed technology, $59.0 million for the Delco Remy, Remy and Maval trade names,
$3.8 million for in-process R&D and $0.1 million for leasehold interests. These intangible assets, excluding
the indefinite-lived trade names, will be amortized over a period of 5 to 15 years. Various valuation techniques
were used to determine the fair value of the intangible assets, with the primary techniques being forms of
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the income approach, specifically, the relief-from-royalty and excess earnings valuation methods, which use
significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation
approaches, the Company is required to make estimates and assumptions about sales, operating margins,
growth rates, royalty rates and discount rates based on budgets, business plans, economic projections,
anticipated future cash flows and marketplace data. Due to the nature of the transaction, goodwill is not
deductible for tax purposes.
In the fourth quarter of 2016, the Company finalized all purchase accounting adjustments related to the
Remy acquisition. The Company has recorded fair value adjustments based on new information obtained
during the measurement period primarily related to warranty, inventory, and deferred taxes. These
adjustments have resulted in a decrease in goodwill of $12.1 million from the Company's initial estimate.
In October 2016, the Company entered into a definitive agreement to sell the light vehicle aftermarket
business associated with the Company’s acquisition of Remy for approximately $80 million in cash, subject
to customary adjustment. The Remy light vehicle aftermarket business sells remanufactured and new
starters, alternators and multi-line products to aftermarket customers, mainly retailers in North America, and
warehouse distributors in North America, South America and Europe. The sale of this business allows the
Company to focus on the rapidly developing original equipment manufacturer powertrain electrification trend.
During the third quarter of 2016, the Company determined that assets and liabilities subject to the Remy
light vehicle aftermarket business sale met the held for sale criteria and recorded an asset impairment
expense of $106.5 million to adjust the net book value of this business to its fair value. During the fourth
quarter of 2016, upon the closing of the transaction, the Company recorded an additional loss of $20.6
million related to the finalization of the sale proceeds, changes in working capital from the amounts originally
estimated and costs associated with the winding down of an aftermarket related product line, resulting in a
total loss on divestiture of $127.1 million in the year ended December 31, 2016. As a result of this transaction,
total assets of $284.1 million including $94.7 million of inventory and $72.6 million of accounts receivable
and total liabilities of $93.2 million were removed from the Company’s consolidated balance sheet. The loss
on divestiture is subject to final working capital adjustments, which is expected to be completed in the first
quarter of 2017.
Supplemental Pro Forma Data (Unaudited)
The following supplemental pro forma information for the years ended December 31, 2015 and 2014 is
based on the assumption that the acquisition of Remy occurred on January 1, 2014.
(millions of dollars, except per share amounts)
Net sales
Net earnings
Earnings per share:
Basic
Diluted
2015
2014
8,977.7 $
9,487.4
652.0 $
653.9
2.91 $
2.89 $
2.88
2.86
$
$
$
$
The 2014 pro forma results include after-tax adjustments of $23.2 million of investment banker and other
fees and accelerated stock compensation incurred by the Company and Remy related to the acquisition;
$12.2 million net decrease in expense related to fair value adjustments; and $3.0 million net decrease in
interest expense.
These pro forma results of operations have been prepared for comparative purposes only, and do not
purport to be indicative of the results of operations that actually would have resulted had the acquisition
occurred on the date indicated or that may result in the future.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
BERU Diesel Start Systems Pvt. Ltd.
In January 2015, the Company completed the purchase of the remaining 51% of BERU Diesel by
acquiring the shares of its former joint venture partner. The former joint venture was formed in 1996 to
develop and manufacture glow plugs in India. After this transaction, the Company owns 100% of the entity.
The cash paid, net of cash acquired, was $12.6 million (783.1 million Indian rupees).
The operating results are reported within the Company's Engine reporting segment. The Company paid
$12.6 million, which is recorded as an investing activity in the Company's Consolidated Statement of Cash
Flows. As a result of this transaction, the Company recorded a $10.8 million gain on the previously held
equity interest in this joint venture. Additionally, the Company acquired assets of $16.0 million, including
$11.2 million in definite-lived intangible assets, and assumed liabilities of $4.6 million. The Company also
recorded $13.9 million of goodwill, which is expected to be non-deductible for tax purposes.
Gustav Wahler GmbH u. Co KG
On February 28, 2014, the Company acquired 100% of the equity interests in Wahler. Wahler was a
producer of exhaust gas recirculation ("EGR") valves, EGR tubes and thermostats, and had operations in
Germany, Brazil, the U.S., China and Slovakia. The cash paid, net of cash acquired was $110.5 million (80.1
million Euro).
The Wahler acquisition strengthens the Company's strategic position as a producer of complete EGR
systems and creates additional market opportunities in both passenger and commercial vehicle applications.
The operating results and assets are reported within the Company's Engine reporting segment as of
the date of the acquisition. The Company paid $110.5 million, which is recorded as an investing activity in
the Company's Consolidated Statement of Cash Flows. Additionally, the Company assumed retirement-
related liabilities of $3.2 million and assumed debt of $40.3 million, which are reflected in the supplemental
cash flow information on the Company's Consolidated Statement of Cash Flows.
The following table summarizes the aggregated estimated fair value of the assets acquired and liabilities
assumed on February 28, 2014, the date of acquisition:
(millions of dollars)
Receivables, net
Inventories, net
Property, plant and equipment, net
Goodwill
Other intangible assets
Other assets and liabilities
Accounts payable and accrued expenses
Total consideration, net of cash acquired
Less: Assumed retirement-related liabilities
Less: Assumed debt
Cash paid, net of cash acquired
$
$
52.4
46.8
55.3
74.6
42.7
(47.4)
(70.4)
154.0
3.2
40.3
110.5
In connection with the acquisition, the Company capitalized $24.9 million for customer relationships,
$10.2 million for know-how, $4.1 million for patented technology and $3.5 million for the Wahler trade name.
These intangible assets will be amortized over a period of 5 to 15 years. The income approach was used
to determine the fair value of all intangible assets. Additionally, $56.9 million in goodwill is non-deductible
for tax purposes.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 19 REPORTING SEGMENTS AND RELATED INFORMATION
The Company's business is comprised of two reporting segments: Engine and Drivetrain. These
segments are strategic business groups, which are managed separately as each represents a specific
grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return on invested
capital ("ROIC") of its business initiatives. ROIC is comprised of Adjusted EBIT after deducting notional
taxes compared to the projected average capital investment required. Adjusted EBIT is comprised of earnings
before interest, income taxes and noncontrolling interest (“EBIT") adjusted for restructuring, goodwill
impairment charges, affiliates' earnings and other items not reflective of on-going operating 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.
2016 Segment information
Net sales
(millions of dollars)
Customers
Inter-segment
Net
Year-end assets
Depreciation/
amortization
Long-lived asset
expenditures (b)
Engine
Drivetrain
Inter-segment eliminations
Total
Corporate (a)
Consolidated
$
5,547.3
$
42.8
$
5,590.1
$
4,134.6
$
211.9
$
3,523.7
—
9,071.0
—
—
(42.8)
—
—
3,523.7
(42.8)
9,071.0
—
3,212.4
—
7,347.0
1,487.7
154.5
—
366.4
25.0
$
9,071.0
$
— $
9,071.0
$
8,834.7
$
391.4
$
298.7
182.8
—
481.5
19.1
500.6
2015 Segment information
Net sales
(millions of dollars)
Customers
Inter-segment
Net
Year-end assets
Depreciation/
amortization
Long-lived asset
expenditures (b)
Engine
Drivetrain
Inter-segment eliminations
Total
Corporate (a)
Consolidated
$
5,466.5
$
33.5
$
5,500.0
$
4,017.8
$
200.2
$
2,556.7
—
8,023.2
—
—
(33.5)
—
—
2,556.7
(33.5)
8,023.2
—
3,685.1
—
7,702.9
1,122.8
97.0
—
297.2
23.0
$
8,023.2
$
— $
8,023.2
$
8,825.7
$
320.2
$
332.4
221.8
—
554.2
23.1
577.3
2014 Segment information
Net sales
(millions of dollars)
Customers
Inter-segment
Net
Year-end assets
Depreciation/
amortization
Long-lived asset
expenditures (b)
Engine
Drivetrain
Inter-segment eliminations
Total
Corporate (a)
Consolidated
$
5,673.7
$
32.2
$
5,705.9
$
3,936.2
$
215.3
$
2,631.4
—
8,305.1
—
—
(32.2)
—
—
2,631.4
(32.2)
8,305.1
—
1,783.5
—
5,719.7
1,505.5
92.8
—
308.1
22.3
$
8,305.1
$
— $
8,305.1
$
7,225.2
$
330.4
$
349.8
189.2
—
539.0
24.0
563.0
_______________
(a) Corporate assets include investments and other long-term receivables and deferred income taxes.
(b) Long-lived asset expenditures include capital expenditures and tooling outlays.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Adjusted earnings before interest, income taxes and noncontrolling interest ("Adjusted EBIT")
(millions of dollars)
Engine
Drivetrain
Adjusted EBIT
Asbestos-related charge
Loss on divestiture
Restructuring expense
Merger and acquisition expense
Intangible asset impairment
Contract expiration gain
Pension settlement loss
Gain on previously held equity interest
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
Year Ended December 31,
2016
2015
2014
$
934.1
$
900.7
$
354.5
1,288.6
703.6
127.1
26.9
23.7
12.6
(6.2)
—
—
132.1
(6.3)
84.6
190.5
30.3
160.2
41.7
294.6
1,195.3
—
—
65.7
21.8
—
—
25.7
(10.8)
113.2
(7.5)
60.4
926.8
280.4
646.4
36.7
924.0
303.3
1,227.3
—
—
90.8
—
10.3
—
3.1
—
112.1
(5.5)
36.4
980.1
292.6
687.5
31.7
655.8
Net earnings attributable to BorgWarner Inc.
$
118.5
$
609.7
$
Geographic Information
Outside the U.S., only Germany, China, South Korea, Mexico and Hungary exceeded 5% of consolidated
net sales during the year ended December 31, 2016, 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 the
Balance Sheet Information footnote to the Consolidated Financial Statements) of $172.9 million, $158.7
million and $143.8 million at December 31, 2016, 2015 and 2014, respectively, is excluded from the definition
of long-lived assets, as are goodwill and certain other non-current assets.
(millions of dollars)
United States
Europe:
Germany
Hungary
France
Other Europe
Total Europe
China
South Korea
Mexico
Other foreign
Total
Net sales
Long-lived assets
2016
2,236.0 $
2015
1,985.1 $
2014
2,008.1 $
$
2016
2015
2014
799.3 $
800.5 $
586.2
1,735.1
541.1
305.2
888.7
3,470.1
1,218.0
948.2
805.6
393.1
9,071.0 $
1,857.1
500.5
339.2
921.8
3,618.6
1,009.0
741.7
312.7
356.1
8,023.2 $
2,145.6
518.1
405.2
1,097.3
4,166.2
885.1
623.0
201.4
421.3
8,305.1 $
370.3
122.2
39.5
298.2
830.2
384.6
208.0
136.2
143.5
2,501.8 $
380.9
112.4
41.4
276.6
811.3
355.8
218.6
132.8
129.1
2,448.1 $
413.6
73.2
42.5
258.8
788.1
299.9
185.9
96.6
137.2
2,093.9
$
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sales to Major Customers
Consolidated net sales to Ford (including its subsidiaries) were approximately 15%, 15%, and 13% for
the years ended December 31, 2016, 2015 and 2014, respectively; and to Volkswagen (including its
subsidiaries) were approximately 13%, 15% and 17% for the years ended December 31, 2016, 2015 and
2014, respectively. Both of the Company's reporting segments had significant sales to Volkswagen and Ford
in 2016, 2015 and 2014. 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 28%, 31% and 28% of total net sales
for the years ended December 31, 2016, 2015 and 2014, respectively. The Company currently supplies
light vehicle turbochargers to many OEMs including BMW, Daimler, Fiat Chrysler Automobiles, Ford, General
Motors, Great Wall, Hyundai, Renault, Volkswagen and Volvo. No other single product line accounted for
more than 10% of consolidated net sales in any of the years presented.
Interim Financial Information (Unaudited)
(millions of dollars, except per share amounts)
2016
2015
Quarter ended
Net sales
Cost of sales
Gross profit
Mar-31
Jun-30
Sep-30
Dec-31
Year
Mar-31
Jun-30
Sep-30
Dec-31
Year
$ 2,268.6
$ 2,329.2
$ 2,214.2
$ 2,259.0
$ 9,071.0
$ 1,984.2
$ 2,031.9
$ 1,884.0
$ 2,123.1
$ 8,023.2
1,804.3
1,832.5
1,743.1
1,758.0
7,137.9
1,555.2
1,602.9
1,485.8
1,676.2
6,320.1
464.3
496.7
471.1
501.0
1,933.1
429.0
429.0
398.2
446.9
1,703.1
Selling, general and administrative
expenses
Other expense, net
Operating income (loss)
Equity in affiliates’ earnings, net of tax
Interest income
Interest expense and finance charges
Earnings (loss) before income taxes
and noncontrolling interest
Provision (benefit) for income taxes
Net earnings (loss)
Net earnings attributable to the
noncontrolling interest, net of tax
Net earnings (loss) attributable to
BorgWarner Inc. (a)
Earnings per share — basic
Earnings per share — diluted
_______________
188.4
11.7
264.2
(9.1)
(1.6)
21.3
253.6
80.4
173.2
202.3
25.0
269.4
(10.1)
(1.5)
21.4
259.6
84.2
175.4
209.7
111.1
150.3
(12.4)
(1.6)
22.4
141.9
48.8
93.1
217.1
741.9
(458.0)
(11.3)
(1.6)
19.5
(464.6)
(183.1)
(281.5)
817.5
889.7
225.9
(42.9)
(6.3)
84.6
190.5
30.3
160.2
168.2
1.2
259.6
(8.5)
(1.7)
10.0
259.8
72.1
187.7
167.4
19.1
242.5
(11.1)
(1.6)
17.6
237.6
80.2
157.4
148.0
13.1
237.1
(8.7)
(2.0)
15.0
232.8
66.9
165.9
178.4
68.0
200.5
(11.7)
(2.2)
17.8
196.6
61.2
135.4
662.0
101.4
939.7
(40.0)
(7.5)
60.4
926.8
280.4
646.4
9.1
11.0
9.8
11.8
41.7
8.8
9.3
8.5
10.1
36.7
$ 164.1
$ 164.4
$
$
0.75
0.75
$
$
0.76
0.76
$
$
$
83.3
$ (293.3) $ 118.5
$ 178.9
$ 148.1
$ 157.4
$ 125.3
$ 609.7
0.39
0.39
$
$
(1.39) $
(1.39) $
0.55
0.55
$
$
0.79
0.79
$
$
0.66
0.65
$
$
0.70
0.70
$
$
0.57
0.56
$
$
2.72
2.70
(a) The Company's results were impacted by the following:
• Quarter ended December 31, 2016: The Company recorded an asbestos-related charge of $703.6 million
representing the difference in the total liability from what was previously accrued, consulting fees, less available
insurance coverage, and an intangible asset impairment loss of $12.6 million related to the Engine segment Etatech’s
ECCOS intellectual technology. Additionally, the Company recorded an incremental loss on divestiture of $20.6 million
related to the sale of Remy light vehicle aftermarket business. The Company also recorded merger and acquisition
expense of $4.8 million primarily related to the Remy transaction. The Company recorded tax benefits of $263.0 million
related to asbestos-related charge, $4.4 million related to intangible asset loss, and $4.9 million related to other one-
time tax adjustments. The Company also recorded a tax expense of $4.9 million related to the sale of the Remy light
vehicle aftermarket business and the reversal of the associated deferred tax balances.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
• Quarter ended September 30, 2016: The Company recorded an asset impairment expense of $106.5 million to
adjust the net book value of the Remy light vehicle aftermarket business to fair value, based on the anticipated sale
price. Additionally, the Company recorded restructuring expense of $1.3 million related to Drivetrain and Engine
segment actions designed to improve future profitability and competitiveness. The Company also recorded merger
and acquisition expense of $5.9 million primarily related to the Remy transaction. The Company recorded tax benefits
of $27.6 million related to asset impairment expense, $2.4 million related to other one-time tax adjustments, $0.5
million related to restructuring expense, and $0.4 million related to a gain associated with the release of certain Remy
light vehicle aftermarket liabilities due to the expiration of a customer contract.
• Quarter ended June 30, 2016: The Company recorded restructuring expense of $19.2 million related to Drivetrain
and Engine segment actions designed to improve future profitability and competitiveness. The Company also recorded
merger and acquisition expense of $7.2 million primarily related to the Remy transaction. The Company recorded tax
benefits of $4.4 million related to restructuring expense and $0.3 million related to other one-time tax adjustments,
as well as a tax expense of $2.6 million related to a gain associated with the release of certain Remy light vehicle
aftermarket liabilities due to the expiration of a customer contract.
• Quarter ended March 31, 2016: The Company recorded restructuring expense of $6.4 million related to Drivetrain
and Engine segment actions designed to improve future profitability and competitiveness. The Company also recorded
merger and acquisition expense of $5.8 million primarily related to the Remy transaction. The Company recorded tax
benefits of $1.0 million related to restructuring expense and $1.0 million related to other one-time tax adjustments.
• Quarter ended December 31, 2015: The Company recorded restructuring expense of $24.4 million related to
Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The Company
also incurred a non-cash settlement loss of $25.7 million related to a lump-sum pension de-risking disbursement made
to an insurance company to unconditionally and irrevocably guarantee all future payments to certain participants that
were receiving payments from the U.S. pension plan. Furthermore, the Company recorded merger and acquisition
expense of $17.9 million primarily related to the Remy transaction. The Company recorded tax benefits of $9.0 million
related to the pension settlement loss, $7.7 million primarily related to foreign tax incentives and tax settlements, $3.8
million related to merger and acquisition expense, partially offset by a tax expense of $0.4 million related to restructuring
expense.
• Quarter ended September 30, 2015: The Company recorded restructuring expense of $6.3 million related to
Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Additionally, the
Company recorded $3.0 million of restructuring expense related to a global realignment plan intended to enhance
treasury management flexibility by creating a legal entity structure that better aligns with the Company's business
strategy. The Company also recorded merger and acquisition expense of $3.9 million primarily related to the Remy
transaction. The Company recorded tax benefits of $4.5 million related to a global realignment plan, $0.7 million
related to restructuring expense and $0.4 million primarily related to foreign tax incentives.
• Quarter ended June 30, 2015: The Company recorded restructuring expense of $10.5 million related to Drivetrain
and Engine segment actions designed to improve future profitability and competitiveness. Additionally, the Company
recorded $9.4 million of restructuring expense related to a global realignment plan intended to enhance treasury
management flexibility by creating a legal entity structure that better aligns with the Company's business strategy.
The Company recorded tax expense of $10.3 million related to a global realignment plan, partially offset by tax benefits
of $3.9 million related to tax settlements, $2.2 million related to restructuring expense and $1.3 million primarily related
to foreign tax incentives.
• Quarter ended March 31, 2015: The Company recorded restructuring expense of $9.4 million related to Drivetrain
and Engine segment actions designed to improve future profitability and competitiveness. Additionally, the Company
recorded $2.7 million of restructuring expense related to a global realignment plan intended to enhance treasury
management flexibility by creating a legal entity structure that better aligns with the Company's business strategy.
The Company also recorded a $10.8 million gain on the previously held equity interest in BERU Diesel as a result of
purchasing the remaining 51% of this joint venture. The Company recorded tax benefits of $2.4 million primarily related
to foreign tax incentives and $1.2 million related to restructuring expense.
108
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 (2013). Based on the assessment, management concluded that, as of December 31, 2016, the
Company's internal control over financial reporting is effective based on those criteria.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the
Company's consolidated financial statements and the effectiveness of internal controls over financial
reporting as of December 31, 2016 as stated in its 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.
109
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information with respect to directors, executive officers and corporate governance that appears in the
Company's proxy statement for its 2017 Annual Meeting of Stockholders under the captions “Election of
Directors,” “Information on Nominees for Directors and Continuing Directors,” “Board of Directors and Its
Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics,” and
“Compensation Committee Report” is incorporated herein by this reference and made a part of this report.
Item 11. Executive Compensation
Information with respect to director and executive compensation that appears in the Company's proxy
statement for its 2017 Annual Meeting of Stockholders under the captions “Director Compensation,”
“Compensation Committee Interlocks and Insider Participation,” “Executive Compensation,” “Compensation
Discussion and Analysis,” “Restricted Stock,” “Long Term Equity Incentives,” and “Change of Control
Agreements” is incorporated herein by this reference and made a part of this report.
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 2017 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 2017 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 2017 Annual Meeting of Stockholders under the caption “Fees Paid to PwC” 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.
110
Item 16. Form 10-K Summary
Not applicable.
111
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 9, 2017
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 9th day of February, 2017.
Signature
/s/ James R. Verrier
James R. Verrier
/s/ Ronald T. Hundzinski
Ronald T. Hundzinski
/s/ Anthony D. Hensel
Anthony D. Hensel
/s/ Jan Carlson
Jan Carlson
/s/ Dennis C. Cuneo
Dennis C. Cuneo
/s/ Michael S. Hanley
Michael S. Hanley
/s/ John R. McKernan, Jr.
John R. McKernan, Jr.
/s/ Alexis P. Michas
Alexis P. Michas
/s/ Ernest J. Novak, Jr.
Ernest J. Novak, Jr.
/s/ Vicki L. Sato
Vicki L. Sato
/s/ Richard O. Schaum
Richard O. Schaum
/s/ Thomas T. Stallkamp
Thomas T. Stallkamp
Title
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)
Director
Director
Director
Director
Director and Non-Executive Chairman
Director
Director
Director
Director
Exhibit Number
Description
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit
3.1/4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
Amended and Restated By-Laws of the Company, as amended (incorporated by reference to
Exhibit 3.1/4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2016).
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).
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).
Fourth Supplemental Indenture dated as of March 16, 2015, between the Company and The
Bank of New York Mellon Trust Company, N.A., as the indenture trustee (incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed March 16, 2015).
Fifth Supplemental Indenture dated as of November 6, 2015, between the Company and
Deutsche Bank Trust Company Americas, as the indenture trustee (incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K filed November 6, 2015).
Second Amended and Restated Credit Agreement dated as of June 30, 2014, 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, 2014).
Amendment No. 1 to Credit Agreement dated as of October 23, 2014, to the Second Amended
and Restated Credit Agreement dated as of June 30, 2014 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 Annual Report on Form 10-K for the year ended
December 31, 2015).
Amendment No. 2 to Credit Agreement dated October 27, 2015 to the Second Amended and
Restated Credit Agreement dated as of June 30, 2014 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 Quarterly Report on Form 10-Q for the quarter ended
September 30, 2015).
†10.4
BorgWarner Inc. 2014 Stock Incentive Plan (incorporated by reference to Annex A to the
Company’s Definitive Proxy Statement filed March 21, 2014).
†10.5
First Amendment to the BorgWarner Inc. 2014 Stock Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 2, 2016).
A - 1
Exhibit Number
Description
†10.6
†10.7
†10.8
†10.9
†10.10
Form of February 2016 RRG BorgWarner Inc. 2014 Stock Incentive Plan Performance Share
Award Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended March 31, 2016).
Form of February 2016 BorgWarner Inc. 2014 Stock Incentive Plan Performance Share Award
Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2016).
Form of April 2015 BorgWarner Inc. 2014 Stock Incentive Plan Restricted Stock Agreement for
Employees (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2015).
Form of April 2015 BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement
for Non-U.S. Employees (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2015).
Form of BorgWarner Inc. 2014 Stock Incentive Plan Restricted Stock Agreement for Employees
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2015).
†10.11
Form of BorgWarner Inc. 2014 Stock Incentive Plan Performance Share Award Agreement
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2015).
†10.12
†10.13
†10.14
†10.15
Form of BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement -- Non-U.S.
Employees (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2015).
Form of 2014 BorgWarner Inc. 2014 Stock Incentive Plan Restricted Stock Agreement for Non-
Employee Directors (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2014).
Form of 2014 BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement for
Non-U.S. Directors (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2014).
BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan (incorporated by reference
to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December
31, 2014).
†10.16
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 10.8
to the Company's Annual Report on Form 10-K for the year ended December 31, 2013).
†10.17
†10.18
Second Amendment dated as of July 26, 2011, to the BorgWarner Inc. Amended and Restated
2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2016).
Form of 2014 BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan Performance
Share Award Agreement (incorporated by reference to Exhibit 10.6 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2014).
A - 2
Exhibit Number
Description
†10.19
†10.20
†10.21
†10.22
Form of BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan Restricted Stock
Agreement for Employees (incorporated by reference to Exhibit 10.13 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2012).
Form of 2014 BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan Stock Units
Award Agreement Non-U.S. Employees (incorporated by reference to Exhibit 10.3 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
Form of BorgWarner Inc. 2004 Stock Incentive Plan Non-Qualified Stock Option Award
Agreement (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2012).
Amended and Restated Executive Incentive Plan as amended, restated, and renamed effective
April 26, 2015 (incorporated by reference to Appendix A to the Company's Definitive Proxy
Statement filed March 20, 2015).
†10.23
Amended and Restated BorgWarner Inc. Management Incentive Bonus Plan effective as of
December 31, 2008 (incorporated by reference to Exhibit 10.18 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2013).
†10.24
†10.25
†10.26
†10.27
BorgWarner Inc. Retirement Savings Excess Benefit Plan amended and restated effective
January 1, 2009 (incorporated by reference to Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2013).
Form of Amendment dated December 10, 2012 to the BorgWarner Inc. Retirement Savings
Excess Benefit Plan (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2012).
BorgWarner Inc. Board of Directors Deferred Compensation Plan as amended and restated
effective January 1, 2009 (incorporated by reference to Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2013).
First Amendment dated as of November 22, 2010 to BorgWarner Inc. Board of Directors Deferred
Compensation Plan (incorporated by reference to Exhibit 10.22 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2013).
†10.28
Second Amendment dated as of August 1, 2016 to BorgWarner Inc. Board of Directors Deferred
Compensation Plan.*
†10.29
†10.30
†10.31
Form of Amended and Restated Change of Control Employment Agreement for Executive
Officers (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form
10-K for the year ended December 31, 2013).
Form of Amended and Restated Change of Control Employment Agreement for Executive
Officers (effective 2009) (incorporated by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2013).
BorgWarner Inc. 2004 Deferred Compensation Plan as amended and restated effective January
1, 2009 (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form
10-K for the year ended December 31, 2013).
A - 3
Exhibit Number
Description
10.32
Distribution and Indemnity Agreement dated January 27, 1993 between Borg-Warner
Automotive, Inc. and Borg-Warner Security Corporation (incorporated by reference to Exhibit
10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012).
10.33
Assignment of Trademarks and License Agreement (incorporated by reference to Exhibit 10.28
to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012).
10.34
Amendment to Assignment of Trademarks and License Agreement (incorporated by reference
to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December
31, 2012).
21.1
Subsidiaries of the Company.*
23.1
Independent Registered Public Accounting Firm's Consent.*
31.1
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.*
31.2
Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.*
32.1
Section 1350 Certifications.*
101.INS
XBRL Instance Document.*
101.SCH
XBRL Taxonomy Extension Schema Document.*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.*
*Filed herewith.
† Indicates a management contract or compensatory plan or arrangement.
A - 4
B O R G W A R N E R V I S I O N
B O R G W A R N E R B E L I E F S
D e a r F e l l ow S t o c k h o l D e r S ,
ongoing efforts, the name BorgWarner
Over the course of my 28-year career at
continues to be synonymous with
BorgWarner, people have often asked
cutting-edge technology and quality,
me what is the secret to our success.
allowing us to recruit and retain a team
There are two parts to the answer, with
of approximately 27,000 people in
the first and most crucial – our people
17 countries around the world, that is
– appearing to be a simple response.
second to none!
However, building and nurturing an
engaged and dedicated team is no
small feat, and is predicated on the
daily contributions from every person
at the Company to strengthen our
position in the industry. Based on these
The second part of the “secret to
our success” answer is best outlined
using the three key factors we have
consistently highlighted over the years
– and continue to provide an excellent
J A M E S V E R R I E R ,
President and Chief Executive Officer
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2016BORGWARNER TODAY: Balance andA Clean, Energy-Efficient World Respect for Each Other Power of CollaborationPassion for ExcellencePersonal Integrity Responsibility to Our Communities Stockholders letter and annual report on form 10-K
BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
borgwarner.com
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