Execution and Partnership
BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
borgwarner.com
Propulsion Systems Leader
2017 Stockholders letter and annual report on form 10-K
333225_BorgWarner_CVR_R2.indd 1-3
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“
I think this is possibly the most exciting time in the auto industry
during my 30-plus year career. We stand on the cusp of a real
metamorphosis of passenger and commercial vehicles. At
BorgWarner, we are excited by the possibilities and know, through
our trusted partnerships with customers, we have earned our
position at the forefront of this dynamic transformation.
”
2017
D E A R F E L L O W S T O C K H O L D E R S
There is no doubt that 2017 was an
emissions and performance in all types
exceptional year for BorgWarner in many
of vehicles. There are few companies in
ways. Comparing our Company today to
our industry with similar capabilities, a
our position just a few short years ago,
fact that our entire organization is very
it is clear we have already undertaken
proud of. I firmly believe we have the
an amazing transformation, and today
right strategy in place and made great
stand in a unique position as a compa-
progress in executing our plans.
ny with engine, drivetrain, and power
electronics capabilities across all three
propulsion systems - combustion, hybrid
and electric. Across the world, many
people agree there are few challenges
as important today as creating solutions
that support a cleaner, more energy-ef-
ficient world. We made the commitment
decades ago to constantly improve
transportation and have since been cre-
ating technologies to enhance efficiency,
Today, balance is the key to our busi-
ness, in the breadth and depth of our
product offering, and in the customer
base we serve. Our ability to collabo-
rate with customers, rather than simply
supply them with components, is an
important competitive differentiator that
has allowed us to build and maintain
our strong customer relationships. As
I look back on the past year, I am both
333225_BorgWarner_CVR_R2.indd 4-6
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Wherever the journey leads - we deliver the propulsion solutions of tomorrow 1
$2.89
$3.25
$3.04
$3.27
$3.89
$7.4
$8.3
$8.0
$9.1
$9.8
E A R N I N G S P E R F O R M A N CE *
Per Diluted Share *Excludes special items.
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S A L E S G R O W T H
Billions of Dollars
EXPORT PAGES 3-10 ONLY FOR
J A M E S V E R R I E R ,
President and Chief Executive Officer
333225_BorgWarner_CVR.indd
humbled and honored to be part of such
performance in 2016. Our 2017 sales of $9.8
(R&D) back into the Company to support
an amazing Company as we continue to
billion were an improvement on the already
sustainable long-term growth. We also
grow and evolve.
updated guidance we provided in October,
repurchased approximately $100 million
Consistent Strong Execution
10%. From a profitability perspective, we
imately $124 million in dividends. Finally,
and produced organic growth of over
worth of our stock, and paid out approx-
IFC
NARRATIVE
USE
FOR COVER
For 2017, the headlines read that we ex-
ceeded the high-end of revenue guidance.
While this is certainly gratifying, we focus on
the underlying story; our performance was
driven by effective execution throughout the
year. This consistently strong performance
is a testament to the more than 29,000
dedicated individuals at BorgWarner who
deliver every day to maintain and expand
our market-leading position.
continue to expect mid-teens incremental
we invested approximately $188 million in
margins on our sales growth. For full year
M&A activity, the majority of which was
2017, on an adjusted basis, we delivered
focused on the acquisition of Sevcon, Inc..
net earnings of $3.89 per diluted share, an
Acquiring Sevcon increased our scale in
increase of 19% compared to 2016.
power electronics expertise and provided
We maintained our balanced approach
to capital deployment to provide the
best overall return for our shareholders.
In addition, during 2017 we invested
approximately $560 million in capital
complimentary capabilities to our existing
businesses to help drive growth. Between
our dividend payments to stockholders,
our share buyback program and acquisi-
tions, we firmly believe we have invested
wisely to support our long-term growth
prospects and maximize stockholder value.
As our cash flow grows, we plan to invest
Our performance was especially strong,
in that it compared favorably to a first-rate
expenditures and invested approximately
$408 million in research and development
333225_BorgWarner_NARR_R2.indd 3
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2017 STOCKHOLDERS LETTER AND ANNUAL REPORT ON FORM 10-K 2
DualClutch and
Control Module
Over the past two years, we have
broadened our suite of products
driving growth and diversifying our
offering, providing increased stability
and balance.
the same percentage of our revenue in
over expected industry levels continues
research and development (R&D), meaning
to improve. For example, our state-of-
our overall budget continues to increase on
the-art dual-clutch module and control
a dollar basis without impacting our profit-
module enables quick shifts without any
ability. Our R&D spending as a percentage
noticeable interruptions of power flow,
of sales is expected to be approximately
providing an improved driving experience,
4% in 2018, to allow us to continue to be
all while improving fuel efficiency. With
the leading innovator in the industry.
increasingly stringent emissions standards
Balanced Across Platforms
As I’ve already mentioned, balance is the
key to our business and will be for the fore-
seeable future. It is remarkable that we will
be agnostic across propulsion systems on
an estimated average content per vehicle
basis in 2020. Over the past two years, we
and higher fuel economy requirements,
many Chinese domestic automakers are
embracing these technologies that offer
greater fuel efficiency and environmental
benefits. During 2017, we began production
of our customized dual-clutch and control
modules for two customers, Great Wall
Motors Company and Changan Automobile
eBooster® Electrically
Driven Compressor
have broadened our suite of products driv-
Company.
ing growth and diversifying our offering,
providing increased stability and balance.
HYBRID
P2 Module
We achieved across combustion, hybrid,
It is important to remember that our
and electric vehicles:
COMBUSTION
Even though the overall combustion engine
market is expected to shrink by 2023, we
are predicting growth for our combustion
products for the foreseeable future, based
on continued growth in demand for our
turbocharger and VCT products, plus the
expected ongoing strength of our trans-
mission and all-wheel drive businesses.
While the outlook for industry combustion
volume has moderated, our growth has
not slowed, which means our growth
combustion products will be increasingly
used on hybrids. For instance, turbo-
chargers for hybrid applications account
for more than 10% of our overall backlog.
We are seeing considerable success
with our clutching technology, motor
technology and eBooster® compressor.
During the year, we introduced our 48-volt
eBooster electrically driven compressor in
Daimler’s latest 3.0-liter gasoline engine.
The engine features our eBooster technol-
ogy matched with a BorgWarner-supplied
turbocharger to improve fuel efficiency,
enhance low-end torque and deliver boost
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3
GM 1%
Ford 1%
VW/Audi 2%
Great Wall 2%
Other China 10%
Hyundai 7%
Other Asia 5%
Ford 2%
VW/Audi 11%
Daimler 5%
Renault/Nissan 3%
BMW 2%
PSA 2%
16%
CHINA
12%
ASIA
(EX. CHINA)
38%
EUROPE
34%
AMERICAS
C U S T O M E R D I V E R S I T Y W O R L D W I D E
2017 Sales
6% Other Americas
4% Commercial Vehicle
3% Asian OEMs
7% FCA
9% Ford
5% GM
3% Commercial Vehicle
5% Other Europe
1% Porsche
2% Jaguar/Land Rover
2% Volvo
on demand without any perceptible turbo
are seeing increasing interest in China and
lag. Our market-leading eBooster technol-
North America.
ogy improves performance for combustion
and hybrid vehicles by enabling 6-cylinder
ELECTRIC
engines to perform like a much larger con-
We already have a broad array of products
ventional V8. In addition, we are excited by
for electric vehicles (“EV”) and have
the prospects for our P2 module for hybrid
announced additional business awarded
electric vehicles (HEVs) for customers all
across this portfolio in recent years. One
over the world. This highly flexible tech-
of our main competitive advantages in this
nology facilitates fast-to-market hybrid-
area is our ability to supply either compo-
ization by enabling pure electric driving as
nents, or the entire EV propulsion system.
well as hybrid functionalities. We recently
announced a comprehensive development
Interestingly, we are seeing progress in
contract with a Chinese automaker for
both light vehicle and commercial vehicle
the on-axis design. While Europe is still
applications, and recently announced we
leading the charge in adopting hybrids, we
will be supplying our HV250 electric motor
U S E S O F C A S H
Millions of Dollars
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$418
$226
$57
$563
$140
$111
$116
$577
$350
$501 $113
$288
$560
$100
$188
$124
Capital Expenditures
Share Repurchase
M&A Activity
Dividends
$1,200
$117
333225_BorgWarner_NARR_R2.indd 5
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2017 STOCKHOLDERS LETTER AND ANNUAL REPORT ON FORM 10-K 4
and eGearDrive® transmission for the initial
stream coming from the blower, deliver-
hybrid and electric vehicles continues
launch of the FUSO eCanter truck - the
ing a comfortable and odor-free cabin
to accelerate. Our balanced approach is
world’s first series-produced all-electric
environment, while saving battery power
paying dividends and I firmly believe we
light-duty truck. The scalable HVH250
through efficient operation. It is a superior
have the right portfolio of products to
electric motor delivers industry-leading
engineering solution that enhances driver
achieve industry awards in the years to
torque and power density, while our
comfort and contributes to improved driv-
come. I think this is possibly the most ex-
eGearDrive transmission uses less battery
ing range in cold weather. Finally, it is worth
citing time in the auto industry during my
energy, extending battery-powered driving
noting that for EVs Chinese OEMs continue
30-plus year career. We stand on the cusp
range. An exciting project all round! We
to move at a rapid pace and our work with
of a real metamorphosis of passenger and
were also pleased to begin supplying our
European OEMs is increasing; plus early
commercial vehicles. At BorgWarner, we
advanced high-voltage positive tem-
interest from North America is picking up.
are excited by the possibilities and know,
perature coefficient (PTC) cabin heating
technology for a new EV for a globally
known EV automaker during 2017. Our
high-voltage cabin heater warms the air
The overall need for advanced technolo-
gy continues to grow across propulsion
systems and it is clear that activity in
through our trusted partnerships with cus-
tomers, we have earned our position at the
forefront of this dynamic transformation.
Deep Customer Relationships
Of course, at BorgWarner the needs and
wishes of our customers are paramount
and we always endeavor to provide the
best possible products and service. I
strongly believe our reputation as a trusted
partner with every major manufacturer
around the world today is well deserved.
Our excellent customer reach and the di-
versity of customer base highlight the fact
that we are considered a truly balanced
propulsion partner that delivers on its
commitments. Our top five customers in
the backlog we announced in January are
2017 SALES
10% Organic
Growth
Strong Performance
19%
Increase
2017 NET EARNINGS
333225_BorgWarner_NARR_R2.indd 6
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5
hybrid and electric vehicles continues
to accelerate. Our balanced approach is
paying dividends and I firmly believe we
have the right portfolio of products to
achieve industry awards in the years to
come. I think this is possibly the most ex-
citing time in the auto industry during my
30-plus year career. We stand on the cusp
of a real metamorphosis of passenger and
commercial vehicles. At BorgWarner, we
are excited by the possibilities and know,
through our trusted partnerships with cus-
tomers, we have earned our position at the
forefront of this dynamic transformation.
Deep Customer Relationships
Of course, at BorgWarner the needs and
wishes of our customers are paramount
and we always endeavor to provide the
best possible products and service. I
strongly believe our reputation as a trusted
partner with every major manufacturer
around the world today is well deserved.
Our excellent customer reach and the di-
versity of customer base highlight the fact
that we are considered a truly balanced
propulsion partner that delivers on its
commitments. Our top five customers in
the backlog we announced in January are
Ford, Great Wall, Hyundai/Kia, Jaguar/
Land Rover, and Daimler, emblematic of
our global, blue-chip customer base.
Our diverse customer base is becoming in-
creasingly important. Historically, like most
companies in the industry, BorgWarner
engaged with customers on a component
level. It is gratifying that we are increasing-
ly asked to help our customers define the
mix of propulsion solutions across systems.
Given our unique view across the industry,
we have unparalleled insight across the en-
tire propulsion landscape and can provide
perspective and advice on a strategic level.
Given our
unique view across
the industry, we
have unparalleled
insight across the
entire propulsion
landscape.
19%
Increase
2017 NET EARNINGS
T O T A L S T O C K H O L D E R R E T U R N
$100 invested on 12/31/11 in stock or index, including reinvestment
of dividends. Fiscal year ending December 31.
BorgWarner Inc.
S&P 500
SIC Code Index
2012
2013
2014
2015
2016
2017
333225_BorgWarner_NARR_R2.indd 7
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2017 STOCKHOLDERS LETTER AND ANNUAL REPORT ON FORM 10-K$300$250$200$150$100
6
The Drivetrain Segment harnesses BorgWarner’s legacy
of more than 100 years as an innovator in transmission and all-wheel
drive technology. By leveraging its deep understanding of powertrain
clutching technology, the Drivetrain group is developing leading edge
interactive control systems and advancing the capabilities of hybrid and
electric vehicles.
Sales in Millions of Dollars
$2,447 M
$2,631 M
$2,557 M
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We are uniquely positioned to provide this
Importantly, this aligns with our estimat-
counsel because of our unrivaled breadth
ed 2020 revenue outlook of $11.5 billion
of knowledge and experience, and diverse
to $11.8 billion. We believe this backlog
range of products.
The diversity of our customer base is
another strength, with no single customer
comprising more than 15% of our overall
business, and our geographic balance
remains broad and strong. This diversity
means we are as insulated as possible
from evolving consumer trends, regulatory
changes, and regional economic shifts that
could negatively impact our business. As
we have shown in recent years, we under-
stand and embrace the continued evolution
of our Company and have a reinforced
commitment to stay ahead of the industry.
positions us strongly to continue to deliver
in the mid-to-high single digit long-term
organic growth range. We plan to meet
or exceed our 2020 revenue outlook and
continue to produce mid-to-high single
digit long-term organic growth.
Talented Team
If there is one fact about our Company that
I am reminded of every day, it is strength
and depth of our team. In every meeting I
attend, in every memo or update I see, in
every piece of news, I am amazed at the
relentless drive, intelligence, and ingenuity
of our people around the world.
Over the years, our HR team has done
an excellent job of recruiting top talent
$3,524 M
$3,790 M
Robust Backlog and Outlook
From a product perspective, we see
DualTronic™ Transmission
Clutch Modules
GenerationV All-Wheel Drive
All-Wheel Drive
Transfer Cases
Transmission
One-Way Clutches
Transmission
Control Modules
Transmission
Friction Products
Rotating Electrics
Electric Drive Module
Power Electronics
balanced growth across the portfolio with
to the Company. In addition, we have
50% of our backlog relating to vehicles
worked hard to develop our people and
with hybrid or electric propulsion systems,
promote from within wherever possible.
and the remaining 50% relating to vehicles
This means we have gained an import-
with combustion propulsion systems. As
ant reputation as a brilliant place to
the industry continues to evolve at a rapid
build a career, which builds upon itself
pace, we are well positioned to innovate
every year. The best example I can give
and adapt to maintain our market leading
is the recent well-deserved promotion
position for the foreseeable future.
On a regional basis, we continue to see
backlog growth in all of our major markets.
The Americas account for 38% of the back-
log, with Asia accounting for 41%. Within
Asia, China accounts for more than 30%,
and we expect continued strong growth
in that market. Despite our view that the
industry will continue to shift from diesel
to advanced gasoline engines, Europe still
of Frédéric Lissalde to Chief Operating
Officer. Naturally, creating this new role
created multiple opportunities for other
individuals, which I am pleased to report
we will fill with internal candidates,
highlighting the bench strength of our
team. Our great track record of finding
and developing talent, has been, and will
continue to be a critical component of
our success.
represents 21% of our backlog, in line with
I also want to recognize the importance
our prior estimates.
We expect our 2018-2020 backlog to be
within a range of $2.0 to $2.4 billion, which
is 33% higher than our prior three-year
backlog. This will support an organic
growth CAGR of 5% to 7% between 2018
and 2020, versus industry production that
we assume will be flat to up 1% annually.
of Ron Hundzinski, our Executive Vice
President and Chief Financial Officer,
to BorgWarner. Ron has always been a
strong partner, helping me manage the
Company, set strategy, and maintain our
financial strength and discipline. He is
certainly much more than ‘the numbers
guy’ and has amassed a wealth of knowl-
edge in his 13 years with the Company.
333225_BorgWarner_NARR_R2.indd 8
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We are uniquely positioned to provide this
Importantly, this aligns with our estimat-
counsel because of our unrivaled breadth
ed 2020 revenue outlook of $11.5 billion
of knowledge and experience, and diverse
to $11.8 billion. We believe this backlog
range of products.
The diversity of our customer base is
another strength, with no single customer
comprising more than 15% of our overall
business, and our geographic balance
remains broad and strong. This diversity
means we are as insulated as possible
from evolving consumer trends, regulatory
changes, and regional economic shifts that
could negatively impact our business. As
we have shown in recent years, we under-
stand and embrace the continued evolution
of our Company and have a reinforced
commitment to stay ahead of the industry.
Robust Backlog and Outlook
From a product perspective, we see
positions us strongly to continue to deliver
in the mid-to-high single digit long-term
organic growth range. We plan to meet
or exceed our 2020 revenue outlook and
continue to produce mid-to-high single
digit long-term organic growth.
Talented Team
If there is one fact about our Company that
I am reminded of every day, it is strength
and depth of our team. In every meeting I
attend, in every memo or update I see, in
every piece of news, I am amazed at the
relentless drive, intelligence, and ingenuity
of our people around the world.
Over the years, our HR team has done
an excellent job of recruiting top talent
balanced growth across the portfolio with
to the Company. In addition, we have
50% of our backlog relating to vehicles
worked hard to develop our people and
with hybrid or electric propulsion systems,
promote from within wherever possible.
and the remaining 50% relating to vehicles
This means we have gained an import-
with combustion propulsion systems. As
ant reputation as a brilliant place to
the industry continues to evolve at a rapid
build a career, which builds upon itself
pace, we are well positioned to innovate
every year. The best example I can give
and adapt to maintain our market leading
is the recent well-deserved promotion
position for the foreseeable future.
On a regional basis, we continue to see
backlog growth in all of our major markets.
The Americas account for 38% of the back-
log, with Asia accounting for 41%. Within
Asia, China accounts for more than 30%,
and we expect continued strong growth
in that market. Despite our view that the
industry will continue to shift from diesel
to advanced gasoline engines, Europe still
of Frédéric Lissalde to Chief Operating
Officer. Naturally, creating this new role
created multiple opportunities for other
individuals, which I am pleased to report
we will fill with internal candidates,
highlighting the bench strength of our
team. Our great track record of finding
and developing talent, has been, and will
continue to be a critical component of
our success.
represents 21% of our backlog, in line with
I also want to recognize the importance
our prior estimates.
We expect our 2018-2020 backlog to be
within a range of $2.0 to $2.4 billion, which
is 33% higher than our prior three-year
backlog. This will support an organic
growth CAGR of 5% to 7% between 2018
and 2020, versus industry production that
we assume will be flat to up 1% annually.
of Ron Hundzinski, our Executive Vice
President and Chief Financial Officer,
to BorgWarner. Ron has always been a
strong partner, helping me manage the
Company, set strategy, and maintain our
financial strength and discipline. He is
certainly much more than ‘the numbers
guy’ and has amassed a wealth of knowl-
edge in his 13 years with the Company.
7
The Engine Segment develops thermal management strategies
and products to optimize vehicle fuel efficiency, reduce emissions and
enhance performance. The group’s efforts are enhanced by BorgWarner’s
efforts in innovating new engine timing systems, boosting systems, ignition
systems and thermal management systems. This unique combination of
expertise allows BorgWarner to continually break new ground in combustion,
hybrid and electric vehicle technology.
Sales in Millions of Dollars
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$5,022 M
$5,706 M
$5,500 M
$5,590 M
$6,062 M
Regulated Two-Stage
Turbocharger
Engine Timing
Exhaust Gas
Recirculation
Cam Torque
Actuated Variable
Cam Timing
Cooling Systems
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.
333225_BorgWarner_NARR_R2.indd 9
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2017 STOCKHOLDERS LETTER AND ANNUAL REPORT ON FORM 10-K 8
S T R O N G B A C K L O G
ACROSS COMBUSTION, HYBRID AND ELEC TRIC PRO PULSI ON
50%
45%
5%
50% of Backlog Related to Hybrid and Electric Propulsion
top-line growth and sound operating
performance and expect to continue this
success in 2018, with another year of
above industry growth and significant new
business awards. Finally, we are committed
to delivering the 2020 outlook we outlined
in January 2018. Between our talented em-
ployees, renowned technology, and finan-
cial strength, we are primed to continue
creating solutions that support a cleaner,
more energy-efficient world. We remain
focused on leveraging our operational
effectiveness – which allows us to launch
a new product every day – to produce a
consistently positive performance. We are
making great progress and have the right
Between our
I hope he will indulge my mentioning his
significant ongoing contributions this
strategy in place.
talented employees,
one time.
renowned technology,
and financial strength,
we are primed to
continue creating
solutions that support
a cleaner, more energy-
efficient world.
It is important to remember the
BorgWarner Strategic Difference. Our
fundamental mission as a Company is to be
Dedicated to fulfilling our potential
As successful as 2017 has been, I can
the Propulsion System Leader for Combus-
promise you BorgWarner will not rest on
tion, Hybrid, and Electric Vehicles. As we
its laurels. We will continue to strive to im-
strive to maintain balance and diversity, we
prove and fulfill our considerable potential.
believe we are well on our way to achieving
In the rapidly changing global economy,
our goals and are well positioned as the
we are fully aware of the need to maintain
leading provider of propulsion technology
our technological preeminence and stay
to improve efficiency, emissions and perfor-
ahead of the competition.
mance in all types of vehicles. I am pleased
we have been able to deliver on our com-
mitments, meeting or exceeding expec-
tations, and look forward to continuing to
execute effectively in 2018 and beyond.
Sincerely,
Collectively, our Board of Directors had
the vision and determination to push our
management team to assess and advance
our strategy at the right time several years
ago. Today, they continually ask tough
questions, provide sage advice and are an
integral part of the Company. Their ongo-
ing willingness to challenge the status quo,
but without becoming divisive or com-
bative, is a testament to their confidence
as leaders, and pushes our management
team to stretch ourselves, ensuring we set
the right course for BorgWarner.
James R. Verrier
President and Chief Executive Officer
By many measures, 2017 was a great year
for BorgWarner. We produced excellent
333225_BorgWarner_NARR_R2.indd 10
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2017
OR
o 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, smaller reporting company, or an
emerging growth 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
Emerging growth company
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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, 2017 (the last business day of the most recently completed second fiscal quarter) was approximately $8.9
billion.
Yes
As of February 2, 2018, the registrant had 210,550,106 shares of voting common stock outstanding.
Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the BorgWarner Inc. Proxy Statement for the 2018 Annual Meeting of Stockholders
Document
Part of Form 10-K into which incorporated
Part III
BORGWARNER INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2017
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.
5
15
23
25
26
26
26
29
30
52
52
108
108
109
110
110
110
110
110
110
111
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 components in their entirety and
that they are computed in a manner intended to facilitate consistent period-to-period comparisons. The
3
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. Where non-GAAP financial measures are used,
the most directly comparable GAAP financial measure, as well as the reconciliation to the most directly
comparable GAAP 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 20, “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, 2017, 2016 and 2015 are as follows:
(millions of dollars)
Engine
Drivetrain
Inter-segment eliminations
Net sales
Year Ended December 31,
2017
6,061.5 $
3,790.3
(52.5)
9,799.3 $
2016
5,590.1 $
3,523.7
(42.8)
9,071.0 $
2015
5,500.0
2,556.7
(33.5)
8,023.2
$
$
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 $844 million,
$737 million, and $650 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Engine
The Engine Segment develops and manufactures products to improve fuel economy, reduce emissions
and enhance performance. Increasingly stringent regulations of, and consumer demand for, better fuel
economy and emissions performance are driving demand for the Engine Segment's products in combustion,
hybrid and electric propulsion systems. The Engine Segment's technologies include: turbochargers,
eBoosters, timing systems, emissions systems, thermal systems, 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 combustion and hybrid propulsion systems. The Engine Segment provides
turbochargers for light, commercial and off-highway applications for combustion and hybrid vehicles 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%, 28% and 31% of total net sales
for the years ended December 31, 2017, 2016 and 2015, 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 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, four-wheel drive (“4WD”) chain for light vehicles and
hybrid power transmission chain. 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
valves, glow plugs and instant starting systems for combustion and hybrid vehicles.
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., and China.
In the third quarter of 2017, the Company started exploring strategic options for the non-core emission
product lines. In the fourth quarter of 2017, the Company, among other actions, has launched an active
program to locate a buyer for the non-core pipes and thermostat product lines and initiated all other actions
required to complete the plan to sell the non-core product lines. The Company determined that the assets
and liabilities of the pipes and thermostat product lines met the held for sale criteria as of December 31,
2017. Refer to Note 19, “Assets and Liabilities Held for Sale,” to the Consolidated Financial Statements in
Item 8 of this report for financial information about the Company's reporting segments.
The Engine Segment's thermal systems products are designed to optimize temperatures in propulsion
systems and vehicle cabins. Products include viscous fan drives that sense and respond to multiple cooling
requirements, polymer fans and coolant pumps.
Drivetrain
The Drivetrain Segment develops and manufactures products to improve fuel economy, reduce
emissions and enhance performance in combustion, hybrid and electric vehicles. The Drivetrain Segment’s
technologies include: rotating electrical components, power electronics, clutching systems, control modules
and all-wheel drive systems. 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 separator plates, transmission bands, torque converter clutches, one-way clutches
6
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 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, used 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.
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 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, and off-highway 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 electric motors are
used in both light and commercial vehicles including off-highway 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.
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,
7
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 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.
In 2017, the Company acquired Sevcon, Inc. ("Sevcon"), a global player in electrification technologies,
serving customers in the U.S., U.K., France, Germany, Italy, China and the Asia Pacific region. Principal
products include motor controllers, battery chargers, and uninterrupted power source systems for electric
and hybrid vehicles, industrial, medical and telecom applications. Sevcon complements BorgWarner’s
power electronics capabilities utilized to provide electrified propulsion solutions.
Joint Ventures
As of December 31, 2017, 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 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.
SeohanWarner Turbo Systems
Ltd.
Transfer cases
Turbochargers
BorgWarner United Transmission
Systems Co. Ltd.
Transmission
components
________________
Year
organized
Percentage
owned by the
Company
Location
of
operation
Joint venture partner
Fiscal 2017 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.
$
$
$
$
$
$
$
669.6
173.9
272.9
52.5
151.3
260.1
184.5
(a)
(b)
(c)
All sales figures are for the year ended December 31, 2017, except NSK-Warner and Turbo Energy Private Limited. NSK-
Warner’s sales are reported for the 12 months ended November 30, 2017. Turbo Energy Private Limited’s sales are
reported for the 12 months ended September 30, 2017.
The Company made purchases from Turbo Energy Private Limited totaling $31.9 million, $28.9 million and $36.5 million
for the years ended December 31, 2017, 2016 and 2015, 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, 2017, approximately 77% 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 20, “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, 2017, approximately 82% of the Company's net sales were for
light-vehicle applications; approximately 10% were for commercial vehicle applications; approximately 4%
were for off-highway vehicle applications; and approximately 4% 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,
2017
2016
2015
15%
13%
15%
13%
15%
15%
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 seeks 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
2017
$
$
473.1 $
(65.6)
407.5 $
417.8 $
(74.6)
343.2 $
386.2
(78.8)
307.4
Net R&D expenditures as a percentage of net sales were 4.2%, 3.8% and 3.8% for the years ended
December 31, 2017, 2016 and 2015, 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 approximately 6,425 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
Continental
Emissions systems:
Timing devices and chains:
Thermal systems:
Mahle
Denso
Bosch
Eldor
Denso
Iwis
Horton
Mahle
T.RAD
Pierburg
NGK
Eberspaecher
Schaeffler Group
Tsubaki Group
Usui
Xuelong
Product Type: Drivetrain
Torque transfer:
GKN Driveline
Magna Powertrain
Names of Competitors
JTEKT
Rotating electrical machines:
Transmission systems:
Denso
Bosch
Bosch
Dynax
Valeo
Valeo
Continental
FCC
Schaeffler Group
Denso
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, 2017, the Company had a salaried and hourly workforce of approximately 29,000
(as compared with approximately 27,000 at December 31, 2016), of which approximately 6,300 were in the
U.S. Approximately 15% 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 2018 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 2018, 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 8, 2018.
Name
James R. Verrier
Ronald T. Hundzinski
Frederic B. Lissalde
Tonit M. Calaway
Brady D. Ericson
John J. Gasparovic
Stefan Demmerle
Joseph F. Fadool
Martin Fischer
Anthony D. Hensel
Robin Kendrick
Thomas J. McGill
Joel Wiegert
Age Position with the Company
55
President and Chief Executive Officer
59
50
49
46
60
53
51
47
59
53
51
44
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Operating Officer
Executive Vice President and Chief Human Resources Officer
Executive Vice President and Chief Strategy Officer
Executive Vice President, Chief Legal Officer and Secretary
Vice President
Vice President
Vice President
Vice President and Controller
Vice President
Vice President and Treasurer
Vice President
Mr. Verrier has been President, Chief Executive Officer and a member of BorgWarner's Board of Directors
since January 1, 2013.
Mr. Hundzinski has been Executive Vice President and Chief Financial Officer of the Company since
March 2012.
Mr. Lissalde has been Executive Vice President and Chief Operating Officer of the Company since
January 2018. He was Vice President of the Company and President and General Manager of BorgWarner
Turbo Systems LLC from May 2013 to December 2017. 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.
Ms. Calaway has been Executive Vice President and Chief Human Resource Officer of the Company
since August 2016. She was Vice President of Human Resources of Harley-Davidson Inc. and President
of The Harley-Davidson Foundation from February 2010 to July 2016.
Mr. Ericson has been Executive Vice President and 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. Gasparovic has been Executive Vice President, Chief Legal Officer and Secretary of the Company
since January 2007.
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.
14
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
the Company and President and General Manager of BorgWarner Morse TEC Inc.
Dr. Fischer has been Vice President of the Company and President and General Manager of BorgWarner
Transmission Systems LLC since January 2018. From July 2015 until December 2017, he was Vice
President and General Manager of BorgWarner Turbo Systems LLC Europe and South America. From
January 2014 until June 2015, he was Vice President and General Manager of BorgWarner Turbo Systems
LLC Europe. From October 2009 until December 2013, Mr. Fischer was a member of the Executive Board
of the electronics division of Hella KGaA Hueck & Co., in addition to his roles of President of the Hella
Corporate Center USA, Inc. and the CEO of Hella‘s electronics business in the Americas.
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.
Mr. Kendrick has been Vice President of the Company and President and General Manager of
BorgWarner Turbo Systems LLC since January 2018. He was Vice President of the Company and President
and General Manager of BorgWarner Transmissions Systems LLC from September 2011 to December
2017.
Mr. McGill has been Vice President and Treasurer of the Company since May 2012.
Mr. Wiegert has been Vice President of the Company and 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.
We are under substantial pressure from OEMs to reduce the prices of our products.
Risks related to our business
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, 2017, approximately 15% 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 an adverse effect on our business.
We are subject to extensive environmental regulations.
Our operations are subject to laws governing, among other things, emissions to air, discharges to waters
and the generation, handling, storage, transportation, treatment and disposal of waste and other materials.
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 cost 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. We vigorously defend against asbestos-related claims, and we have
historically been successful in getting the majority of such claims dismissed without payment.
Notwithstanding these factors, asbestos-related claims may be asserted against us in the future, and the
number of those claims may be substantial. 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 may 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, substantially all 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 of 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.
The Tax Cuts and Jobs Act (the “Act”) that was signed into law in December 2017 constitutes a major
change to the US tax system. The estimated impact of the law is based on management’s current
interpretations of the Act and related assumptions. Our final tax liability may be materially different from
current estimates based on regulatory developments and our further analysis of the impacts of the Act. In
future periods, our effective tax rate could be subject to additional uncertainty as a result of regulatory
developments related to the Act. Furthermore, changes in the earnings mix or applicable foreign tax laws
may result in significant fluctuations in our effective tax rates.
Because we are a U.S. holding company, one significant source of funds is distributions from our non-
U.S. subsidiaries. Certain countries in which we operate have adopted or could institute currency exchange
controls that limit or prohibit our local subsidiaries' ability to convert local currency into U.S. dollars or to
make payments outside the country. This could subject us to the risks of local currency devaluation and
business disruption.
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
20
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.
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 2017, approximately 77% 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
21
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, competitiveness and to optimize our product portfolio and may not
achieve the anticipated savings and benefits from these actions.
We have and may continue to initiate restructuring actions designed to improve future profitability,
competitiveness, enhance treasury management flexibility, optimize our product portfolio 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 2017 to Ford and Volkswagen constituted
approximately 15% and 13% of our 2017 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
22
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.
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 comment letters from the Staff of the SEC’s Division of Corporation Finance
on May 11, June 23, August 23 and November 29, 2017 as part of its review of the Company’s Form 10-K
for the year ended December 31, 2016. The Company responded to all of the letters - most recently on
January 25, 2018. As of the date of this Form 10-K, the Staff has not confirmed to the Company that its
review process is complete. The Company intends to continue working with the Staff in the event the Staff
has any further comments.
The Staff’s comments related to the Company’s accounting for the $703.6 million asbestos related
charge recorded in the December 31, 2016 Consolidated Financial Statements, as well as asbestos related
insurance assets. These two matters are disclosed in Note 14, Contingencies in the 2017 and 2016 Notes
23
to Financial Statements. The Staff’s comments are focused on whether all or a portion of the amounts
recognized in the 2016 consolidated statement of operations should have been recognized in earlier periods.
The Company believes that its accounting for asbestos related matters is appropriate and in accordance
with generally accepted accounting principles and it has addressed the Staff’s comments in full; however,
it is possible that the Staff will have additional comments. If all or a portion of the asbestos related charge
were to be reflected in periods prior to 2016, the impact would be a reduction in net earnings in periods prior
to the year ended December 31, 2016 and a corresponding increase in earnings for the year ending
December 31, 2016. There would be no impact to the December 31, 2016 Consolidated Balance Sheet or
net cash provided by operating activities in the Consolidated Statements of Cash Flows for the three years
ending December 31, 2016.
24
Item 2. Properties
As of December 31, 2017, the Company had 66 manufacturing, assembly, and technical
locations worldwide. In addition to its 16 U.S. locations, the Company had ten locations in China; eight
locations in Germany, seven locations in South Korea; four locations in each of India and Mexico; three
locations in each of Brazil and Japan; two locations in each of Italy and the United Kingdom; and one location
in each of France, Hungary, Ireland, Poland, Portugal, Spain, and Sweden. 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 (UK)
Asia
Aoyama, Japan
Chennai, India (b)
Kirchheimbolanden, Germany
Chungju-City, South Korea
Ludwigsburg, Germany
Lugo, Italy (b)
Markdorf, Germany
Muggendorf, Germany
Oberboihingen, Germany
Oroszlany, Hungary (d)
Rzeszow, Poland (d)
Tralee, Ireland
Viana de Castelo, Portugal
Vigo, Spain
Europe
Arnstadt, Germany
Heidelberg, Germany
Ketsch, Germany
Landskrona, Sweden (b)
Tulle, France
Wrexham, Wales (UK)
Jiangsu, China (b)
Kakkalur, India
Manesar, India
Nabari City, Japan
Ningbo, China (b) (e)
Pune, India
Pyongtaek, South Korea (b) (c)
Asia
Beijing, China (b)
Dae-Gu, South Korea (b)
Dalian, China (b)
Eumsung, South Korea
Fukuroi City, Japan
Jingzhou City, China (b)
Changnyeong, South Korea
Ochang, South Korea (b)
Shanghai, China (b)
Tianjin, China (b)
Wuhan, China (b)
________________
(a)
(b)
(c)
(d)
(e)
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.
City has 3 locations: 2 wholly owned subsidiaries and a joint venture
25
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 2, 2018, there were 1,658 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
$
0.59 $
0.53 $
0.52 $
0.51 $
0.25
2017
2016
2015
2014
2013
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 2016 and 2017 were:
Quarter Ended
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
High
Low
42.25 $
39.93 $
36.12 $
41.86 $
43.95 $
44.36 $
51.23 $
55.68 $
28.23
27.69
28.52
33.64
39.50
37.99
43.00
50.92
$
$
$
$
$
$
$
$
26
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, 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, and SIC 374 Motor Vehicle Parts
___________
*$100 invested on 12/31/2012 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 and S&P 500 data are from Capital IQ; SIC Code Index data is from Research Data Group
BorgWarner Inc.(1)
S&P 500(2)
SIC Code Index(3)
________________
December 31,
2012
2013
2014
2015
2016
2017
$
100.00 $
156.91 $
155.56 $
123.64 $
114.58 $
150.33
100.00
100.00
132.39
148.42
150.51
168.08
152.59
171.80
170.84
196.44
208.14
261.64
(1) BorgWarner Inc.
(2) S&P 500 — Standard & Poor’s 500 Total Return Index
(3) Standard Industrial Code (“SIC”) 3714-Motor Vehicle Parts
27
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 79.6 million shares of the Company's common stock in the aggregate. As of December 31, 2017,
the Company had repurchased 69.7 million 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, 2017:
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, 2017
Common Stock Repurchase Program
Employee transactions
Month Ended November 30, 2017
Common Stock Repurchase Program
Employee transactions
Month Ended December 31, 2017
Common Stock Repurchase Program
Employee transactions
— $
256
$
— $
— $
— $
— $
—
50.76
—
—
—
—
—
—
—
—
—
—
9,857,280
9,857,280
9,857,280
Equity Compensation Plan Information
As of December 31, 2017, the number of shares of restricted common stock outstanding under our
equity compensation plans, the weighted average exercise price of outstanding 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
38.86
—
—
4,903,395
—
4,903,395
1,592,574
$
— $
1,592,574
$
28
Item 6. Selected Financial Data
(in millions, except share and per share data)
2017
2016
2015
2014
2013
Year Ended December 31,
Operating results
Net sales
Operating income (a)
Net earnings attributable to BorgWarner Inc. (a)
Earnings per share — basic
Earnings per share — diluted
Net R&D expenditures
Capital expenditures, including tooling outlays
Depreciation and amortization
$ 9,799.3
$ 9,071.0
$ 8,023.2
$ 8,305.1
$ 7,436.6
$ 1,077.1
$
$
$
$
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
439.9
2.09
2.08
407.5
$
343.2
$
307.4
$
336.2
$
303.2
560.0
407.8
$
$
500.6
391.4
$
$
577.3
320.2
$
$
563.0
330.4
$
$
417.8
299.4
$
$
$
$
$
$
Number of employees
29,000
27,000
30,000
22,000
19,700
Financial position
Cash
Total assets
Total debt
$
545.3
$
443.7
$
577.7
$
797.8
$
939.5
$ 9,787.6
$ 8,834.7
$ 8,825.7
$ 7,225.2
$ 6,913.7
$ 2,188.3
$ 2,219.5
$ 2,550.3
$ 1,337.2
$ 1,219.3
Common share information
Cash dividend declared and paid per share
Market prices of the Company's common stock
High
Low
$
$
$
0.59
$
0.53
$
0.52
$
0.51
$
0.25
55.68
37.99
$
$
42.25
27.69
$
$
63.01
38.89
$
$
67.38
50.24
$
$
56.45
35.22
Weighted average shares outstanding (thousands)
Basic
Diluted
210,429
211,548
214,374
215,325
224,414
225,648
227,150
228,924
228,600
231,337
________________
(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, 2017, 2016 and 2015.
29
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, 2017, 2016 and 2015 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
$
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
2017
9,799.3 $
7,679.2
2,120.1
898.5
144.5
1,077.1
(51.2)
(5.8)
70.5
1,063.6
580.3
483.3
43.4
Net earnings attributable to BorgWarner Inc.
Earnings per share — diluted
$
$
439.9 $
2.08 $
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
30
Non-comparable items impacting the Company's earnings per diluted share and net earnings
The Company's earnings per diluted share were $2.08, $0.55 and $2.70 for the years ended December
31, 2017, 2016 and 2015, 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:
Asset impairment and loss on divestiture
Restructuring expense
Merger and acquisition expense
Asbestos-related charge
Intangible asset impairment
Contract expiration gain
Pension settlement loss
Gain on previously held equity interest
Tax reform adjustments
Tax adjustments
Total impact of non-comparable items per share — diluted:
$
Year Ended December 31,
2017
2016
2015
(0.25) $
(0.23)
(0.05)
—
—
—
—
—
(1.29)
0.02
(1.80) $
(0.48) $
(0.10)
(0.11)
(2.05)
(0.04)
0.02
—
—
—
0.04
(2.72) $
—
(0.27)
(0.08)
—
—
—
(0.07)
0.05
—
0.04
(0.33)
A summary of non-comparable items impacting the Company’s net earnings for the years ended
December 31, 2017, 2016 and 2015 is as follows:
Year ended December 31, 2017:
•
In the third quarter of 2017, the Company started exploring strategic options for the non-core emission
product lines. In the fourth quarter of 2017, the Company launched an active program to locate a
buyer for the non-core pipes and thermostat product lines and initiated all other actions required to
complete the plan to sell the non-core product lines. The Company determined that the assets and
liabilities of the pipes and thermostat product lines met the held for sale criteria as of December 31,
2017. As a result, the Company recorded an asset impairment expense of $71.0 million in the fourth
quarter of 2017 to adjust the net book value of this business to fair value less costs to sell. Refer to
Note 19, "Assets and Liabilities Held for Sale," to the Consolidated Financial Statements in Item 8
of this report for more information.
• The Company recorded restructuring expense of $58.5 million related to Engine and Drivetrain
segment actions designed to improve future profitability and competitiveness, including $48.2 million
primarily related to professional fees and negotiated commercial costs associated with emissions
business divestiture and manufacturing footprint rationalization activities. The Company will continue
its plan to improve the future profitability and competitiveness of its remaining European emissions
business and these actions may result in the recognition of additional restructuring charges that
could be material. The Company also recorded restructuring expense of $6.8 million primarily related
to contractually required severance associated with Sevcon executive officers and other employee
termination benefits. Refer to Note 15, "Restructuring," to the Consolidated Financial Statements in
Item 8 of this report for more information.
• During the year ended December 31, 2017, the Company recorded $10.0 million of merger and
acquisition expense primarily related to the acquisition of Sevcon, Inc. ("Sevcon") completed on
September 27, 2017. Refer to Note 18, "Recent Transactions," to the Consolidated Financial
Statements in Item 8 of this report for more information.
31
• The Company recorded reduction of income tax expenses of $10.1 million, $1.0 million, $18.2 million
and $3.8 million related to restructuring expense, merger and acquisition expense, asset impairment
expense and other one-time tax adjustments, respectively, discussed in the Other Expense, Net
footnote. Additionally, the Company recorded a tax expense of $273.5 million for the change in the
tax law related to tax effects of the Act.
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 of 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.
• The Company recorded a $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 reduction of income tax expenses 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
32
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 reduction of income tax expenses 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.
Net Sales
Net sales for the year ended December 31, 2017 totaled $9,799.3 million, an 8.0% increase from the
year ended December 31, 2016. Excluding the impact of stronger foreign currencies and the net impact of
acquisitions and divestitures, net sales increased 10.3%.
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%.
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,
2017
2016
2015
100.0%
100.0%
100.0%
78.4
21.6
9.2
1.5
10.9
(0.5)
(0.1)
0.7
10.8
5.9
4.9
0.4
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
Net earnings attributable to BorgWarner Inc.
4.5%
1.4%
7.6%
Cost of sales as a percentage of net sales was 78.4%, 78.7% and 78.8% in the years ended December
31, 2017, 2016 and 2015, respectively. The Company's material cost of sales was approximately 55% of
net sales in the years ended December 31, 2017, 2016 and 2015. The Company's remaining cost to convert
raw material to finished product, which includes direct labor and manufacturing overhead, continues to
improve during the years ended December 31, 2017 and 2016 compared to 2015. Gross profit as a
percentage of net sales was 21.6%, 21.3% and 21.2% in the years ended December 31, 2017, 2016 and
33
2015, respectively. Included in the 2016 gross profit and gross margin was 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 $898.5 million, $817.5 million and $662.0
million or 9.2%, 9.0% and 8.3% of net sales for the years ended December 31, 2017, 2016 and 2015,
respectively. Excluding the impact of the 2017 acquisition of Sevcon, SG&A and SG&A as a percentage of
net sales were $891.3 million and 9.1% for the year ended December 31, 2017. 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 $407.5 million, or
4.2% of net sales, in the year ended December 31, 2017, compared to $343.2 million, or 3.8% of net sales,
and $307.4 million, or 3.8% of net sales, in the years ended December 31, 2016 and 2015, respectively.
The increase of R&D costs, net of customer reimbursements, in the year ended December 31, 2017
compared with the years ended December 31, 2016 and 2015 was primarily due to investments in advanced
engineering programs across product lines. We will continue to invest in a number of cross-business R&D
programs, as well as a number of other key programs, all of which are necessary for short- and long-term
growth. Our current long-term expectation for R&D spending remains at 4% of net sales.
Other expense, net was $144.5 million, $889.7 million and $101.4 million for the years ended December
31, 2017, 2016 and 2015, respectively. This line item is primarily comprised of non-income tax 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 $51.2 million, $42.9 million and $40.0 million in the years
ended December 31, 2017, 2016 and 2015, 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, 2017 compared to 2016 and 2015
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 $70.5 million, $84.6 million and $60.4 million in the years
ended December 31, 2017, 2016 and 2015, respectively. The decrease in interest expense for the year
ended December 31, 2017 compared with the year ended December 31, 2016 was primarily due to the
reduction in average outstanding short term borrowings and senior notes and increase in capitalized interest.
The increase in interest expense for the year ended December 31, 2016 compared with the year ended
December 31, 2015 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 54.6%
for the year ended December 31, 2017, compared with rates of 15.9% and 30.3% for the years ended
December 31, 2016 and 2015, respectively. The U.S. income tax payable of $25.1 million includes an
estimated $23.6 million of transition tax, net of foreign tax credits associated with the required inclusion of
unremitted foreign earnings and amounts carried forward from prior years. The estimated transition tax is
due and payable annually over an eight year period beginning in the first quarter of 2018. For further details,
see Note 4, "Income Tax," to the Consolidated Financial Statements in Item 8.
The Company is continuing to evaluate the impact that the Act will have on the future effective tax rates.
Based upon the Company’s current interpretations of tax regulations, we estimate that our 2018 effective
tax rate will be approximately 28%.
34
The effective tax rate of 54.6% for the year ended December 31, 2017 includes reduction of income tax
expenses of $10.1 million, $1.0 million, $18.2 million and $3.8 million related to restructuring expense,
merger and acquisition expense, asset impairment expense and other one-time tax adjustments,
respectively, discussed in the Other Expense, Net footnote. Additionally, the Company recorded a tax
expense of $273.5 million for the change in the tax law related to tax effects of the Act. Excluding the impact
of these non-comparable items, the Company's annual effective tax rate associated with ongoing operations
for 2017 was 28.2%.
The effective tax rate of 15.9% for the year ended December 31, 2016 includes reduction of income tax
expenses 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 reduction of income tax
expenses 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%.
Net earnings attributable to the noncontrolling interest, net of tax of $43.4 million for the year ended
December 31, 2017 increased by $1.7 million and $6.7 million compared to the years ended December 31,
2016 and 2015, respectively. The increase during the year ended December 31, 2017 compared to the
years ended December 31, 2016 and 2015 was primarily related to higher sales and earnings by the
Company's joint ventures.
Results By Reporting Segment
The Company's business is comprised of two reporting segments: Engine and Drivetrain. These
segments are strategic business groups, which are managed separately as each represents a specific
grouping of related automotive components and systems.
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.
35
Net Sales by Reporting Segment
(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 $
2017
6,061.5 $
3,790.3
(52.5)
9,799.3 $
2015
5,500.0
2,556.7
(33.5)
8,023.2
Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest ("Adjusted EBIT")
(millions of dollars)
Engine
Drivetrain
Adjusted EBIT
Asset impairment and loss on divestiture
Restructuring expense
Merger and acquisition expense
Lease termination settlement
Other expense, net
Asbestos-related charge
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
2017
$
995.7 $
947.3 $
449.8
1,445.5
71.0
58.5
10.0
5.3
2.1
—
—
—
—
—
170.3
(5.8)
70.5
1,063.6
580.3
483.3
43.4
364.5
1,311.8
127.1
26.9
23.7
—
—
703.6
12.6
(6.2)
—
—
155.3
(6.3)
84.6
190.5
30.3
160.2
41.7
913.9
304.6
1,218.5
—
65.7
21.8
—
—
—
—
—
25.7
(10.8)
136.4
(7.5)
60.4
926.8
280.4
646.4
36.7
609.7
Net earnings attributable to BorgWarner Inc.
$
439.9 $
118.5 $
The Engine segment's net sales for the year ended December 31, 2017 increased $471.4 million, or
8.4%, and segment Adjusted EBIT increased $48.4 million, or 5.1%, from the year ended December 31,
2016. Excluding the impact of strengthening foreign currencies, primarily the Euro and Korean Won, net
sales increased 7.7% from the year ended December 31, 2016 due to higher sales of light vehicle
turbochargers, thermal products, engine timing systems and stronger commercial vehicle markets around
the world. The segment Adjusted EBIT margin was 16.4% for the year ended December 31, 2017, down
from 16.9% in the year ended December 31, 2016. The Adjusted EBIT margin decrease was primarily
related to inefficiencies in the non-core emission product lines. In the third quarter of 2017, the Company
initiated actions designed to improve future profitability and competitiveness and started exploring strategic
options for the non-core emission product lines. See the Restructuring footnote to the Consolidated Financial
Statements for further discussion.
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
36
Korean Won, net sales increased 3.1% from the year ended December 31, 2016 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 16.9% for the year ended December 31, 2016, up from 16.6% in the year ended December
31, 2015.
The Drivetrain segment's net sales for the year ended December 31, 2017 increased $266.6 million,
or 7.6%, and segment Adjusted EBIT increased $85.3 million, or 23.4%, from the year ended December
31, 2016. Excluding the impact of strengthening foreign currencies, primarily the Euro and Korean Won,
and the net impact of acquisitions and divestitures, net sales increased 14.9% from the year ended December
31, 2016 primarily due to higher sales of all-wheel drive systems and transmission components. The segment
Adjusted EBIT margin was 11.9% in the year ended December 31, 2017, compared to 10.3% in the year
ended December 31, 2016. The Adjusted EBIT margin improvement was primarily due to increased sales
and the divestiture of the Remy light vehicle aftermarket business.
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 19.7%, 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
10.3% in the year ended December 31, 2016, compared to 11.9% in the year ended December 31, 2015.
Corporate represents headquarters' expenses not directly attributable to the individual segments and
equity in affiliates' earnings. This net expense was $170.3 million, $155.3 million and $136.4 million for the
years ended December 31, 2017, 2016 and 2015, respectively. The increase of Corporate expenses in 2017
is primarily due to costs associated with talent acquisition and severance expenses, stock-based
compensation, compliance costs and various other corporate initiatives.
Outlook
Our overall outlook for 2018 is positive. Net new business-related sales growth, due to increased
penetration of BorgWarner products around the world, is expected to drive growth above the modest global
industry production growth expected in 2018.
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 America 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.
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, 2017, the Company had $545.3
million of cash, of which $541.2 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. state and local income taxes. As a result of the Tax Cuts
and Jobs Act of 2017("the Act"), the Company has recorded a liability for the U.S. federal and applicable
state income tax liabilities calculated under the provisions of the deemed repatriation of foreign earnings.
As of January 1, 2018, funds repatriated from foreign subsidiaries will generally no longer be taxable for
37
U.S. federal tax purposes. A deferred tax liability has been recorded for all estimated legally distributable
foreign earnings. 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 Act reduces the U.S. federal corporate tax rate from 35 percent to 21 percent, requires companies
to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.
We believe the impact of the Act on liquidity sources as of December 31, 2017 is insignificant.
On June 29, 2017, the Company amended and extended its $1 billion multi-currency revolving credit
facility (which included a feature that allowed the Company's borrowings to be increased to $1.25 billion)
to a $1.2 billion multi-currency revolving credit facility (which includes a feature that allows the Company's
borrowings to be increased to $1.5 billion). The facility provides for borrowings through June 29, 2022. 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, 2017 and expects to remain compliant in future periods. At December
31, 2017 and December 31, 2016, 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, which increased from
$1.0 billion to $1.2 billion effective July 26, 2017. Under this program, the Company may issue notes from
time to time and will use the proceeds for general corporate purposes. At December 31, 2017, the Company
had no outstanding borrowings under this program. As of December 31, 2016, the Company had outstanding
borrowings of $50.8 million under this program, which is classified in the Condensed 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 $1.2 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 08, 2017, April 26, 2017, and July 26, 2017, the Company’s Board of Directors declared
quarterly cash dividends of $0.14 per share of common stock. On November 8, 2017, the Company’s Board
of Directors declared quarterly cash dividends of $0.17 per share of common stock. These dividends were
paid in the 12 months ended December 31, 2017.
The Company's net debt to net capital ratio was 30.0% at December 31, 2017 versus 35.0% at December
31, 2016.
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. In October 2017, Moody’s reaffirmed the Company’s credit rating of “Baa1” and revised the rating
outlook to stable from negative. None of the Company's debt agreements require accelerated repayment
in the event of a downgrade in credit ratings.
38
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,
2017
2016
$
84.6
$
175.9
2,103.7
2,188.3
545.3
1,643.0
3,825.9
2,043.6
2,219.5
443.7
1,775.8
3,301.9
$ 5,468.9
$ 5,077.7
30.0%
35.0%
Balance sheet debt decreased by $31.2 million and cash increased by $101.6 million compared with
December 31, 2016. The $132.8 million decrease in balance sheet debt (net of cash) was primarily due to
cash flow from operations.
Total equity increased by $524.0 million in the year ended December 31, 2017 as follows:
(millions of dollars)
Balance, January 1, 2017
Net earnings
Purchase of treasury stock
Stock-based compensation
Other comprehensive income
Dividends declared to BorgWarner stockholders
Dividends declared to noncontrolling stockholders
Balance, December 31, 2017
Operating Activities
$
3,301.9
483.3
(100.0)
50.6
243.5
(124.1)
(29.3)
$
3,825.9
Net cash provided by operating activities was $1,180.3 million, $1,035.7 million and $867.9 million in
the years ended December 31, 2017, 2016 and 2015, respectively. The increase for the year ended
December 31, 2017 compared with the year ended December 31, 2016 primarily reflected higher net earnings
adjusted for non-cash charges to operations and improved working capital. The increase for the year ended
December 31, 2016 compared with the year ended December 31, 2015 primarily reflected higher net earnings
adjusted for non-cash charges to operations and improved working capital resulting from inventory
management initiatives and product mix change.
39
Investing Activities
Net cash used in investing activities was $752.3 million, $404.2 million and $1,759.1 million in the years
ended December 31, 2017, 2016 and 2015, respectively. The increase in the year ended December 31,
2017 compared with the year ended December 31, 2016 was primarily due to the acquisition of Sevcon and
higher capital expenditures, including tooling outlays, offset by the 2016 sales of Divgi-Warner and the Remy
light vehicle aftermarket business. The decrease in the year ended December 31, 2016 compared with the
year ended December 31, 2015 was primarily driven by lower capital expenditures, including tooling outlays,
the 2016 sales of Divgi-Warner and the Remy light vehicle aftermarket business and the 2015 acquisition
of Remy and BERU Diesel. Year over year capital spending increase of $59.4 million during the year ended
December 31, 2017 is due to higher spending required for new program awards within the Drivetrain segment.
Year over year capital spending decrease of $76.7 million during the year ended December 31, 2016 was
primarily due to lower spending on new buildings and building expansions.
Financing Activities
Net cash used in financing activities was $362.5 million and $733.8 million in the years ended December
31, 2017 and 2016, respectively, and net cash provided by financing activities was $736.6 million in the year
ended December 31, 2015. The decrease in the year ended December 31, 2017 compared with the year
ended December 31, 2016 was primarily due to lower debt repayments and treasury stock purchases. The
decrease in the year ended December 31, 2016 compared with the year ended December 31, 2015 was
primarily driven by lower debt borrowings and higher debt repayments, partially offset by lower treasury
stock purchases.
The Company's significant contractual obligation payments at December 31, 2017 are as follows:
(millions of dollars)
Total
2018
2019-2020
2021-2022
After 2022
Other postretirement employee benefits, excluding
pensions (a)
$ 138.3 $
13.3 $
23.9 $
20.2 $
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
50.2
2,200.1
904.2
78.3
106.5
333.5
3.5
84.6
82.9
23.0
106.5
333.5
9.1
391.4
145.2
28.1
—
—
9.8
603.1
114.2
15.4
—
—
80.9
27.8
1,121.0
561.9
11.8
—
—
$ 3,811.1 $ 647.3 $ 597.7 $ 762.7 $ 1,803.4
________________
(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 2022” column is for unfunded plans and
includes estimated payments through 2027. 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.
40
Asbestos-related Liability
During 2017 and 2016, the Company had paid indemnity and related defense costs totaling $51.7 million
and $45.3 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, vehicles and certain office equipment. The total expected future cash outlays
for non-cancelable operating lease obligations at December 31, 2017 is $78.3 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, 2017, all
legal funding requirements had been met. The Company contributed $18.3 million, $19.7 million and $19.3
million to its defined benefit pension plans in the years ended December 31, 2017, 2016 and 2015,
respectively. The Company expects to contribute a total of $15 million to $25 million into its defined benefit
pension plans during 2018. Of the $15 million to $25 million in projected 2018 contributions, $3.5 million
are contractually obligated, while any remaining payments would be discretionary.
The funded status of all pension plans was a net unfunded position of $188.6 million and $187.4 million
at December 31, 2017 and 2016, respectively. Of these amounts, $75.7 million and $77.5 million at December
31, 2017 and 2016, 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 $107.0 million and
$119.9 million at December 31, 2017 and 2016, 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
41
Company's environmental and product 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.
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.
Refer to "Note 14 - Contingencies," to the Consolidated Financial Statements in Item 8 of this report for
further details and information respecting the Company’s environmental liability.
Asbestos-related Liability
Like many other industrial companies that have historically operated in the United States, the Company,
or parties the Company is obligated to indemnify, continues to be named as one of many defendants in
asbestos-related personal injury actions. The Company has an estimated liability of $828.2 million as of
December 31, 2017 for asbestos-related claims and associated costs through 2067, which is the last date
by which the Company currently estimates it may have resolved all asbestos-related claims. The Company
additionally estimates that, as of December 31, 2017, it has aggregate insurance coverage available in the
amount of $386.4 million to satisfy asbestos-related claims and associated defense costs.
Refer to "Note 14 - Contingencies," to the Consolidated Financial Statements in Item 8 of this report for
further details and information respecting the Company’s asbestos-related liability and corresponding
insurance asset.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with accounting principles generally
accepted in the United States (“GAAP”). In preparing these financial statements, management has made
its best estimates and judgments of certain amounts included in the financial statements, giving due
consideration to materiality. Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and results of operations. Some of these policies require management's
most difficult, subjective or complex judgments in the preparation of the financial statements and
accompanying notes. Management makes estimates and assumptions about the effect of matters that are
inherently uncertain, relating to the reporting of assets, liabilities, revenues, expenses and the disclosure
of contingent assets and liabilities. Our most critical accounting policies are discussed below.
Use of estimates The preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial
42
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.
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. 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.
Assets and liabilities held for sale The Company classifies assets and liabilities (disposal groups) to
be sold as held for sale in the period in which all of the following criteria are met: management, having the
authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available
for immediate sale in its present condition subject only to terms that are usual and customary for sales of
such disposal groups; an active program to locate a buyer and other actions required to complete the plan
to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the
disposal group is expected to qualify for recognition as a completed sale within one year, except if events
or circumstances beyond the Company's control extend the period of time required to sell the disposal group
43
beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in
relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a disposal group that is classified as held for sale at the lower of its
carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized
in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of
a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less any
costs to sell, each reporting period it remains classified as held for sale and reports any subsequent changes
as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not
exceed the carrying value of the disposal group at the time it was initially classified as held for sale.
Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company
reports the assets and liabilities of the disposal group, if material, in the line items assets held for sale and
liabilities held for sale in the Consolidated Balance Sheet.
Refer to Note 19, "Assets and Liabilities Held for Sale," to the Consolidated Financial Statements in
Item 8 of this report for more information.
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, restructuring 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 2017, the Company performed an analysis on each reporting unit. For the
reporting unit with restructuring 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, 2017 goodwill quantitative, "step one," impairment review are as
follows:
44
• Discount rate: The Company used a 10.4% 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.
• Revenue growth rate:The Company used a global automotive market industry growth rate forecast
adjusted to estimate its own market participation for product lines.
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
2017 indicated the Company's goodwill assigned to the reporting unit with restructuring activity that was
quantitatively assessed was not impaired and contained a fair value that exceeded the reporting unit's
carrying value by more than 20%. Additionally, for the reporting unit quantitatively assessed, sensitivity
analyses were completed indicating that a one percent increase in the discount rate, a one percent decrease
in the operating margin, or a one percent decrease in the revenue growth rate assumptions would not result
in the carrying value exceeding the fair value.
Refer to Note 6, "Goodwill and Other Intangibles," to the Consolidated Financial Statements in Item 8
of this report for more information regarding goodwill.
Product warranties The Company provides warranties on some, but not all, of its products. The warranty
terms are typically from one to three years. Provisions for estimated expenses related to product warranty
are made at the time products are sold. These estimates are established using historical information about
the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and
industry developments and recoveries from third parties. Management actively studies trends of warranty
claims and takes action to improve product quality and minimize warranty claims. Management believes
that the warranty accrual is appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the accrual. The increase in 2016 in our warranty provision as a
percentage of net sales was primarily related to the Company's fourth quarter 2015 acquisition of Remy:
(millions of dollars)
Net sales
Warranty provision
Warranty provision as a percentage of net sales
Year Ended December 31,
2017
2016
2015
$ 9,799.3
$ 9,071.0
$ 8,023.2
$
73.1
$
62.2
$
28.6
0.7%
0.7%
0.4%
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
45
December 31,
2017
2016
2015
$
$
(24.5) $
24.5 $
(22.7) $
22.7 $
(20.1)
20.1
At December 31, 2017, the total accrued warranty liability was $111.5 million. The accrual is represented
as $69.0 million in current liabilities and $42.5 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.
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 $8.3 million at December 31, 2017.
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
46
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, 2017 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, 2017, the Company used long-term rates of return on plan
assets ranging from 1.5% to 6.00% outside of the U.S. and 6.01% in the U.S.
Actual returns on U.S. pension assets were 11.5%, 5.9% and 0.1% for the years ended December 31,
2017, 2016 and 2015, respectively, compared to the expected rate of return assumption of 6.01% for
the same years ended.
Actual returns on U.K. pension assets were 9.7%, 22.0% and 1.0% for the years ended December 31,
2017, 2016 and 2015, respectively, compared to the expected rate of return assumption of 6.00% for
the same years ended.
Actual returns on German pension assets were 7.0%, 8.6% and 5.1% for the years ended December
31, 2017, 2016 and 2015, respectively, compared to the expected rate of return assumption of 5.9% for
the same years ended.
• Discount rate: The discount rate is used to calculate pension and other postretirement employee benefit
obligations (“OPEB”). In determining the discount rate, the Company utilizes a full yield approach in the
estimation of service and interest 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
used discount rates ranging from 0.66% to 9.50% to determine its pension and other benefit obligations
as of December 31, 2017, including weighted average discount rates of 3.55% in the U.S., 2.25% outside
of the U.S., and 3.32% 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
47
health care plans as of December 31, 2017, the Company used health care cost trend rates of 6.75%,
declining to an ultimate trend rate of 5% by the year 2025.
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
OPEB 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 2018 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
Impact on U.S. 2018
pre-tax pension
(expense)/income
Impact on Non-U.S.
2018 pre-tax pension
(expense)/income
$
$
$
$
— * $
— * $
(2.3)
2.3
$
$
(5.9)
5.9
(4.8)
4.8
________________
* A one percentage point increase or decrease in the discount rate would have a negligible impact on the Company’s U.S. 2018
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 2018 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 2018 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
$
$
7.1 $
0.2 $
(6.3)
(0.2)
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.
Restructuring Restructuring costs may occur when the Company takes action to exit or significantly
curtail a part of its operations or implements a reorganization that affects the nature and focus of operations.
A restructuring charge can consist of severance costs associated with reductions to the workforce, costs to
terminate an operating lease or contract, professional fees and other costs incurred related to the
implementation of restructuring activities.
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
48
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 740. 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, 2017, the Company has recorded a liability for its
best estimate of the more-likely-than-not loss on certain of its tax positions, which is included in other non-
current liabilities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by
the taxing authorities may differ materially from the amounts accrued for each year.
The Tax Cuts and Jobs Act (“the Act”) that was signed into law in December 2017 constitutes a major
change to the US tax system. The estimated impact of the law is based on management’s current
interpretations of the Act and related assumptions. Our final tax liability may be materially different from
current estimates based on regulatory developments and our further analysis of the impacts of the Act. In
future periods, our effective tax rate could be subject to additional uncertainty as a result of regulatory
developments related to Act.
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
Refer to Note 1, "Summary of Significant Accounting Policies," to the Consolidated Financial Statements
in Item 8 of this report for more information regarding new applicable accounting pronouncements.
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.
49
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, 2017, the amount
of debt with fixed interest rates was 99.7% 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, $0.1 million and $2.1
million in the years ended December 31, 2017, 2016 and 2015, 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 $59.2 million
and $82.1 million as of December 31, 2017 and 2016, 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 following 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 represent less than 2% of the Company's net sales in 2017. 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, 2017 and
2016, the Company recorded a deferred gain related to foreign currency derivatives of $1.6 million and $6.7
million, respectively, and deferred loss related to foreign currency derivatives of $3.9 million and $1.1 million,
respectively.
The foreign currency translation adjustment gain of $236.5 million for the year ended December 31,
2017, and foreign currency translation adjustment loss of $109.1 million and $260.5 million for the years
ended December 31, 2016 and 2015, 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 2017 foreign
currency translation adjustment gain was primarily due to the impact of a weakening U.S. dollar against the
Euro, which decreased approximately 14% and increased other comprehensive income by approximately
$265.9 million since December 31, 2016. The 2016 foreign currency translation adjustment loss was primarily
due to the impact of a strengthening 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.
50
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, 2017, the
Company had no forward or option commodity contracts outstanding, and as of December 31, 2016, the
Company had forward and option commodity contracts with a total notional value of $1.0 million outstanding.
Disclosure Regarding Forward-Looking Statements
The matters discussed in this Item 7 include forward looking statements. See "Forward Looking
Statements" at the beginning of this Annual Report on Form 10-K.
51
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
53
55
56
57
58
59
60
52
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of BorgWarner Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of BorgWarner Inc. and its subsidiaries as of
December 31, 2017 and December 31, 2016, and the related consolidated statements of operations, comprehensive
income, equity, and cash flows for each of the three years in the period ended December 31, 2017, including the related
notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2017 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, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated 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 the Company’s consolidated financial statements and on the Company's
internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting
was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. 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.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Sevcon,
Inc. from its assessment of internal control over financial reporting as of December 31, 2017 because it was acquired
by the Company in a purchase business combination during 2017. We have also excluded Sevcon, Inc. from our audit
of internal control over financial reporting. Sevcon, Inc. is a wholly-owned subsidiary whose total assets and total
revenues excluded from management’s assessment and our audit of internal control over financial reporting represent
0.6% and 0.2%, respectively, of the related consolidated financial statement amounts as of and for the year ended
December 31, 2017.
53
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 8, 2018
We have served as the Company’s auditor since 2008.
54
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
Assets held for sale
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
Liabilities held for sale
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: (2017 -
246,387,057; 2016 - 246,387,057); outstanding shares: (2017- 210,812,793; 2016 -
212,262,965)
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,
2017
2016
$
545.3
$
443.7
2,018.9
1,689.3
766.3
145.4
67.3
641.2
137.4
—
3,543.2
2,911.6
2,863.8
547.4
1,881.8
492.7
458.7
2,501.8
502.2
1,702.2
463.5
753.4
$
9,787.6
$
8,834.7
$
84.6
$
175.9
2,270.3
1,847.3
40.8
29.5
68.6
—
2,425.2
2,091.8
2,103.7
2,043.6
775.7
301.6
355.5
827.6
294.1
275.7
1,432.8
1,397.4
—
2.5
—
—
2.5
—
1,118.7
4,531.0
(490.0)
1,104.3
4,215.2
(722.1)
Common stock held in treasury, at cost: (2017 - 35,574,264 shares; 2016 - 34,124,092 shares)
(1,445.4)
(1,381.6)
Total BorgWarner Inc. stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
3,716.8
109.1
3,825.9
3,218.3
83.6
3,301.9
$
9,787.6
$
8,834.7
See Accompanying Notes to Consolidated Financial Statements.
55
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
Year Ended December 31,
2016
$ 9,071.0
7,137.9
1,933.1
2015
$ 8,023.2
6,320.1
1,703.1
2017
$ 9,799.3
7,679.2
2,120.1
898.5
144.5
1,077.1
(51.2)
(5.8)
70.5
1,063.6
580.3
483.3
43.4
439.9
2.09
2.08
$
$
$
$
$
$
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
210,429
211,548
214,374
215,328
224,414
225,648
Dividends declared per share
$
0.59
$
0.53
$
0.52
See Accompanying Notes to Consolidated Financial Statements.
56
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of dollars)
Net earnings attributable to BorgWarner Inc.
Other comprehensive income (loss)
Foreign currency translation adjustments
Hedge instruments*
Defined benefit postretirement plans*
Other*
Year Ended December 31,
2017
2016
2015
$
439.9
$
118.5
$
609.7
236.5
(6.3)
0.5
1.4
(109.1)
(260.5)
7.0
(8.2)
(1.6)
(3.7)
37.4
0.2
Total other comprehensive income (loss) attributable to BorgWarner Inc.
232.1
(111.9)
(226.6)
Comprehensive income attributable to BorgWarner Inc.*
672.0
6.6
383.1
Net earnings attributable to noncontrolling interest, net of tax*
Other comprehensive income (loss) attributable to the noncontrolling interest*
Comprehensive income
____________________________________
* Net of income taxes.
43.4
11.4
41.7
(5.1)
36.7
(5.1)
$
726.8
$
43.2
$
414.7
See Accompanying Notes to Consolidated Financial Statements.
57
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,
2016
2015
2017
$
483.3
$
160.2
$
646.4
Non-cash charges (credits) to operations:
Asset impairment and loss on divestiture
Asbestos-related charge
Gain on previously held equity interest
Pension settlement loss
Depreciation and amortization
Stock-based compensation expense
Restructuring expense, net of cash paid
Deferred income tax provision (benefit)
Tax reform adjustments to provision for income taxes
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
(Payments for) proceeds from settlement of net investment hedges
Payments for venture capital investment
Net cash used in investing activities
FINANCING
Net decrease in notes payable
Additions to long-term debt, net of debt issuance costs
Repayments of long-term debt, including current portion
Payments for debt issuance cost
Proceeds from interest rate swap termination
Payments for purchase of treasury stock
(Payments for) proceeds from 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 increase (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
71.0
—
—
—
407.8
52.7
27.0
41.8
273.5
(32.0)
1,325.1
(167.9)
(84.5)
0.5
232.8
(42.8)
(82.9)
1,180.3
(560.0)
—
4.5
(185.7)
(8.5)
(2.6)
(752.3)
(88.3)
3.0
(19.3)
(2.4)
—
(100.0)
(2.1)
(124.1)
(29.3)
(362.5)
36.1
101.6
443.7
545.3
92.0
279.8
18.0
$
$
$
$
127.1
703.6
—
—
391.4
43.6
12.0
(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
443.7
100.3
300.5
$
$
$
— $
— $
— $
—
—
(10.8)
25.7
320.2
40.2
36.3
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
577.7
70.2
183.8
31.1
10.9
$
$
$
$
$
See Accompanying Notes to Consolidated Financial Statements.
58
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, 2015
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) $
Dividends declared
Stock incentive plans
Net issuance for executive stock plan
Net issuance of restricted stock
Purchase of treasury stock
Net earnings
Other comprehensive income
—
—
—
—
—
—
—
—
473,419
73,935
402,184
(2,399,710)
—
—
—
—
—
—
—
—
—
—
(10.6)
21.0
4.0
—
—
—
—
18.9
2.7
14.6
(100.0)
—
—
(124.1)
—
—
—
—
439.9
—
—
—
—
—
—
—
232.1
Balance, December 31, 2017
246,387,057
(35,574,264) $
2.5
$
1,118.7
$
(1,445.4) $
4,531.0
$
(490.0) $
74.7
(28.5)
—
—
—
—
36.7
(5.1)
77.8
(26.0)
—
—
—
—
(4.8)
41.7
(5.1)
83.6
(29.3)
—
—
—
—
43.4
11.4
109.1
See Accompanying Notes to Consolidated Financial Statements.
59
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 Certain prior period amounts have been reclassified to conform to current period
presentation. During 2017, the Company identified a prior period error related to the exclusion of the net
earnings attributable to the non-controlling interest in the 2016 and 2015 Consolidated Statements of
Comprehensive Income. The inclusion of these amounts increased total Comprehensive Income by $41.7
million and $36.7 million for the years ended December 31, 2016 and 2015, respectively.
The Company concluded that the errors were not material to the financial statements of any prior annual
or interim period and therefore, amendments of previously filed reports are not required. In accordance with
ASC Topic 250, "Accounting Changes and Error Corrections," we have corrected the error for all prior periods
presented by revising the consolidated financial statements appearing herein. Quarterly periods not
presented herein will be revised, as applicable, in future filings. The revision had no impact on the
Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Cash
Flows or the Consolidated Statements of Equity.
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.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Receivables, net Accounts receivable are stated at cost less an allowance for bad debts. An allowance
for doubtful accounts is recorded when it is probable amounts will not be collected based on specific
identification of customer circumstances or age of the receivable.
See the Balance Sheet Information footnote to the Consolidated Financial Statements for more
information on receivables, net.
Inventories, net Cost of certain U.S. inventories is determined using the last-in, first-out (“LIFO”) method
at the lower of cost or market, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or
average-cost methods at the lower of cost and net realizable value. Inventory held by U.S. operations using
the LIFO method was $147.4 million and $131.4 million at December 31, 2017 and 2016, respectively. Such
inventories, if valued at current cost instead of LIFO, would have been greater by $13.1 million and $15.2
million at December 31, 2017 and 2016, 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.
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
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. 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.
Assets and liabilities held for sale The Company classifies assets and liabilities (disposal groups) to
be sold as held for sale in the period in which all of the following criteria are met: management, having the
authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available
for immediate sale in its present condition subject only to terms that are usual and customary for sales of
such disposal groups; an active program to locate a buyer and other actions required to complete the plan
to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the
disposal group is expected to qualify for recognition as a completed sale within one year, except if events
or circumstances beyond the Company's control extend the period of time required to sell the disposal group
beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in
relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a disposal group that is classified as held for sale at the lower of its
carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized
in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of
a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less any
costs to sell, each reporting period it remains classified as held for sale and reports any subsequent changes
as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not
exceed the carrying value of the disposal group at the time it was initially classified as held for sale.
Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company
reports the assets and liabilities of the disposal group, if material, in the line items assets held for sale and
liabilities held for sale in the Consolidated Balance Sheets. Additionally, depreciation is not recorded during
the period in which the long-lived assets, included in the disposal group, are classified as held for sale.
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, restructuring 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.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
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
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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.
Restructuring Restructuring costs may occur when the Company takes action to exit or significantly
curtail a part of its operations or implements a reorganization that affects the nature and focus of operations.
A restructuring charge can consist of severance costs associated with reductions to the workforce, costs to
terminate an operating lease or contract, professional fees and other costs incurred related to the
implementation of restructuring activities.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See the Restructuring footnote to the Consolidated Financial Statements for more information regarding
the Company's restructuring activities.
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 August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") No. 2017-12, "Derivatives and Hedging (Topic 815)." It expands and refines hedge
accounting for both nonfinancial and financial risk components and reduces complexity in fair value hedges
of interest rate risk. It eliminates the requirement to separately measure and report hedge ineffectiveness
and generally requires the entire change in the fair value of a hedging instrument to be presented in the
same income statement line as the hedged item. It also eases certain documentation and assessment
requirements and modifies the accounting for components excluded from assessment of hedge
effectiveness. The guidance is effective prospectively for interim and annual periods beginning after
December 15, 2018. Early adoption is permitted. The Company expects to early adopt this guidance on Q1
2018 and does not expect the adoption to have a material impact on its Consolidated Financial Statements.
In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting." Under this
guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification
of the share-based payment award changes as a result of the change in terms or conditions. This guidance
is effective prospectively for interim and annual periods beginning after December 15, 2017. Early adoption
is permitted. The Company does not expect this guidance to have any impact on its Consolidated Financial
Statements.
In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost." It requires disaggregating the service cost component
from the other components of net benefit cost, provides explicit guidance on how to present the service cost
component and the other components of net benefit cost in the income statement and allows only the service
cost component of net benefit cost to be eligible for capitalization when applicable. This guidance is effective
for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company
does not expect this guidance to have a material impact on its Consolidated Financial Statements.
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 established that an entity should recognize an impairment charge for the
amount by which the carrying amount of the reporting unit exceeds the reporting unit's fair value, not to
exceed the carrying amount of the goodwill. This guidance is effective for annual and any interim impairment
tests in fiscal years beginning after December 15, 2019. The Company adopted this guidance in the fourth
quarter of 2017 in conjunction with the annual goodwill impairment test and there is no 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.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Upon
adopting this guidance in 2017, the Company recorded a tax benefit of $0.8 million within provision for
income tax related to the excess tax benefit on share-based awards and reflected the excess tax benefit in
operating activities rather than financing activities in the Consolidated Statements of Cash Flows. The
Company elected to apply this change in presentation prospectively, so prior periods have not been adjusted.
The Company also excluded the excess tax benefits from the assumed proceeds available to repurchase
shares in the computation of diluted earnings per share for the year ended December 31, 2017. The impact
of this change was de minimis. Additionally, the Company elected not to change its policy on accounting for
forfeitures and continued to estimate the total number of awards for which the requisite service period will
not be rendered.
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 developing policies and processes to meet the requirements of this
new guidance. The Company is in the process of analyzing its global lease obligations in order to evaluate
the impact this guidance will have on its Consolidated Financial Statements. See the Leases and
Commitments footnote to the Consolidated Financial Statements for further information on the Company's
leases.
In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets
and Financial Liabilities." It requires equity investments (except those accounted for under the equity method
of accounting) to be measured at fair value with changes in fair value recognized in net income. However,
an entity may choose to measure equity investments that do not have readily determinable fair values at
cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly
transactions for the identical or a similar investment of the same issuer. It also requires separate presentation
of financial assets and financial liabilities by measurement category and form of financial asset on the
balance sheet or the accompanying notes to the financial statements. This guidance is effective for interim
and fiscal years beginning after December 15, 2017. The Company expects to elect the measurement
alternative for equity investments without readily determinable fair values and does not expect this guidance
to have a material impact on its 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
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
guidance. The new guidance will also require new disclosures about the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for
interim and annual reporting periods beginning after December 15, 2017. The Company will adopt this
guidance effective January 1, 2018 utilizing the Modified Retrospective approach, by recognizing the
cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained
earnings.
Throughout 2017 and 2016, the Company monitored FASB activity related to the new standard, and
worked with non-authoritative industry groups to assess relevant issues and the implementation of the
new standard.
The relevant issues include (1) customer contracts and arrangements related to our highly customized
products with no alternative use and for which the Company has an enforceable right to payment which will
result in the recognition of revenue over time as parts are produced rather than upon shipment or delivery
of the parts; and (2) pricing provisions contained in a limited number of our contracts and customer
arrangements. The Company does not expect any changes to how it accounts for reimbursable pre-
production costs, currently accounted for as a cost reduction. As the majority of the Company’s revenues
are not impacted by the new guidance, the adoption of this guidance is not expected to have a material
impact on the Company’s consolidated financial position, results of operations, equity or cash flows.
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,
2017
2016
2015
$
$
473.1 $
(65.6)
407.5 $
417.8 $
(74.6)
343.2 $
386.2
(78.8)
307.4
Net R&D expenditures as a percentage of net sales were 4.2%, 3.8% and 3.8% for the years ended
December 31, 2017, 2016 and 2015, 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.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3
OTHER EXPENSE, NET
Items included in other expense, net consist of:
(millions of dollars)
Asset impairment and loss on divestiture
Restructuring expense
Merger and acquisition expense
Lease termination settlement
Asbestos-related charge
Intangible asset impairment
Pension settlement loss
Gain on previously held equity interest
Other income
Other expense, net
Year Ended December 31,
2017
2016
2015
71.0 $
58.5
10.0
5.3
—
—
—
—
(0.3)
144.5 $
127.1 $
26.9
23.7
—
703.6
12.6
—
—
(4.2)
889.7 $
—
65.7
21.8
—
—
—
25.7
(10.8)
(1.0)
101.4
$
$
In the third quarter of 2017, the Company started exploring strategic options for the non-core emission
product lines. In the fourth quarter of 2017, the Company launched an active program to locate a buyer for
the non-core pipes and thermostat product lines and initiated all other actions required to complete the plan
to sell the non-core product lines. The Company determined that the assets and liabilities of the pipes and
thermostat product lines met the held for sale criteria as of December 31, 2017. As a result, the Company
recorded an asset impairment expense of $71.0 million in the fourth quarter of 2017 to adjust the net book
value of this business to fair value less costs to sell. See the Assets and Liabilities Held for Sale footnote
to the Consolidated Financial Statements for further details.
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 a 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.
During the years ended December 31, 2017, 2016 and 2015, the Company recorded restructuring
expense of $58.5 million, $26.9 million and $65.7 million, respectively, primarily related to Drivetrain and
Engine segment actions designed to improve future profitability and competitiveness. The restructuring
expense in the year ended December 31, 2015 also included amounts 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. See the Restructuring footnote to the Consolidated Financial
Statements for further discussion of these expenses.
During the year ended December 31, 2017, the Company recorded $10.0 million of merger and
acquisition expense primarily related to the acquisition of Sevcon, Inc. ("Sevcon") completed on September
27, 2017. See the Recent Transactions 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,
respectively. See the Recent Transactions footnote to the Consolidated Financial Statements for further
discussion.
During the first quarter of 2017, the Company recorded a loss of $5.3 million related to the termination
of a long term property lease for a manufacturing facility located in Europe.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, was $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 2016, the Company recorded an intangible asset impairment loss of $12.6
million related to Engine segment Etatech’s ECCOS intellectual technology. The ECCOS intellectual
technology impairment was 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.
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,
2017
2016
2015
203.0 $
860.6
1,063.6 $
(724.7) $
915.2
190.5 $
125.6
801.2
926.8
36.4 $
37.4 $
4.6
247.4
288.4
323.7
2.1
(33.9)
291.9
580.3 $
6.1
251.7
295.2
(239.8)
(13.2)
(11.9)
(264.9)
30.3 $
32.5
(4.3)
228.3
256.5
31.8
2.6
(10.5)
23.9
280.4
$
$
$
$
The provision for income taxes resulted in an effective tax rate of 54.6%, 15.9% and 30.3% for the years
ended December 31, 2017, 2016 and 2015, respectively. An analysis of the differences between the effective
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
tax rate and the U.S. statutory rate for the years ended December 31, 2017, 2016 and 2015 is presented
below.
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S.
federal corporate tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition
tax on earnings of certain foreign subsidiaries that were previously tax deferred. As of December 31, 2017,
in accordance with guidance provided by Staff Accounting Bulletin No. 118 (SAB 118), we have not completed
our accounting for the tax effects of enactment of the Act. In certain cases, as described below, we have
made a provisional estimate of significant items including: (i) the effects on our existing deferred tax balances,
(ii) the one-time transition tax, and (iii) our indefinite reinvestment assertion, including the measurement of
deferred taxes on foreign unremitted earnings. These provisional items require additional information and
analysis to complete the accounting. Other items for which the accounting for the tax effects of the Act is
complete are not significant. Items for which the accounting for the tax effects of the Act cannot be completed
is not applicable.
The Act is complex and its impact may materially differ from these estimates, due to, among other things,
changes in the Company’s assumptions, implementation guidance that may be issued from the Internal
Revenue Service and related interpretations and clarifications of tax law relevant for the completion of the
Company’s 2017 tax return filings. The Company expects to complete its assessment of these items during
2018, and any adjustments to the provisional amounts initially recorded, will be included as an adjustment
to income tax expense or benefit in the period the amounts are determined, in accordance with SAB 118.
We recognized income tax expense of $273.5 million in the year ended December 31, 2017 for significant
items we could reasonably estimate associated with the Act. This expense reflects (i) the revaluation of our
net deferred tax assets based on a U.S. federal tax rate of 21 percent, (ii) a one-time transition tax on our
unremitted foreign earnings and profits, net of foreign tax credits, and (iii) our indefinite reinvestment
assertion, including the measurement of deferred taxes on foreign unremitted earnings.
In light of the treatment of foreign earnings under the Act, we have reconsidered our indefinite
reinvestment position and provisionally concluded we will no longer assert indefinite reinvestment with
respect to our foreign unremitted earnings. Therefore, the Company has accrued additional provisional
deferred tax liabilities of $94.1 million with respect to the expected future remittance of foreign earnings.
The U.S. income tax payable of $25.1 million includes an estimated $23.6 million of transition tax, net
of foreign tax credits associated with the required inclusion of unremitted foreign earnings and amounts
carried forward from prior years. The estimated transition tax is due and payable annually over an eight
year period beginning in the first quarter of 2018.
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
Revaluation of U.S. deferred taxes
Other
Year Ended December 31,
2017
2016
2015
$
372.3 $
66.7 $
324.4
2.3
226.0
(17.9)
(100.2)
(31.0)
24.9
(24.2)
8.0
12.2
10.9
(1.9)
4.0
0.7
8.1
3.3
63.7
19.1
(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
—
(2.9)
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
—
(15.0)
280.4
Provision for income taxes, as reported
$
580.3 $
30.3 $
The 2017 effective tax rate increased 38.7 percentage to 54.6%. The change in the effective tax rate
for 2017, as compared to 2016, was primarily due to the Act. In addition to the transition tax, which results
in a tax charge of $104.7 million, the Act also includes a reduction in the US income tax rate from 35% to
21%, as of January 1, 2018. This change in income tax rate requires a revaluation of our US deferred tax
assets and liabilities at December 31, 2017, resulting in a tax charge of $ $63.7 million. The Company also
included a tax charge of $94.1 million for additional provisional deferred tax liabilities with respect to the
expected future remittance of foreign earnings.
The Company's provision for income taxes for the year ended December 31, 2017, includes reduction
of income tax expenses of $10.1 million, $1.0 million, $18.2 million and $3.8 million related to the restructuring
expense, merger and acquisition expense, asset impairment expense and other one-time adjustments,
respectively, discussed in the Other Expense, Net footnote.
The Company's provision for income taxes for the year ended December 31, 2016, includes reduction
of income tax expenses 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 reduction
of income tax expenses 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.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A roll forward of the Company's total gross unrecognized tax benefits for the years ended December
31, 2017 and 2016, respectively, is presented below. Of the total $85.1 million of unrecognized tax benefits
as of December 31, 2017, approximately $62.4 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.
(millions of dollars)
Balance, January 1
Additions based on tax positions related to current year
Additions/(reductions) for tax positions of prior years
Reductions for closure of tax audits and settlements
Reductions for lapse in statute of limitations
Translation adjustment
Balance, December 31
2017
2016
$
91.1 $
127.3
16.8
(2.4)
(19.9)
(0.8)
7.2
$
92.0 $
16.1
1.6
(45.7)
(5.0)
(3.2)
91.1
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 2017 and 2016 is $6.4 million and $3.2 million,
respectively. The Company has an accrual of approximately $22.6 million and $16.0 million for the payment
of interest and penalties at December 31, 2017 and 2016, respectively. The Company estimates that
payments of approximately $0.8 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
2013 and prior
2011 and prior
2013 and prior
2011 and prior
2008 and prior
Tax jurisdiction
Japan
Mexico
Poland
South Korea
Years no longer subject to audit
2015 and prior
2011 and prior
2011 and prior
2011 and prior
In the U.S., certain tax attributes created in years prior to 2013 were subsequently utilized. Even though
the U.S. federal statute of limitations has expired for years prior to 2013, 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, 2017 and 2016 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
Unremitted foreign earnings
Other
Total deferred tax liabilities
Net deferred taxes
December 31,
2017
2016
$
— $
26.4
54.5
76.4
74.6
19.1
167.1
146.6
564.7 $
(95.9)
468.8 $
(193.9)
(104.6)
(98.5)
(12.0)
(409.0) $
59.8 $
$
$
$
$
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)
(38.5)
(16.5)
(453.4)
369.8
At December 31, 2017, certain non-U.S. subsidiaries have net operating loss carryforwards totaling
$168.9 million available to offset future taxable income. Of the total $168.9 million, $110.0 million expire at
various dates from 2018 through 2036 and the remaining $58.9 million have no expiration date. The Company
has a valuation allowance recorded against $88.0 million of the $168.9 million of non-U.S. net operating
loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling $791.1
million which are partially offset by a valuation allowance of $779.2 million. The state net operating loss
carryforwards expire at various dates from 2018 to 2037. Certain U.S. subsidiaries also have state tax credit
carryforwards of $19.7 million which are fully offset by a valuation allowance of $19.7 million. Certain non-
U.S. subsidiaries located in China had tax exemptions or tax holidays, which reduced local tax expense
approximately $31.0 million and $25.5 million in 2017 and 2016, respectively. The U.S. foreign tax credit
carryforwards of $139.5 million from 2016 were fully utilized in 2017 as a result of the transition tax.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 5 BALANCE SHEET INFORMATION
Detailed balance sheet data is as follows:
(millions of dollars)
Receivables, net:
Customers
Indirect taxes
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
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,
2017
2016
1,735.7 $
152.1
136.8
2,024.6
(5.7)
2,018.9 $
1,448.3
99.1
144.8
1,692.2
(2.9)
1,689.3
469.7 $
126.7
183.0
779.4
(13.1)
766.3 $
81.9 $
5.3
58.2
145.4 $
378.6
102.9
174.9
656.4
(15.2)
641.2
77.5
8.0
51.9
137.4
115.7 $
783.5
2,734.4
1.5
410.5
4,045.6
(1,391.7)
2,653.9
209.9
2,863.8 $
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
239.6 $
307.8
547.4 $
121.2 $
127.7
209.8
458.7 $
218.9
283.3
502.2
424.0
178.7
150.7
753.4
$
$
$
$
$
$
$
$
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(millions of dollars)
Accounts payable and accrued expenses:
Trade payables
Payroll and employee related
Indirect taxes
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,
2017
2016
1,545.6 $
239.7
111.0
69.0
75.7
52.5
22.9
17.2
17.7
0.8
10.1
5.8
5.0
97.3
2,270.3 $
61.4 $
52.4
42.5
199.2
355.5 $
1,259.4
206.4
63.9
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
$
$
$
$
2017
2016
2015
$
(2.9) $
(2.7)
0.1
—
(0.2)
(1.9) $
(3.2)
0.2
2.0
—
(2.3)
(0.5)
0.7
—
0.2
$
(5.7) $
(2.9) $
(1.9)
As of December 31, 2017 and December 31, 2016, accounts payable of $106.5 million and $85.3 million,
respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the years ended December 31, 2017, 2016 and 2015 were $19.7 million,
$14.1 million and $16.5 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 $20.2 million, $34.3 million and $18.0 million in calendar years ended
December 31, 2017, 2016 and 2015, 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, 2017, 2016 and
2015 (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,
2017
2016
$
104.6 $
289.2
231.9
154.9
68.1
298.1
98.6
256.3
194.5
122.6
48.2
280.0
Year Ended November 30,
2017
2016
2015
$
669.6 $
601.8 $
149.2
85.2
134.1
71.7
519.0
118.6
73.3
NSK-Warner had no debt outstanding as of November 30, 2017 and 2016. Purchases by the Company
from NSK-Warner were $12.3 million, $23.9 million and $23.0 million for the years ended December 31,
2017, 2016 and 2015, 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, restructuring
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 2017, the Company performed an analysis on each reporting unit. For the
reporting unit with restructuring 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.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2017 goodwill quantitative, "step one," impairment review are as
follows:
• Discount rate: The Company used a 10.4% 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.
• Revenue growth rate: The Company used a global automotive market industry growth rate forecast
adjusted to estimate its own market participation for product lines.
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
2017 indicated the Company's goodwill assigned to the reporting unit with restructuring activity that was
quantitatively assessed was not impaired and contained a fair value that exceeded the reporting unit's
carrying value by more than 20%. Additionally, for the reporting unit quantitatively assessed, sensitivity
analyses were completed indicating that a one percent increase in the discount rate, a one percent decrease
in the operating margin, or a one percent decrease in the revenue growth rate assumptions would not result
in the carrying value exceeding the fair value.
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 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*
Held for sale
Divestitures**
Translation adjustment and other
Ending balance, December 31
2017
2016
Engine
Drivetrain
Engine
Drivetrain
$
$
1,324.0 $
880.2 $
1,338.2 $
921.5
(501.8)
(0.2)
(501.8)
(0.2)
822.2 $
880.0 $
836.4 $
921.3
—
(7.3)
—
42.9
125.8
—
—
18.2
—
—
—
(14.2)
(12.1)
—
(24.2)
(5.0)
$
857.8 $
1,024.0 $
822.2 $
880.0
________________
* Acquisitions during 2017 relate to the Company's 2017 purchase of Sevcon. Acquisitions during 2016 were related to the
Company's fair value adjustments for the 2015 Remy acquisition, based on new information obtained during the measurement
period.
** 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:
(millions of dollars)
Amortized intangible assets:
Patented and unpatented
technology
Customer relationships
Miscellaneous
Total amortized intangible assets
In-process R&D
Unamortized trade names
December 31, 2017
December 31, 2016
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
$
157.7 $
507.6
4.9
670.2
3.8
55.8
52.9 $
104.8 $
108.1 $
41.5 $
181.0
3.2
237.1
—
—
326.6
1.7
433.1
3.8
55.8
481.4
5.3
594.8
3.8
51.0
141.2
3.4
186.1
—
—
66.6
340.2
1.9
408.7
3.8
51.0
Total other intangible assets
$
729.8 $
237.1 $
492.7 $
649.6 $
186.1 $
463.5
Amortization of other intangible assets was $40.0 million, $40.4 million and $19.2 million for the years
ended December 31, 2017, 2016 and 2015, respectively. The estimated useful lives of the Company's
amortized intangible assets range from three to 20 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: $44.3 million in 2018, $43.3
million in 2019, $42.5 million in 2020, $42.2 million in 2021 and $40.9 million in 2022.
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*
Held for sale
Impairment**
Divestitures***
Translation adjustment
Ending balance, December 31
2017
2016
$
649.6 $
705.3
72.6
(32.7)
—
—
40.3
—
—
(23.9)
(19.9)
(11.9)
$
729.8 $
649.6
________________
* Acquisitions primarily relate to the Company's 2017 purchase of Sevcon.
** 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
Held for sale
Impairment
Divestitures
Translation adjustment
Ending balance, December 31
2017
2016
$
186.1 $
161.5
40.0
(11.6)
—
—
22.6
$
237.1 $
40.4
—
(8.2)
(0.3)
(7.3)
186.1
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, 2017 and 2016 were as follows:
(millions of dollars)
Beginning balance, January 1
Provisions
Acquisitions
Dispositions
Held for sale
Payments
Translation adjustment
Ending balance, December 31
2017
2016
$
95.3 $
107.9
73.1
1.0
—
(3.6)
(60.6)
6.3
$
111.5 $
62.2
6.9
(9.1)
—
(70.1)
(2.5)
95.3
Acquisition activity in 2017 of $1.0 million relates to the warranty liability associated with the Company's
purchase of Sevcon.
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.
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
NOTE 8 NOTES PAYABLE AND LONG-TERM DEBT
December 31,
2017
2016
$
$
69.0 $
42.5
111.5 $
63.9
31.4
95.3
As of December 31, 2017 and 2016, the Company had short-term and long-term debt outstanding as
follows:
(millions of dollars)
Short-term debt
Short-term borrowings
Long-term debt
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
79
December 31,
2017
2016
$
68.8 $
156.5
137.4
251.4
595.7
496.1
118.9
493.5
26.5
2,119.5 $
15.8
139.1
251.9
520.7
495.6
118.8
493.3
43.6
2,063.0
19.4
2,103.7 $
2,043.6
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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,
2017 was $2.9 million and $0.8 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, 2016 was $3.9 million and $1.3 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, 2017 was $2.7 million on the 8.00% note as an increase to the note. The value
related to these swap terminations at December 31, 2016 was $4.1 million on the 8.00% note as an increase
to the note.
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2017 and
2016 was 3.1% and 2.3%, respectively. The weighted average interest rate on all borrowings outstanding,
including the effects of outstanding swaps, as of December 31, 2017 and 2016 was 3.8%.
Annual principal payments required as of December 31, 2017 are as follows :
(millions of dollars)
2018
2019
2020
2021
2022
After 2022
Total payments
Less: unamortized discounts
Total
$
$
$
84.6
138.7
252.7
2.7
600.4
1,121.0
2,200.1
11.8
2,188.3
The Company's long-term debt includes various covenants, none of which are expected to restrict future
operations.
On June 29, 2017, the Company amended and extended its $1 billion multi-currency revolving credit
facility (which included a feature that allowed the Company's borrowings to be increased to $1.25 billion)
to a $1.2 billion multi-currency revolving credit facility (which includes a feature that allows the Company's
borrowings to be increased to $1.5 billion). The facility provides for borrowings through June 29, 2022. 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, 2017 and expects to remain compliant in future periods. At December
31, 2017 and December 31, 2016, 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, which increased from
$1.0 billion to $1.2 billion effective July 26, 2017. Under this program, the Company may issue notes from
time to time and will use the proceeds for general corporate purposes. At December 31, 2017, the Company
had no outstanding borrowings under this program. As of December 31, 2016, the Company had outstanding
borrowings of $50.8 million under this program, which is classified in the Condensed Consolidated Balance
Sheets in Notes payable and other short-term debt.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The total current combined borrowing capacity under the multi-currency revolving credit facility and
commercial paper program cannot exceed $1.2 billion.
As of December 31, 2017 and 2016, the estimated fair values of the Company's senior unsecured notes
totaled $2,209.1 million and $2,081.4 million, respectively. The estimated fair values were $116.1 million
and $62.0 million higher than their carrying value at December 31, 2017 and 2016, 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 $31.4 million and $32.3 million at December 31, 2017
and 2016, respectively. The letters of credit typically act as guarantees of payment to certain third parties
in accordance with specified terms and conditions.
NOTE 9 FAIR VALUE MEASUREMENTS
ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity specific
measurement. Therefore, a fair value measurement should be determined based on assumptions that
market participants would use in pricing an asset or liability. As a basis for considering market participant
assumptions in fair value measurements, ASC Topic 820 establishes a fair value hierarchy, which prioritizes
the inputs used in measuring fair values as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;
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).
81
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, 2017 and 2016:
(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)
Valuation
technique
Balance at
December 31, 2017
Foreign currency contracts
Other long-term receivables
(insurance settlement agreement note
receivable)
Liabilities:
Foreign currency contracts
$
$
$
1.7 $
— $
1.7 $
42.9 $
— $
42.9 $
5.0 $
— $
5.0 $
—
—
—
A
C
A
(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)
Valuation
technique
Balance at
December 31, 2016
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
The following tables classify the Company's defined benefit plan assets measured at fair value on a
recurring basis as of December 31, 2017 and 2016:
Basis of fair value measurements
(millions of dollars)
U.S. Plans:
Fixed income securities
Equity securities
Real estate and other
Non-U.S. Plans:
Fixed income securities
Equity securities
Real estate and other
Balance at
December 31, 2017
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)
$
$
$
$
127.1 $
1.3 $
— $
86.7
26.3
13.5
19.9
—
0.4
240.1 $
34.7 $
0.4 $
212.4 $
233.9
37.1
483.4 $
— $
105.4
—
105.4 $
— $
—
—
— $
A
A
A
A
A
A
—
—
—
—
—
—
—
—
125.8
73.2
6.0
$
205.0
212.4
128.5
37.1
378.0
$
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(millions of dollars)
U.S. Plans:
Fixed income securities
Equity securities
Real estate and other
Non-U.S. Plans:
Fixed income securities
Equity securities
Real estate and other
Basis of fair value measurements
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)
$
$
$
$
113.8 $
15.3 $
— $
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
________________
(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, 2017 and 2016, 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, 2017, there were no commodity
derivative contracts outstanding:
Commodity derivative contracts
Commodity
Copper
Volume hedged
December 31, 2017
Volume hedged
December 31, 2016
Units of measure
Duration
—
213.8
Metric Tons
—
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, 2017 and December
31, 2016, the Company had no outstanding interest rate swaps.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2017 and December 31,
2016, the following foreign currency derivative contracts were outstanding:
Foreign currency derivatives (in millions)
Notional in traded currency
December 31, 2017
Notional in traded currency
December 31, 2016
Ending Duration
Functional currency
Traded currency
Brazilian real
Chinese renminbi
Euro
Euro
Chinese renminbi
US dollar
Euro
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
Chinese renminbi
Japanese yen
Polish zloty
Swedish krona
US dollar
Chinese renminbi
Korean won
US dollar
Euro
Japanese yen
US dollar
US dollar
Euro
Euro
1.1
18.6
36.0
3.9
85.0
1,311.3
—
267.4
56.5
—
—
—
3.1
619.0
11.2
—
109.7
42.0
—
—
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
—
Apr - 18
Jun - 18
Sept - 18
Dec - 18
Dec - 18
Dec - 18
Dec - 17
May - 18
Mar - 19
Dec - 17
Dec - 17
Dec - 17
Dec - 18
Dec - 18
Dec - 18
Dec - 17
Jan - 20
Dec - 18
At December 31, 2017 and 2016, 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
December 31,
2017
December 31,
2016
Location
December 31,
2017
December 31,
2016
Foreign currency
Commodity
Prepayments and other
current assets
Other non-current assets
Prepayments and other
current assets
$
$
$
0.9
0.8
$
$
— $
Accounts payable and
accrued expenses
7.2
— Other non-current liabilities
Accounts payable and
accrued expenses
0.1
$
$
$
5.0
$
— $
— $
1.1
—
—
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.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2017 market rates.
(millions of dollars)
Foreign currency
Commodity
Net investment hedges
Total
Deferred gain (loss) in AOCI at
December 31, 2017
$
December 31, 2016
(2.3) $
—
(54.2)
(56.5) $
$
Gain (loss) expected to
be reclassified to income
in one year or less
5.6 $
(0.1)
29.5
35.0 $
(3.1)
—
—
(3.1)
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
2017
2016
Location
2017
2016
Foreign currency
Sales
Foreign currency
Cost of goods sold
Commodity
Cost of goods sold
$
$
$
3.4
$
(0.1) $
0.5
$
(0.1) SG&A expense
1.4 SG&A expense
(1.4) Cost of goods sold
$
$
$
— $
(0.1) $
— $
0.3
—
(0.3)
(millions of dollars)
Contract Type
Location
Year Ended December 31,
2017
2016
Gain (loss)
on swaps
Gain (loss)
on
borrowings
Gain (loss)
on swaps
Gain (loss)
on
borrowings
Interest rate swap
Interest expense and finance charges
$
— $
— $
8.5
$
(8.5)
At December 31, 2017 and 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 $33.5 million, $28.3 million and $28.0 million in the years ended December 31, 2017, 2016 and
2015, 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
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
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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,
2017
2016
2015
$
$
33.5 $
28.3 $
12.5
0.5
10.1
1.4
46.5 $
39.8 $
28.0
35.5
3.3
66.8
86
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
2017
2016
Change in projected benefit obligation:
Projected benefit obligation, January 1
$
282.5
$
528.2
$
300.7
$
508.5
$
119.9
$
145.3
Pension benefits
Year Ended December 31,
Other postretirement
employee benefits
2017
2016
Year Ended December 31,
Service cost
Interest cost
Plan participants’ contributions
Plan amendments
Settlement and curtailment
Actuarial loss (gain)
Currency translation
Acquisition (divestiture)
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
Acquisition (divestiture)
Other
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:
—
8.9
—
—
—
8.7
—
4.0
18.0
11.0
0.3
—
(3.7)
(7.8)
63.4
37.0
—
9.6
—
—
—
(5.7)
—
—
(20.8)
(17.6)
(22.1)
16.2
12.5
0.4
0.2
(1.3)
70.2
(45.3)
(12.8)
(20.4)
0.1
3.2
—
(0.7)
—
2.2
—
—
0.2
4.0
—
—
—
(14.4)
—
—
(17.7)
(15.2)
283.3
$
628.8
$
282.5
$
528.2
$
107.0
$
119.9
229.5
$
393.8
$
235.8
$
395.1
23.5
4.0
—
—
—
3.8
—
30.7
14.3
0.3
(3.6)
46.8
18.1
0.6
12.7
2.7
—
—
—
—
—
54.0
17.0
0.4
(1.3)
(40.8)
(10.2)
—
(20.7)
(17.6)
(21.7)
(20.4)
240.1
$
483.4
$
229.5
$
393.8
(43.2) $ (145.4) $
(53.0) $ (134.4) $
(107.0) $
(119.9)
— $
23.2
$
— $
4.9
$
— $
—
(0.1)
(43.1)
(3.9)
(164.7)
(0.1)
(52.9)
(3.5)
(135.8)
(13.2)
(93.8)
(14.5)
(105.4)
$
$
$
$
$
$
(43.2) $ (145.4) $
(53.0) $ (134.4) $
(107.0) $
(119.9)
Net actuarial loss
Net prior service (credit) cost
Net amount*
$
$
111.0
$
159.0
$
116.9
$
163.7
$
20.8
$
(6.6)
0.8
(7.4)
0.8
(15.8)
104.4
$
159.8
$
109.5
$
164.5
$
5.0
$
19.9
(19.2)
0.7
Total accumulated benefit obligation for all plans $
283.3
$
602.0
$
282.5
$
505.5
________________
*
AOCI shown above does not include our equity investee, NSK-Warner. NSK-Warner had an AOCI loss of $9.7 million and
$10.8 million at December 31, 2017 and 2016, respectively.
87
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,
2017
2016
(681.2) $
(594.0)
494.8
423.3
(186.4) $
(170.7)
(43.2) $
(75.7)
(67.5)
(53.0)
(77.5)
(40.2)
(186.4) $
(170.7)
$
$
$
$
The weighted average asset allocations of the Company’s funded pension plans and target allocations
by asset category are as follows:
U.S. Plans:
Real estate and other
Fixed income securities
Equity securities
Non-U.S. Plans:
Real estate and other
Fixed income securities
Equity securities
December 31,
2017
2016
Target
Allocation
11%
53%
36%
9% 0% - 15%
50% 45% - 65%
41% 25% - 45%
100%
100%
8%
44%
48%
5% 0% - 10%
47% 43% - 53%
48% 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, 2017 and
2016. A portion of pension assets is invested in common and commingled trusts.
The Company expects to contribute a total of $15 million to $25 million into its defined benefit pension
plans during 2018. Of the $15 million to $25 million in projected 2018 contributions, $3.5 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, 2017 and 2016.
88
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:
(millions of dollars)
Service cost
Interest cost
Pension benefits
Year Ended December 31,
Other postretirement
employee benefits
2017
2016
2015
Year Ended December 31,
US
Non-US
US
Non-US
US
Non-US
2017
2016
2015
$
— $
8.9
18.0
11.0
9.6
$
— $
16.2
$
— $
14.9
$
Expected return on plan assets
(13.2)
(23.8)
(15.0)
Settlements, curtailments and other
Amortization of unrecognized prior service
(credit) cost
Amortization of unrecognized loss
—
(0.8)
4.2
0.3
—
7.9
—
(0.8)
5.1
12.5
(24.3)
—
0.6
6.2
11.2
(17.0)
25.7
(0.8)
6.3
14.1
(24.8)
(0.8)
0.1
6.6
Net periodic (income) cost
$
(0.9) $
13.4
$
(1.1) $
11.2
$
25.4
$
10.1
$
$
0.1
3.2
—
—
$
0.2
4.0
—
—
0.2
5.7
—
—
(4.1)
(4.9)
(5.7)
1.3
0.5
$
2.1
1.4
$
3.1
3.3
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 $11.2 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 $1.2
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, 2017 and 2016 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,
2017
2016
3.55
N/A
3.32
N/A
2.25
2.98
3.94
N/A
3.61
N/A
2.25
3.00
89
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,
2017, 2016 and 2015 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,
2017
2016
2015
3.94
N/A
6.01
3.61
N/A
N/A
2.25
3.00
5.68
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
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. In determining the discount rate, the Company utilizes a full yield approach in the estimation
of service and interest 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 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
2018
2019
2020
2021
2022
2023-2027
Pension benefits
U.S.
Non-U.S.
Other
postretirement
employee
benefits
$
22.2 $
20.0 $
19.5
19.4
19.3
18.5
87.2
20.5
21.4
22.4
23.6
130.8
13.3
12.2
11.7
10.6
9.6
34.2
The weighted-average rate of increase in the per capita cost of covered health care benefits is projected
to be 6.75% in 2018 for pre-65 and post-65 participants, decreasing to 5.0% by the year 2025. 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
90
One Percentage Point
Increase
Decrease
$
$
7.1 $
0.2 $
(6.3)
(0.2)
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 4.9 million shares are available for future issuance
as of December 31, 2017.
Stock Options A summary of the plans’ shares under option at December 31, 2017, 2016 and 2015 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, 2015
Exercised
Forfeited
Outstanding at December 31, 2015
Exercised
Outstanding at December 31, 2016
Exercised
Outstanding at December 31, 2017
1,714 $
(440) $
(7) $
1,267 $
(794) $
473 $
(473) $
— $
Options exercisable at December 31, 2017
— $
16.11
14.76
14.52
16.59
16.07
17.47
17.47
—
—
1.7 $
$
0.9 $
$
0.1 $
$
0.0 $
0.0 $
66.5
19.2
33.7
14.4
10.4
10.4
—
—
Proceeds from stock option exercises for the years ended December 31, 2017, 2016 and 2015 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,
2017
2016
2015
$
$
8.3 $
8.2
12.7 $
0.3
16.5 $
13.0 $
6.5
10.3
16.8
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 2017, restricted stock in the amount of 776,753 shares and 26,919
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, 2017, there
was $28.0 million of unrecognized compensation expense that will be recognized over a weighted average
period of approximately 2 years.
91
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,
2017
2016
2015
$
$
27.0 $
19.7 $
26.7 $
19.5 $
28.0
20.4
A summary of the status of the Company’s nonvested restricted stock for employees and non-employee
directors at December 31, 2017, 2016 and 2015 is as follows:
Nonvested at January 1, 2015
Granted
Vested
Forfeited
Nonvested at December 31, 2015
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Shares subject
to restriction
(thousands)
Weighted
average grant
date fair value
1,266 $
687 $
(588) $
(39) $
1,326 $
724 $
(551) $
(70) $
1,429 $
804 $
(521) $
(119) $
1,593 $
43.57
58.45
39.14
50.85
53.18
30.07
47.55
43.05
44.12
40.10
56.53
38.97
38.86
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 return relative to a peer group of
automotive companies. Based on the Company’s relative ranking within the performance peer group, it is
possible for none of the awards to vest or for a range up to the 200% of the target shares to vest.
The Company recognizes compensation expense relating to its performance share plans ratably over
the performance period regardless of whether the market conditions are expected to be achieved.
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, 2017, 2016 and 2015 were as follows:
(millions of dollars, except share data)
Expense
Number of shares
Year Ended December 31,
2017
2016
2015
$
9.9 $
9.6 $
—
—
12.2
—
The Company’s non-vested total shareholder return performance share awards outstanding at
December 31, 2017, 2016 and 2015 were 356,750; 409,600; and 474,600 shares, respectively. The weighted
average grant date fair value of the total shareholder return performance share awards was $32.26, $43.99
and $56.55 for 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $7.2 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)
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 award 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. The actual performance of the Company is evaluated quarterly,
and the expense is adjusted according to the new projections. The amounts expensed under the plan and
common stock issuance for the year ended December 31, 2017 and 2016 were as follows:
(millions of dollars, except share data)
Expense
Number of shares
Year Ended December 31,
2017
2016
$
15.9 $
126,000
7.1
—
A summary of the status of the Company’s nonvested relative revenue growth performance shares at
December 31, 2017 and 2016 is as follows:
Nonvested at December 31, 2015
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Number of
shares
(thousands)
Weighted
average grant
date fair value
— $
485 $
(126) $
(39) $
320 $
198 $
(156) $
(7) $
355 $
—
38.62
38.62
38.62
38.62
40.08
38.62
39.20
39.42
Based on the Company’s relative revenue growth in excess of the industry vehicle production, it is
possible for none of the awards to vest or for a range up to the 200% of the target shares to vest. As of
December 31, 2017, there was $9.3 million of unrecognized compensation expense that will be recognized
over a weighted average period of approximately 2 years. The unrecognized amount of compensation
expense is based on projected performance as of December 31, 2017.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 13 ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the activity within accumulated other comprehensive loss during the
years ended December 31, 2017, 2016 and 2015:
(millions of dollars)
Foreign
currency
translation
adjustments
Hedge
instruments
Defined benefit
postretirement
plans
Other
Total
Beginning Balance, January 1, 2015
$
(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)
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
236.5
—
—
—
(4.5)
1.0
(3.8)
1.0
(5.0)
(0.5)
8.5
(2.5)
1.4
—
—
—
228.4
0.5
4.7
(1.5)
Ending Balance December 31, 2017
$
(293.8) $
(1.3) $
(197.6) $
2.7
$
(490.0)
NOTE 14 CONTINGENCIES
In the normal course of business, the Company is party to various commercial and legal claims, actions
and complaints, including matters involving warranty claims, intellectual property claims, general liability
and various other risks. It is not possible to predict with certainty whether or not the Company will ultimately
be successful in any of these commercial and legal matters or, if not, what the impact might be. The
Company's environmental and product liability contingencies are discussed separately below. The
Company's management does not expect that 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.
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
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
$8.3 million and $6.3 million at December 31, 2017 and at December 31, 2016, 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”), a former indirect
subsidiary, the Company agreed to indemnify the buyer and Kuhlman Electric against certain environmental
liabilities relating to certain operations of Kuhlman Electric that pre-date the Company’s 1999 acquisition of
Kuhlman Electric. Kuhlman Electric was sued by plaintiffs alleging personal injuries purportedly arising from
contamination at Kuhlman Electric’s Crystal Springs, Mississippi facility. The Company understands that
Kuhlman Electric was required by regulatory officials to remediate such contamination. Kuhlman Electric
and its new owner tendered the personal injury lawsuits and regulatory demands to the Company. After
the Company made certain payments to the plaintiffs and undertook certain remediation on Kuhlman
Electric’s behalf, litigation regarding the validity of the indemnity ensued. The underlying personal injury
lawsuits and indemnity litigation now have been fully resolved. The Company continues to pursue litigation
against Kuhlman Electric’s historical insurers for reimbursement of amounts it paid on behalf of Kuhlman
Electric under the indemnity. The Company may in the future become subject to further legal proceedings
relating to these matters.
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 thirty 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.
The Company’s asbestos-related claims activity for the year ended December 31, 2017 and 2016 is as
follows:
Beginning Claims January 1
New Claims Received
Dismissed Claims
Settled Claims
Ending Claims December 31
2017
2016
9,385
2,116
(1,866)
(410)
9,225
10,061
2,078
(2,402)
(352)
9,385
The Company vigorously defends against these claims, and has obtained the dismissal of the majority
of the claims asserted against it without any payment. The Company likewise expects that no payment will
be made by the Company or its insurers in the vast majority of current and future asbestos-related claims
in which it has been or will be named (or has an obligation to indemnify a party which has been or will be
named).
Through December 31, 2017 and December 31, 2016, the Company incurred $528.7 million and $477.7
million, respectively, in indemnity (including settlement payments) and defense costs in connection with
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
asbestos-related claims. During 2017 and 2016, the Company paid $51.7 million and $45.3 million,
respectively, in indemnity and related defense costs in connection with asbestos-related claims. 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 estimated 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. For periods prior to the year ending December 31, 2016, the Company determined
that its liability for pending asbestos-related claims not yet resolved, and their associated defense costs,
was both probable and reasonably estimable and, in accordance with ASC 450-20, Contingencies, the
Company accrued a liability for such claims. The Company further determined with respect to such periods
that its liability for potential asbestos-related claims that had not yet been asserted, and their associated
defense costs, could not then be reasonably estimated. The inability to arrive at a reasonable estimate of
the liability for such claims and defense costs was based on, among other factors, the Company’s unique
defense profile resulting from the fact that its long-discontinued asbestos-containing products used
encapsulated asbestos, ceased to be manufactured more than 30 years ago, and had short useful lives;
the volatility in claim filing patterns against the Company, including the number and type of such claims;
changes in asbestos-related litigation in the United States and tort reform efforts at the individual court level
and as a result of state or federal legislation; the significant number of co-defendants that had filed for
bankruptcy; the magnitude and timing of co-defendant bankruptcy trust payments; and the inherent
uncertainty of future disease incidence and claiming patterns against the Company. All of these factors
collectively formed the basis for the Company’s conclusion in periods prior to the year ending December
31, 2016 that a reasonable estimate of the liability for potential asbestos-related claims not yet asserted
could not be made.
The Company continued its efforts to evaluate these factors in connection with the preparation of its
annual financial statements for the year ending December 31, 2016 and, if possible, arrive at a reasonable
estimate of the number and value of potential future asbestos-related claims. The Company concluded
based on those efforts that the potential liability for asbestos-related claims not yet asserted was capable
of reasonable estimation for several reasons, including the identification and verification of trends in the
Company’s claims data in recent years indicating that its specific claims experience was becoming less
volatile and stabilizing; changes in the management 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; stabilization in the asbestos litigation environment faced by the Company; a reduction in co-defendant
bankruptcies to historically low levels; stabilization in asbestos trust payments; and a reduction of uncertainty
stemming from the elimination of many dormant claims and changes in the Company’s litigation and defense
strategy respecting asbestos-related claims. All of these factors taken together informed the Company’s
efforts to make a reasonable estimate of potential asbestos-related claims not yet asserted, and no one
factor was determinative.
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 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. 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
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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,
was $828.2 million and $879.3 million as of December 31, 2017 and December 31, 2016, respectively. This
liability reflects the actuarial central estimate, which is intended to represent an expected value of the most
probable outcome. As a result, 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 total liability from what was
previously accrued, consulting fees, less available insurance coverage. As of December 31, 2017, the
Company estimates that its aggregate liability for such claims, including estimated defense costs, is as
follows:
(millions of dollars)
Asbestos Liability as of December 31, 2016
Indemnity and Defense Related Costs
Asbestos Liability as of December 31, 2017
$
$
879.3
(51.1)
828.2
The Company's 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 may
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’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 reasonable best estimate of such costs. Such
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 balances recorded for asbestos-related claims are based on the
best available information and assumptions that the Company believes are reasonable, including as to 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. The Company concluded that it is
reasonably possible that it may incur additional losses through 2067 for asbestos-related claims, in addition
to amounts recorded, of up to approximately $100.0 million as of December 31, 2017. The various
assumptions utilized in arriving at the Company’s estimate 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 Company’s estimate 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
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2017 and December 31, 2016, the Company
received $270.0 million in cash and notes from insurers on account of indemnity and defense costs respecting
asbestos-related claims.
The Company continues to have additional excess insurance coverage available for potential future
asbestos-related claims. As of December 31, 2017 and December 31, 2016, the Company estimates that
it has $386.4 million in aggregate insurance coverage available with respect to asbestos-related claims and
their associated defense costs, which the Company has recorded as a receivable. The Company has
determined the amount of that estimate by taking into account the remaining limits of the insurance coverage,
the number and amount of potential claims from co-insured parties, potential remaining recoveries from
insolvent insurers, the impact of previous insurance settlements, and coverage available from solvent
insurers not party to the coverage litigation. The Company’s remaining estimated insurance coverage
relating to asbestos-related claims and their associated defense costs is the subject of disputes with its
insurers, substantially all of which are being adjudicated in the Cook County insurance litigation. The
Company believes that its insurance receivable is probable of collection notwithstanding those disputes
based on, among other things, the arguments made by the insurers in the Cook County litigation and
evaluation of those arguments by the Company and its counsel, the case law applicable to the issues in
dispute, the rulings to date by the Cook County court, the absence of any credible evidence alleged by the
insurers that they are not liable to indemnify the Company, and the fact that the Company has recovered a
substantial portion of its insurance coverage (approximately $270.0 million) to date from its insurers under
similar policies. However, the resolution of the insurance coverage disputes, and the number and amount
of claims on our insurance from co-insured parties, may increase or decrease the amount of such insurance
coverage available to the Company as compared to the Company’s estimate.
The amounts recorded in the Condensed 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
December 31,
2017
2016
$
$
$
$
386.4 $
386.4 $
52.5 $
775.7
828.2 $
386.4
386.4
51.7
827.6
879.3
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 15 RESTRUCTURING
In the third quarter of 2017, the Company initiated actions within its emissions business in the Engine
segment designed to improve future profitability and competitiveness and started exploring strategic options
for the non-core emission product lines. As a result, the Company recorded restructuring expense of $48.2
million in the year ended December 31, 2017, primarily related to professional fees and negotiated
commercial costs associated with business divestiture and manufacturing footprint rationalization activities.
The Company will continue its plan to improve the future profitability and competitiveness of its remaining
European emissions business in the Engine segment. These actions may result in the recognition of
additional restructuring charges that could be material.
On September 27, 2017, the Company acquired 100% of the equity interests of Sevcon. In connection
with this transaction, the Company recorded restructuring expense of $6.8 million during the year ended
December 31, 2017, primarily related to contractually required severance associated with Sevcon executive
officers and other employee termination benefits.
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 and
$28.0 million in the years ended December 31, 2016 and 2015, respectively. Included in this restructuring
expense are employee termination benefits of $3.0 million and $20.1 million, respectively, and other expense
of $5.2 million and $7.9 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 and $11.6 million in the years ended
December 31, 2016 and 2015, respectively. These restructuring expenses are primarily related to employee
termination benefits.
The Company recorded restructuring expense of $12.5 million in the year ended December 31, 2015
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 was $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.
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.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2017 and
2016:
(millions of dollars)
Drivetrain
Engine
Total
Balance at January 1, 2016
$
25.3 $
4.1 $
Severance Accruals
Provision
Cash payments
Translation adjustment
Balance at December 31, 2016
Provision
Cash payments
Translation adjustment
5.0
(26.9)
0.3
3.7
4.7
(4.6)
0.3
5.6
(6.9)
(0.1)
2.7
1.4
(2.9)
0.1
Balance at December 31, 2017
$
4.1 $
1.3 $
NOTE 16 LEASES AND COMMITMENTS
29.4
10.6
(33.8)
0.2
6.4
6.1
(7.5)
0.4
5.4
Certain assets are leased under long-term operating leases including rent for facilities. 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 $39.6 million, $38.2 million and
$31.9 million in the years ended December 31, 2017, 2016 and 2015, respectively. The Company does not
have any material capital leases.
Future minimum operating lease payments at December 31, 2017 were as follows:
(millions of dollars)
2018
2019
2020
2021
2022
After 2022
Total minimum lease payments
NOTE 17 EARNINGS PER SHARE
$
$
23.0
18.9
9.2
8.4
7.0
11.8
78.3
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. Options are only dilutive when the average
market price of the underlying common stock exceeds the exercise price of the options. The dilutive effects
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of performance-based stock awards described in the Stock Based Compensation footnote are included in
the computation of diluted earnings per share at the level the related performance criteria are met through
the respective balance sheet date.
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
2017
439.9 $
118.5 $
210.429
214.374
2.09 $
0.55 $
609.7
224.414
2.72
439.9 $
118.5 $
609.7
$
$
$
Weighted average shares of common stock outstanding
Effect of stock-based compensation
210.429
1.119
214.374
0.954
Weighted average shares of common stock outstanding including
dilutive shares
Diluted earnings per share of common stock
211.548
215.328
$
2.08 $
0.55 $
224.414
1.234
225.648
2.70
NOTE 18 RECENT TRANSACTIONS
Sevcon, Inc.
On September 27, 2017, the Company acquired 100% of the equity interests in Sevcon for cash of
$185.7 million. This amount includes $26.6 million paid to settle outstanding debt and $5.1 million paid for
Sevcon stock-based awards attributable to pre-combination services.
Sevcon is a global player in electrification technologies, serving customers in the U.S., U.K., France,
Germany, Italy, China and the Asia Pacific region. Sevcon complements BorgWarner’s power electronics
capabilities utilized to provide electrified propulsion solutions.
Sevcon's assets are reported within the Company's Drivetrain reporting segment as of the date of the
acquisition. Sevcon's operating results from the date of acquisition through December 31, 2017 were
insignificant to the Company's Consolidated Statement of Operations. The Company paid $185.7 million in
2017, which is reported as an investing activity in the Company's Consolidated Statement of Cash Flows.
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the aggregated preliminary fair value of the assets acquired and liabilities
assumed on September 27, 2017, the date of acquisition:
(millions of dollars)
Receivables, net
Inventories, net
Other current assets
Property, plant and equipment, net
Goodwill
Other intangible assets
Deferred tax liabilities
Income taxes payable
Other assets and liabilities
Accounts payable and accrued expenses
Total consideration, net of cash acquired
Less: Assumed retirement-related liabilities
Cash paid, net of cash acquired
$
$
15.9
18.6
2.8
7.3
125.8
70.7
(9.5)
(0.7)
(2.7)
(24.5)
203.7
18.0
185.7
In connection with the acquisition, the Company capitalized $17.7 million for customer relationships,
$48.8 million for developed technology and $4.2 million for the Sevcon trade name. These intangible assets,
excluding the indefinite-lived trade name, will be amortized over a period of 7 to 20 years. Various valuation
techniques were used to determine the fair value of the intangible assets, with the primary techniques being
forms of 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.
The Company is in the process of finalizing all purchase accounting adjustments related to the Sevcon
acquisition. The Company has recorded fair value adjustments based on new information obtained during
the measurement period primarily related to intangible assets. These adjustments have resulted in a
decrease in goodwill of $7.8 million from the Company's initial estimate. In addition, certain other estimated
values for the acquisition, including goodwill, contingencies and deferred taxes are not yet finalized, and
the preliminary purchase price allocations are subject to change as the Company completes its analysis of
the fair value at the date of acquisition.
Due to its insignificant size relative to the Company, supplemental pro forma financial information of the
combined entity for the current and prior reporting period is not provided.
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.
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $361.0 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.
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. 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 allowed 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.
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.
NOTE 19 ASSETS AND LIABILITIES HELD FOR SALE
In the third quarter of 2017, the Company started exploring strategic options for the non-core emission
product lines in the Engine segment. In the fourth quarter of 2017, the Company launched an active program
to locate a buyer for the non-core pipes and thermostat product lines and initiated all other actions required
to complete the plan to sell the non-core product lines. The Company determined that the assets and
liabilities of the pipes and thermostat product lines met the held for sale criteria as of December 31, 2017.
As such, assets of $67.3 million, including allocated goodwill of $7.3 million, and liabilities of $29.5 million
were reclassified as held for sale on the Consolidated Balance Sheets as of December 31, 2017. The fair
value of the assets and liabilities, less costs to sell, was determined to be less than the carrying value,
therefore, the Company recorded an asset impairment expense of $71.0 million in Other expense, net to
adjust the net book value of this business to its fair value less cost to sell. The business did not meet the
criteria to be classified as a discontinued operation.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The assets and liabilities classified as held for sale as of December 31, 2017 are as follows:
(millions of dollars)
Receivables, net
Inventories, net
Prepayments and other current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Other assets
Impairment of carrying value
Total assets held for sale
Accounts payable and accrued expenses
Other liabilities
Total liabilities held for sale
$
$
$
$
21.0
30.4
10.3
47.7
7.3
21.1
0.5
(71.0)
67.3
24.6
4.9
29.5
NOTE 20 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.
2017 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
$
6,009.0
$
52.5
$
6,061.5
$
4,732.9
$
218.8
$
3,790.3
—
9,799.3
—
—
(52.5)
—
—
3,790.3
(52.5)
9,799.3
—
3,903.8
—
8,636.7
1,150.9
160.9
—
379.7
28.1
$
9,799.3
$
— $
9,799.3
$
9,787.6
$
407.8
$
305.5
241.6
—
547.1
12.9
560.0
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
_______________
(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
Asset impairment and loss on divestiture
Restructuring expense
Merger and acquisition expense
Lease termination settlement
Other expense, net
Asbestos-related charge
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,
2017
2016
2015
$
995.7
$
947.3
$
449.8
1,445.5
71.0
58.5
10.0
5.3
2.1
—
—
—
—
—
170.3
(5.8)
70.5
1,063.6
580.3
483.3
43.4
364.5
1,311.8
127.1
26.9
23.7
—
—
703.6
12.6
(6.2)
—
—
155.3
(6.3)
84.6
190.5
30.3
160.2
41.7
913.9
304.6
1,218.5
—
65.7
21.8
—
—
—
—
—
25.7
(10.8)
136.4
(7.5)
60.4
926.8
280.4
646.4
36.7
609.7
Net earnings attributable to BorgWarner Inc.
$
439.9
$
118.5
$
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, 2017, 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 $185.1 million, $172.9
million and $158.7 million at December 31, 2017, 2016 and 2015, 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
Other Europe
Total Europe
China
South Korea
Mexico
Other foreign
Total
Net sales
Long-lived assets
2017
2,280.0 $
2016
2,236.0 $
2015
1,985.1 $
$
2017
2016
2015
719.3 $
799.3 $
800.5
1,652.6
655.7
1,427.2
3,735.5
1,560.1
877.6
920.2
425.9
9,799.3 $
$
1,735.1
541.1
1,193.9
3,470.1
1,218.0
948.2
805.6
393.1
9,071.0 $
106
1,857.1
500.5
1,261.0
3,618.6
1,009.0
741.7
312.7
356.1
8,023.2 $
413.4
147.5
426.1
987.0
554.8
244.2
201.2
157.3
2,863.8 $
370.3
122.2
337.7
830.2
384.6
208.0
136.2
143.5
2,501.8 $
380.9
112.4
318.0
811.3
355.8
218.6
132.8
129.1
2,448.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sales to Major Customers
Consolidated net sales to Ford (including its subsidiaries) were approximately 15%, 15%, and 15% for
the years ended December 31, 2017, 2016 and 2015, respectively; and to Volkswagen (including its
subsidiaries) were approximately 13%, 13% and 15% for the years ended December 31, 2017, 2016 and
2015, respectively. Both of the Company's reporting segments had significant sales to Volkswagen and Ford
in 2017, 2016 and 2015. 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%, 28% and 31% of total net sales
for the years ended December 31, 2017, 2016 and 2015, 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.
NOTE 21 INTERIM FINANCIAL INFORMATION (Unaudited)
The following table presents summary quarterly financial data:
(millions of dollars, except per share amounts)
2017
2016
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
$ 2,407.0
$ 2,389.7
$ 2,416.2
$ 2,586.4
$ 9,799.3
$ 2,268.6
$ 2,329.2
$ 2,214.2
$ 2,259.0
$ 9,071.0
1,889.7
1,875.5
1,893.5
2,020.5
7,679.2
1,804.3
1,832.5
1,743.1
1,758.0
7,137.9
517.3
514.2
522.7
565.9
2,120.1
464.3
496.7
471.1
501.0
1,933.1
Selling, general and administrative
expenses
Other expense (income), 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
_______________
218.8
5.8
292.7
(9.7)
(1.5)
18.0
285.9
86.3
199.6
215.0
(0.3)
299.5
(14.4)
(1.4)
18.0
297.3
76.2
221.1
224.8
22.0
275.9
(14.4)
(1.3)
17.6
274.0
79.4
194.6
239.9
117.0
209.0
(12.7)
(1.6)
16.9
898.5
144.5
1,077.1
(51.2)
(5.8)
70.5
206.4
338.4
(132.0)
1,063.6
580.3
483.3
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
10.4
9.1
9.7
14.2
43.4
9.1
11.0
9.8
11.8
41.7
$ 189.2
$ 212.0
$ 184.9
$ (146.2) $ 439.9
$ 164.1
$ 164.4
$
$
0.89
0.89
$
$
1.01
1.00
$
$
0.88
0.88
$
$
(0.70) $
(0.70) $
2.09
2.08
$
$
0.75
0.75
$
$
0.76
0.76
$
$
$
83.3
$ (293.3) $ 118.5
0.39
0.39
$
$
(1.39) $
(1.39) $
0.55
0.55
(a) The Company's results were impacted by the following:
• Quarter ended December 31, 2017: The Company recorded an asset impairment expense of $71.0 million to adjust
the net book value of the the pipes and thermostat product lines to fair value. Additionally, the Company recorded
restructuring expense of $45.2 million related to Drivetrain and Engine segment actions designed to improve future
profitability and competitiveness. The Company also recorded merger and acquisition expense of $3.6 million. The
Company recorded reduction of income tax expenses of $8.9 million, $0.7 million and $18.2 million related to the
restructuring expense, merger and acquisition expense and asset impairment expense. The Company also recorded
a tax expense of $7.9 million related to other one-time tax adjustments. Additionally, the Company recorded a tax
expense of $273.5 million for the change in the tax law related to tax effects of the Act.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
• Quarter ended September 30, 2017: The Company recorded restructuring expense of $13.3 million primarily related
to the initiation of actions within its emissions business in the Engine segment designed to improve future profitability
and competitiveness. The Company also recorded merger and acquisition expense of $6.4 million primarily related
to the Sevcon transaction. The Company recorded reduction of income tax expenses of $1.2 million related to
restructuring expense, $0.3 million merger and acquisition and $5.1 million related to other one-time tax adjustments.
• Quarter ended June 30, 2017: The Company recorded a reduction of income tax expense of $3.2 million related to
one-time tax adjustments, primarily resulting from tax audit settlements.
• Quarter ended March 31, 2017: The Company recorded lease termination settlement of $5.3 million related to the
termination of a long term property lease in Europe. The Company recorded a tax expense of $3.4 million related to
one-time tax adjustments.
• 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 reduction of income tax
expenses 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.
• 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 reduction
of income tax expenses 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
reduction of income tax expenses 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
reduction of income tax expenses of $1.0 million related to restructuring expense and $1.0 million related to other
one-time tax adjustments.
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
108
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). As permitted by Securities and Exchange Commission guidance, management excluded
from its assessment of internal control over financial reporting Sevcon, Inc. which was acquired on September
27, 2017 which accounted for 0.6% of consolidated total assets and 0.2% of consolidated net sales as of
and for the year ended December 31, 2017. Based on the assessment, management concluded that, as of
December 31, 2017, 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, 2017 as stated in its report included herein.
Changes in Internal Control over Financial Reporting
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 2018 Annual Meeting of Stockholders under the captions “Election of
Directors,” “Information on Nominees for Directors,” “Board 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 2018 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 2018 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 2018 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 2018 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 8, 2018
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 8th day of February, 2018.
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/ Roger A. Krone
Roger A. Krone
/s/ Michael S. Hanley
Michael S. Hanley
/s/ John R. McKernan, Jr.
John R. McKernan, Jr.
/s/ Alexis P. Michas
Alexis P. Michas
/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
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director and Non-Executive Chairman
Director
Director
Director
Exhibit Number
Description
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Restated Certificate of Incorporation 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 March
31, 2016).
Amended and Restated By-Laws of the Company, as amended through June 9, 2017
(incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2017).
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).
10.1
Third Amended and Restated Credit Agreement dated as of June 29, 2017, 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, 2017).
†10.2
BorgWarner Inc. 2014 Stock Incentive Plan (incorporated by reference to Annex A to the
Company’s Definitive Proxy Statement filed March 21, 2014).
†10.3
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).
†10.4
Form of 2017 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, 2017).
†10.5
Form of 2017 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 March 31, 2017).
A - 1
Exhibit Number
Description
†10.6
Form of 2017 BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement for
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, 2017).
†10.7
†10.8
†10.9
†10.10
†10.11
†10.12
†10.13
†10.14
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).
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).
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 2017 BorgWarner Inc. 2014 Stock Incentive Plan Restricted Stock Agreement for Non-
Employee Directors (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2017).
†10.15
Form of 2017 BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement for
Non-U.S. Directors (incorporated by reference to Exhibit 10.2of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2017).
†10.16
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).
†10.17
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).
†10.18
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).
A - 2
Exhibit Number
Description
†10.19
†10.20
†10.21
†10.22
†10.23
†10.24
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).
Second Amendment dated as of August 1, 2016 to BorgWarner Inc. Board of Directors Deferred
Compensation Plan. (incorporated by reference to Exhibit 10.31 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2016).
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).
10.25
Distribution and Indemnity Agreement dated January 27, 1993 between Borg-Warner
Automotive, Inc. and Borg-Warner Security.*
10.26
Assignment of Trademarks and License Agreement.*
10.27
Amendment to Assignment of Trademarks and License Agreement.*
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.*
A - 3
Exhibit Number
Description
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
“
I think this is possibly the most exciting time in the auto industry
during my 30-plus year career. We stand on the cusp of a real
metamorphosis of passenger and commercial vehicles. At
BorgWarner, we are excited by the possibilities and know, through
our trusted partnerships with customers, we have earned our
position at the forefront of this dynamic transformation.
”
2017
D E A R F E L L O W S T O C K H O L D E R S
There is no doubt that 2017 was an
emissions and performance in all types
exceptional year for BorgWarner in many
of vehicles. There are few companies in
ways. Comparing our Company today to
our industry with similar capabilities, a
our position just a few short years ago,
fact that our entire organization is very
it is clear we have already undertaken
proud of. I firmly believe we have the
an amazing transformation, and today
right strategy in place and made great
stand in a unique position as a compa-
progress in executing our plans.
ny with engine, drivetrain, and power
electronics capabilities across all three
propulsion systems - combustion, hybrid
and electric. Across the world, many
people agree there are few challenges
as important today as creating solutions
that support a cleaner, more energy-ef-
ficient world. We made the commitment
decades ago to constantly improve
transportation and have since been cre-
ating technologies to enhance efficiency,
Today, balance is the key to our busi-
ness, in the breadth and depth of our
product offering, and in the customer
base we serve. Our ability to collabo-
rate with customers, rather than simply
supply them with components, is an
important competitive differentiator that
has allowed us to build and maintain
our strong customer relationships. As
I look back on the past year, I am both
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Wherever the journey leads - we deliver the propulsion solutions of tomorrow Execution and Partnership
BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
borgwarner.com
Propulsion Systems Leader
2017 Stockholders letter and annual report on form 10-K
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