Accelerating
Our Evolution
Propulsion Systems Leader
2018 Stockholders letter and annual report on form 10-K
The core focus of my business
philosophy is the relentless
pursuit of profitable growth.
F R É D É R I C L I S S A L D E ,
President and Chief Executive Officer
D E A R F E L L O W S T O C K H O L D E R S
I believe today’s rapidly changing
and the ability to develop talent. I am a
landscape in the global automotive
product of that culture and have been
market is both fascinating and
a member of our Strategy Board for
invigorating. The pace of change and
the past seven years. As such, I am fully
the remarkable ideas being developed
aligned with our current vision, mission
provides more exciting opportunities
and the associated strategies. Of course,
than at almost any point in the more than
plans may be calibrated and adjusted
90-year history of our Company. While
over time, but, by and large, we are
we experienced a considerable amount
focused on executing and accelerating
of dynamic change at BorgWarner in
the current plans. James Verrier was an
2018 as our evolution continued, many
excellent CEO and when he decided to
factors remain consistent. As I write this
retire this past summer, the Company
letter, looking back on the past year and
had never been in a stronger position.
my new position, it is a privilege to have
I want to thank James for his strong
assumed the role of President and CEO
leadership and advice over the years.
for such a remarkable Company.
One of our Company’s greatest strengths
the automotive industry, 20 years of
is the breadth and depth of its team
which have been with BorgWarner, I
During my roughly 30-year career in
2 0 1 8 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K
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E A R N I N G S P E R F O R M A N C E *
Per Diluted Share *Excludes special items.
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'18
S A L E S G R O W T H
Billions of Dollars
$3.25
$3.04
$3.27
$3.89
$4.48
$8.3
$8.0
$9.1
$9.8
$10.5
have been fortunate enough to work with
Ultimately, we are addressing one of
diversity. And finally, we are delivering
several different businesses with many
the most important challenges facing
growth significantly above market
talented people that I am very proud to call
our industry as well as society: creating
growth across all three major propulsion
colleagues and friends. As these people
our vision of a cleaner, more energy-
categories.
can attest, the core focus of my business
efficient world.
philosophy is the relentless pursuit of
profitable growth, which I will continue in
my current role.
Soon after I assumed the CEO role,
factors to our ongoing success:
I outlined a simple “State of the
Company,” which I believe succinctly
■ Execute a balanced propulsion
As we look forward, there are four key
Today, we firmly believe we have the right
outlines where we stand today, and
strategy
strategy and an extremely strong portfolio
our near-term focus. We are a product
of products, which allows us to focus
leader in clean and efficient solutions
on delivering profitable growth, above
for combustion, hybrid and electric
market growth rates across combustion,
vehicles. Our products help improve
■ Maintain product leadership - the
primary driver of our business
■ Strengthen operational discipline
■ Deliver growth across all propulsion
hybrid and electric propulsion systems.
vehicle performance, propulsion
categories
BorgWarner maintains a unique position
efficiency, stability and air quality. We
as a company that can specify, develop
have maintained and expanded our
and manufacture a broad product offering
competitive advantages of customer,
across all three propulsion systems.
geographic and propulsion system
While our business is clearly evolving,
one thing has not changed: product
leadership remains the driver of our
2
“While our
business is clearly
evolving, one
thing has not
changed: product
leadership
remains the driver
of our business.”
business. To ensure ongoing success in
this industry and progress towards our
vision, our Company must deliver the
quality products that our customers,
end consumers and governments want
and need, in high volumes to make a
positive impact.
There are three key elements to create
allows us to efficiently keep our fingers
on the pulse of the latest ideas around
the globe and potential new emerging
technologies and trends.
When I travel around the world, I am
always amazed by diversity of talent
and backgrounds that we have in
this Company. Our vision of a clean,
and maintain our product leadership. The
energy-efficient world has attracted
first building block is organic research
and development (“R&D”), and we are
high-quality engineers and talented
people of all backgrounds who want
constantly reinvesting approximately 4%
to help our Company achieve its vision
of our revenue in this area. We are striving
and participate in the next generation of
to invest in the right products for the
propulsion architectures. We are pleased
future, constantly assessing our balance
that greater than 50% of new hires in
and directing additional investment where
2018 were people with engineering
needed, while starting to deemphasize
other more mature areas. Acquisitions
are the second key element of product
backgrounds, and our focus on training
and employee development will continue
to be a key aspect of our strategy going
leadership, which has been a proven
forward.
success in recent years. We now have a
team that is fully focused on identifying
and assessing targets and presenting
the targets to my leadership team for
consideration. Finally, we are participating
in venture capital investments, which
One sometimes overlooked competitive
differentiator is our operational
discipline, particularly around quality and
delivery, which is even more impressive
given that we operate 68 facilities around
U S E S O F C A S H
Millions of Dollars
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$563
$140
$111
$116
$577
$350
$501
$288
$113
$560
$100
$188
$124
$547
$150
$6
$142
Capital Expenditures
Share Repurchase
M&A Activity
Dividends
$1,200
$117
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
2018 Sales
2 0 1 8 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K
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17% CHINA
3% Great Wall
2% VW/Audi
1% Geely/Volvo
11% Other China
34% AMERICAS
10% Ford
6% FCA
4% GM
2% Asian OEMs
4% Commercial Vehicle
2% Aftermarket
6% Other Americas
11% ASIA (EX. CHINA)
6% Hyundai
5% Other Asia
38% EUROPE
10% VW/Audi
4% Daimler PC
3% Ford
2% Renault/Nissan
2% Volvo
2% BMW
2% Commercial Vehicle
1% JLR
1% Aftermarket
11% Other Europe
the world in 19 countries, producing
■ We expect 2023 revenue of $14 billion,
hundreds of millions of parts every
before any benefits from M&A.
year. Today, we have a renewed focus
on quality, with many of our internal
key performance metrics showing
improvement year-over-year. Our plant
managers did a fantastic job focusing
on our Quality Board’s initiatives in 2018.
These initiatives complement our already
robust quality management systems and
help better disseminate best practices
around the world. These actions are
important as we continue to build upon
our success as we look to the future.
To reiterate the long-term outlook for
BorgWarner that we first outlined in
September 2018:
■ We are growing faster than the industry
and will be overweight in hybrid and
electric revenue compared to the
industry by 2023, producing some
impressive growth rates.
■ We also plan to be overweight in hybrid
and electric by 2023 in terms of content
per vehicle, and our penetration rates
are growing rapidly.
■ Although we continue to lead the
industry, we can always improve and as
such we have set a target to deliver $1
billion of free cash flow in 2023.
“We firmly believe we have the right
strategy and an extremely strong portfolio
of products, which allows us to focus on
delivering profitable growth, above market
growth rates across combustion, hybrid
and electric propulsion systems.”
DualClutch and
Control Module
P2 Module and Hydraulic
Control Unit
Integrated Drive Module (iDM)
4
$14B
in sales by 2023
$1B in free cash fl ow
by 2023
As we drive forward towards these goals,
position, expertise and portfolio
our regional exposure. Overall, our team
we believe 2018 was a year of strong
of products remains a significant
is doing an excellent job adjusting to the
execution for our Company, which laid
differentiator in the marketplace.
more challenging industry backdrop, and
a strong foundation from which we can
build. Despite the industry volatility, we
delivered organic growth of more than
600 basis points over our light vehicle
market. We successfully completed
significant project launches and won
new business across combustion, hybrid
and electric vehicle platforms. The
integration of the Sevcon acquisition was
completed in 2018 and we added many
high-quality people to the BorgWarner
family. The integration was completed
successfully on time, and today our
combined teams present seamlessly
to our customers, allowing us to win a
wider range of business opportunities.
Clearly, we continue to be considered
as a balanced propulsion partner by our
customers, and we believe our industry
The current market is volatile with
headwinds facing the industry, focused
we expect to continue to outgrow the
market in 2019.(cid:31)
in Europe and China. In Europe,
For the full-year 2019, we expect to
conditions have stabilized but we still
produce organic revenue growth of up to
expect industry volume declines in the
2.0%, or 250 to 400 basis points over our
near term as customers work through
expected end-market decline, meaning net
the final impacts related to WLTP1.
sales are expected to be in the range of
In China, we expect industry volume
$9.90 billion to $10.37 billion. We expect
declines to continue near-term as
our earnings per share to be in the range
customers reduce inventory, which will
of $4.00 to $4.35. While we continue to
also impact the launch of some new
deliver strong market outgrowth in 2019,
projects. As we look to 2019 as a whole,
we will also look at ways to adjust our
we expect an industry volume decline in
cost structure to adapt to the current
the range of 2.0% to 5.0% adjusted for
environment.
1Under conditions defined by EU law, the Worldwide Harmonized
Light Vehicle Test Procedure (WLTP) laboratory test is used to
measure fuel consumption and CO2 emissions from passenger
cars, as well as their pollutant emissions.
We also recently announced our
three-year net new business backlog
(“Backlog”), which includes many exciting
2 0 1 8 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K
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“As we look forward, there are four key factors to
our ongoing success: execute a balanced propulsion
strategy, maintain product leadership, strengthen
operational discipline, and deliver growth across all
propulsion categories.”
opportunities. Importantly, this Backlog
will support average organic growth over
market of 5.0% to 6.0% for the next three
years. The customers in this Backlog
represent a diverse group around the
world. Our diverse customer base is
increasingly important, not in the least
because of the insights this provides
us across the entire propulsion system
landscape.
From a product perspective, we see
growth across the portfolio with 20%
of the Backlog related to combustion
propulsion systems, 70% related to
vehicles with hybrid propulsion systems
and 10% related to electric propulsion
systems. From a regional perspective,
we continue to see Backlog growth in
all of our major markets, with 25% of
the Backlog in the Americas, 15% in
Europe, and 60% in Asia, with China
$200
$150
$100
$50
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 12/31/13 in stock or index, including reinvestment
of dividends. Fiscal year ending December 31.
BorgWarner Inc.
S&P 500
SIC Code Index
2013
2014
2015
2016
2017
2018
6
The Drivetrain Segment
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
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$2,631 M
$2,557 M
$3,524 M
$3,790 M
$4,139 M
AWD Transfer Case
Integrated Motor Generator (MGI)
Electric Drive Motor (eDM)
accounting for 50% of the overall
hard work, allow us to maintain and
COMBUSTION
Backlog. Despite the near-term industry
improve our competitive positioning year
volume headwinds, we remain focused
after year. Our success is predicated on
on continuing to secure new business
the entire 30,000 strong team, working
with our customers around the world
together to achieve our vision.
and expect to continue to outgrow the
market. We firmly believe that our targets
are achievable because electrification
accelerates the opportunities for us.
I am pleased to report that our hard
work is paying off and we are currently
booking ahead of the plan based on the
combination of our unrivaled product
On behalf of the entire management team
positioning, significant and consistent
and Board of Directors, I want to thank
operational excellence, and the fact
all of the plant managers and employees
that we are the trusted partner of our
in our 68 facilities around the world who,
customers around the world. Looking at
through their dedication and consistent
each of the three propulsion categories
in more depth:
We continue to predict growth for
combustion propulsion based on the
quality of our products, which are
delivering further penetration. We remain
the market leader in combustion, and with
most of our products we are number one in
the world thanks to our technology edge,
product leadership and product efficiency.
Even as the combustion market volumes
decline, the overall addressable volume for
many of our markets continues to increase
because all of our combustion products
are also viable and available for hybrid
vehicles.
2 0 1 8 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K
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The Engine Segment
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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$5,706 M
$5,500 M
$5,590 M
$6,062 M
$6,447 M
Variable Cam Timing
eBooster® Electrically Driven
Compressor
Cabin and Battery Heaters
HY BR ID
ELECTRIC
We start with a strong position in hybrids
Our competitive advantage in electrics is
based on our understanding of both
our full propulsion system expertise. Our
the internal combustion engine and
team can specify, develop and manufacture
drivetrains that will be used in these
all of the major components of an electric
vehicles. This combined knowledge is
vehicle propulsion system. Our Electric
something that very few companies
Vehicle Transmission (eGearDrive)
can match. To this we add one of the
expertise grew out of our long history
most diverse hybrid product portfolios
in transfer cases. To this, we added
in the industry. We can supply major
electric drive motor products through our
components for all of the hybrid
acquisition of Remy. And most recently,
configurations that will be used, which
we increased our Power Electronics
is important as hybrids will have a wide
capabilities through the acquisition of
variety of design variations.
Sevcon. As a result, we now are in a
unique competitive position to supply
and manufacture all of the components
of electric propulsion systems. We
can design and produce the motor,
transmission and power electronics
and are in a much stronger position
to understand the design and overall
cost of the system, which will result in
significant awards of both total systems
and sub-components.
As we look further into 2019 and beyond,
we are focused on accelerating our
evolution, while finding the pragmatic
balance with prudent financial controls.
As such, we will not lose focus on growth
8
80% of Backlog
Related to Hybrid and
Electric Propulsion
20% Combustion
70% Hybrid
10% Electric
When I travel around the
world, I am always amazed
by the diversity of the talent
and backgrounds that we
have in this company.
opportunities and will continue to invest
Our targets are significant but achievable
in R&D and product development. At
and we are absolutely focused on serving
the same time, we expect to continue
our customers around the world and
our growth trajectory above the
answering with the best products that
industry and maintain our incremental
we can deliver. We have an outstanding
margin performance, while diligently
portfolio of technologies, and, based
controlling costs in the weaker industry
on the combined efforts of our 30,000
volume environment. If there is one
strong team of amazing people, our
takeaway from this letter, I hope it is
Company has never been greater. I look
this: electrification accelerates the
forward to serving the Company as
opportunities for BorgWarner. In fact,
President and CEO and working with our
the hybrid and electric markets are
strong leaders to ensure BorgWarner
actually larger than the combustion
continues its long track record of strong
market. BorgWarner is unique in its
performance and product leadership.
ability to deliver the breadth of products
at the cutting edge of technology for
all vehicle propulsion categories. We
manage our portfolio constantly so
that we are in the position to grow this
Company to $14 billion by 2023, with
$1 billion free cash flow.
Sincerely,
Frédéric B. Lissalde
President and Chief Executive Officer
BorgWarner will provide its full financial report electronically as part of its environmental initiative to
conserve resources and reduce costs. For more information on the company’s financial performance and
sustainability initiatives, please visit our website at borgwarner.com.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
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 every Interactive Data File required to be submitted pursuant to Rule 405 of
Yes
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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, 2018 (the last business day of the most recently completed second fiscal quarter) was approximately $8.9
billion.
Yes
As of February 8, 2019, the registrant had 207,700,721 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 2019 Annual Meeting of Stockholders
Part III
Document
Part of Form 10-K into which incorporated
BORGWARNER INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2018
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
25
26
27
27
27
30
31
54
54
116
116
117
118
118
118
118
118
118
119
2
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Statements contained in this Annual Report on Form 10-K ("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. Further, 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. All forward looking 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, that could cause actual results to differ
materially from those expressed, projected or implied in or by the forward-looking statements. These risks
and uncertainties, among others, include: our dependence on automotive and truck production, both of
which are highly cyclical; our reliance on major OEM customers; commodities availability and pricing; supply
disruptions; fluctuations in interest rates and foreign currency exchange rates; availability of credit; our
dependence on key management; our dependence on information systems; the uncertainty of the global
economic environment; the outcome of existing or any future legal proceedings, including litigation with
respect to various claims; future changes in laws and regulations in the countries in which we operate; 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 revisions 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, including
without limitation those not currently known to us or that we currently believe are immaterial, also may impair
our business, operations, liquidity, financial condition and prospects.
Changes in global trade policies and newly enacted tariffs had a modestly negative impact on the
Company's financial results for the year ended December 31, 2018. The Company is continuing to evaluate
the future impact that these newly enacted tariffs, and any other proposed tariffs, may have on our business,
including without limitation, the imposition of new tariffs by the United States government on imports to the
U.S. (which could increase the cost of raw materials or components we purchase) and/or the imposition of
retaliatory tariffs by foreign countries (which could increase the cost of products we sell). Restrictive global
trade policies and the implementation of new tariffs could adversely affect our business.
3
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
calculate these measures using the appropriate GAAP components in their entirety and compute them in
a manner intended to facilitate consistent period-to-period comparisons. The Company's method of
calculating these non-GAAP measures may differ from methods used by other companies. These non-
GAAP measures should not be considered in isolation or as a substitute for those financial measures
prepared in accordance with GAAP. 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. (together with it 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. We manufacture and sell these products 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 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 21, “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, 2018, 2017 and 2016 are as follows:
(millions of dollars)
Engine
Drivetrain
Inter-segment eliminations
Net sales
Year Ended December 31,
$
2018
6,447.4 $
4,139.4
(57.2)
$ 10,529.6 $
2017
6,061.5 $
3,790.3
(52.5)
9,799.3 $
2016
5,590.1
3,523.7
(42.8)
9,071.0
The sales information presented above does not include the sales by the Company's unconsolidated
joint ventures (see sub-heading “Joint Ventures”). Such unconsolidated sales totaled approximately $947
million, $844 million, and $737 million for the years ended December 31, 2018, 2017 and 2016, 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, gasoline ignition technology, cabin heaters,
battery heaters and battery charging.
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
Europe, the Americas 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 27%, 28% and 28% of total net sales
for the years ended December 31, 2018, 2017 and 2016, 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,
International, 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 for
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, both gasoline and diesel propulsion systems,
and hybrid vehicles.
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, coolant pumps, cabin heaters, battery heaters and battery charging.
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 pipes and
thermostats, and had operations in Germany, Brazil, the U.S., and China.
In 2017, the Company started exploring strategic options for its non-core emission product lines in the
Engine segment and launched an active program to locate a buyer and initiated all other actions required
to complete the plan to sell and exit the non-core pipe and thermostat product lines. In December 2018, the
Company reached an agreement to sell its thermostat product lines for approximately $28.0 million subject
to customary adjustments. Completion of the sale is expected in the first quarter of 2019, subject to
satisfaction of customary closing conditions. The assets and liabilities of the pipe and thermostat product
lines are reported as assets and liabilities held for sale as of December 31, 2018. Refer to Note 20, “Assets
and Liabilities Held for Sale,” to the Consolidated Financial Statements in Item 8 of this report for more
information.
6
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 All-
Wheel Drive ("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
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 15 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.
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 producing 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 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. Remy's principal products include starter motors, alternators and
7
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,
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
allowed the Company to focus on the rapidly developing OEM electrification trend in propulsion systems.
In 2017, the Company acquired Sevcon, Inc. ("Sevcon"), a global provider of 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 products complement
BorgWarner’s power electronics capabilities utilized to provide electrified propulsion solutions.
Joint Ventures
As of December 31, 2018, 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.
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 2018 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.
$
$
$
$
$
$
$
731.8
215.3
270.1
70.6
204.3
226.6
333.1
(a)
(b)
(c)
All sales figures are for the year ended December 31, 2018, except NSK-Warner and Turbo Energy Private Limited. NSK-
Warner’s sales are reported for the 12 months ended November 30, 2018. Turbo Energy Private Limited’s sales are
reported for the 12 months ended September 30, 2018.
The Company made purchases from Turbo Energy Private Limited totaling $42.3 million, $31.9 million and $28.9 million
for the years ended December 31, 2018, 2017 and 2016, 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
Refer to Note 21, “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, 2018, 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,
2018
2017
2016
14%
12%
15%
13%
15%
13%
No other single customer accounted for more than 10% of our consolidated net sales in any of the years
presented.
The Company's automotive products are generally sold directly to OEMs, substantially pursuant to
negotiated annual contracts, long-term supply agreements or terms and conditions as may be modified by
the parties. Deliveries are subject to periodic authorizations based upon OEM production schedules. The
Company typically ships its products directly from its plants to the OEMs.
9
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 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. Financial risks and rewards
transfer upon shipment, acceptance of a prototype component by the customer or upon completion of the
performance obligation as stated in the respective customer agreement.
(millions of dollars)
Gross R&D expenditures
Customer reimbursements
Net R&D expenditures
Year Ended December 31,
2018
2017
2016
$
$
511.7 $
(71.6)
440.1 $
473.1 $
(65.6)
407.5 $
417.8
(74.6)
343.2
10
Net R&D expenditures as a percentage of net sales were 4.2%, 4.2% and 3.8% for the years ended
December 31, 2018, 2017 and 2016, respectively. None of the Company's R&D related contracts exceeded
5% of net R&D expenditures in any of the years presented.
Intellectual Property
The Company has approximately 6,930 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” trade name and numerous BORGWARNER trademarks, including
without limitation "BORGWARNER" and "BORGWARNER and Bug Design", 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 non-OEM competitors by product type follow:
Product Type: Engine
Turbochargers:
Cummins Turbo Technology
IHI
Names of Competitors
Garret Motion, Inc.
Mitsubishi Heavy Industries (MHI)
Bosch Mahle Turbo Systems
Continental
Emissions systems:
Timing devices and chains:
Thermal systems:
Product Type: Drivetrain
Torque transfer:
Mahle
Denso
Bosch
Eldor
Denso
Iwis
Delphi Technologies
Horton
Mahle
GKN Driveline
Magna Powertrain
Rotating electrical machines:
Denso
T.RAD
Pierburg
NGK
Eberspaecher
Schaeffler Group
Tsubaki Group
Usui
Xuelong
Names of Competitors
JTEKT
Valeo
Transmission systems:
Zhengzhou Coal Mining Machinery
Group
Continental
Mitsubishi Electric
Bosch
Dynax
Valeo
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."
12
Workforce
As of December 31, 2018, the Company had a salaried and hourly workforce of approximately 30,000
(as compared with approximately 29,000 at December 31, 2017), of which approximately 6,500 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 one domestic collective bargaining agreement which is for one facility in New York, which
expires in September 2020.
Raw Materials
The Company uses a variety of raw materials in the production of its 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 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, optimize 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
2019 and beyond. Refer to Note 11, “Financial Instruments,” of the Consolidated Financial Statements in
Item 8 of this report for information related to the Company's hedging activities.
For 2019, 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 14, 2019.
Name
Frederic B. Lissalde
Age Position with the Company
51
President and Chief Executive Officer
Thomas J. McGill
Tonit M. Calaway
Brady D. Ericson
Stefan Demmerle
Joseph F. Fadool
Martin Fischer
Anthony D. Hensel
Robin Kendrick
Joel Wiegert
52
50
47
54
52
48
60
54
45
Vice President, Interim Chief Financial Officer and Treasurer
Executive Vice President, Chief Legal Officer and Secretary
Executive Vice President and Chief Strategy Officer
Vice President
Vice President
Vice President
Vice President and Controller
Vice President
Vice President
Mr. Lissalde has been President and Chief Executive Officer of the Company since August 2018. He
was Executive Vice President and Chief Operating Officer of the Company from January 2018 to July 2018.
From May 2013 to December 2017, he was Vice President of the Company and President and General
Manager of BorgWarner Turbo Systems LLC.
Mr. McGill has been Vice President and Interim Chief Financial Officer since January 2019. Additionally,
he has been the Treasurer of the Company since May 2012.
Ms. Calaway has been Executive Vice President and Chief Legal Officer and Secretary since August
2018. She was Chief Human Resources Officer of the Company from August 2016 to August 2018. 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.
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.
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
14
January 2014 until June 2015, he was Vice President and General Manager of BorgWarner Turbo Systems
LLC Europe.
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. 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 LLC.
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.
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 we are, 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. In addition, any of our competitors may foresee the course of market
development more accurately than we do, develop products that are superior to our products, produce
15
similar products at a cost that is lower than our cost, or adapt more quickly than we do to new technologies
or evolving customer requirements. As a result, our products may not be able to compete successfully with
our competitors' products, and we may not be able to meet the growing demands of customers. These
trends may adversely affect our sales as well as the profit margins on our products.
If we do not respond appropriately, the evolution of the automotive industry could adversely affect
our business.
The automotive industry is increasingly focused on the development of hybrid and electric vehicles and
of advanced driver assistance technologies, with the goal of developing and introducing a commercially-
viable, fully-automated driving experience. There has also been an increase in consumer preferences for
mobility on demand services, such as car- and ride-sharing, as opposed to automobile ownership, which
may result in a long-term reduction in the number of vehicles per capita. In addition, some industry participants
are exploring transportation through alternatives to automobiles. These evolving areas have also attracted
increased competition from entrants outside the traditional automotive industry. If we do not continue to
innovate, to develop, or acquire new and compelling products that capitalize upon new technologies in
response to OEM and consumer preferences, this could have an adverse impact on our results of operations.
The increased adoption of gasoline and hybrid propulsion systems in Western Europe may materially
reduce the demand for our current products.
The industry mix shift away from diesel propulsion systems in Western Europe may result in lower
demand for current diesel components. This shift is expected to drive increased demand for gasoline and
hybrid propulsion systems. We have developed and are currently in production with products for gasoline
and hybrid propulsion systems. Industry penetration rates for these products are expected to increase
significantly over the next several years. However, due to the high current penetration rates of our key
technologies on diesel propulsion systems, this industry mix shift could adversely impact our near-term
results of operations, financial condition, and cash flows.
Risks related to our business
We are under substantial pressure from OEMs to reduce the prices of our products.
There is substantial and continuing pressure on OEMs to reduce costs, including costs of products we
supply. Annual price reductions to OEM customers are a permanent component of our business. To maintain
our profit margins, we seek price reductions from our suppliers, improved production processes to increase
manufacturing efficiency, and updated product designs to reduce costs, and we attempt to 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 increases in the cost of
materials. The discontinuation or lessening of our ability to pass-through or hedge increasing commodity
costs could adversely affect our business.
16
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.
Changes in U.S. administrative policy, including changes to existing trade agreements and any
resulting changes in international trade relations, may have an adverse effect on us.
The United States has implemented tariffs on imported steel and aluminum, as well as certain other
listed products imported from China. The United States is also considering implementing new tariffs on
items imported by us from China or other countries and export controls on additional items. The impact of
these tariffs could increase the cost of raw materials or components we purchase. The imposition of tariffs
by the United States has resulted in retaliatory tariffs from a number of countries, including China, which
could increase the cost of products we sell. Any resulting trade war could have a negative impact on the
global market and an adverse effect on our business. The potential imposition of additional tariffs on Chinese
imports and imports of automobiles, including cars, SUVs, vans and light trucks, and automotive parts could
increase our costs and could result in lowering our gross margin on products sold.
We use important intellectual property in our business. If we are unable to protect our intellectual
property or if a third party makes assertions against us or our customers relating to intellectual
property rights, our business could be adversely affected.
We own important intellectual property, including patents, trademarks, copyrights and trade secrets, and
are involved in numerous licensing arrangements. Our intellectual property plays an important role in
maintaining our competitive position in a number of the markets that we serve. Our competitors may develop
technologies that are similar or superior to our proprietary technologies or design around the patents we
own or license. Further, as we expand our operations in jurisdictions where the enforcement of intellectual
property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite
efforts we undertake to protect them. Our inability to protect or enforce our intellectual property rights or
claims that we are infringing intellectual property rights of others 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.
17
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 information and
data and that of third parties, including our employees. 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. In addition, we may be required to incur significant costs to protect
against damage caused by such attacks or disruptions in the future. 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. In particular, any unplanned turnover or inability to
attract and retain key employees and employees with technical and software capabilities in numbers sufficient
for our needs could adversely affect our business.
Our profitability and results of operations may be adversely affected by program launch difficulties.
The launch of new business is a complex process, the success of which depends on a wide range of
factors, including the production readiness of our manufacturing facilities and manufacturing processes and
those of our suppliers, as well as factors related to tooling, equipment, employees, initial product quality
and other factors. Our failure to successfully launch new business, or our inability to accurately estimate
the cost to design, develop and launch new business, could have an adverse effect on our profitability and
results of operations.
To the extent we are not able to successfully launch new business, vehicle production at our customers
could be significantly delayed or shut down. Such situations could result in significant financial penalties to
us or a diversion of personnel and financial resources to improving launches rather than investment in
continuous process improvement or other growth initiatives, and could result in our customers shifting work
away from us to a competitor, all of which could result in loss of revenue, or loss of market share and could
have an adverse effect on our profitability and cash flows.
Part of our workforce is unionized which could subject us to work stoppages.
As of December 31, 2018, 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.
Work stoppages and similar events could significantly disrupt our business.
Because the automotive industry relies heavily on just-in-time delivery of components during the
assembly and manufacture of vehicles, a work stoppage at one or more of our manufacturing and assembly
facilities could have adverse effects on our business. Similarly, if one or more of our customers were to
experience a work stoppage, that customer would likely halt or limit purchases of our products, which could
result in the shutdown of the related manufacturing facilities. A significant disruption in the supply of a key
18
component due to a work stoppage at one of our suppliers or any other supplier could have the same
consequences and, accordingly, have an adverse effect on our financial results.
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
is 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 to comply with evolving interpretations of existing environmental, health and
safety laws and regulations or any new such laws and regulations (including concerns about global climate
change and its impact) 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, and, as such, may be liable for the cost of clean-up and other remedial activities at
such sites. While responsibility for clean-up and other remedial activities at such sites is typically shared
among potentially responsible parties based on an allocation formula, we could have greater liability under
applicable statutes. Refer to Note 15, "Contingencies," to the Condensed Consolidated Financial Statements
in item 8 of this report for further discussion.
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.
As suppliers become more integrally involved in the vehicle design process and assume more of the vehicle
assembly functions, auto manufacturers are increasingly looking to their suppliers for contribution when
faced with recalls and product warranty claims. A recall claim brought against us, or a product warranty
claim brought against us, could have an adverse impact on our results of operations. In addition, a recall
claim could require us to review our entire product portfolio to assess whether similar issues are present in
other product lines, which could result in significant disruption to our business and could have an adverse
impact on our results of operations. 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.
19
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.
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 an 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. Despite 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 claim resolution costs and associated 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 they are higher, they 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 insurance carriers. 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.
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
20
associated with laws such as the Foreign Corrupt Practices Act and other anti-corruption laws could adversely
affect our business. We have internal policies and procedures relating to compliance with such laws; however,
there is a risk that such policies and procedures will not always protect us from the improper acts of
employees, agents, business partners, joint venture partners or representatives, particularly in the case of
recently-acquired operations that may not have significant training in applicable compliance policies and
procedures. Violations of these laws, which are complex, may result in criminal penalties, sanctions and/or
fines that could have an adverse effect on our business, financial condition and results of operations and
reputation.
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
intend to operate.
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.
On December 22, 2017, the Tax Cuts and Jobs Act (the “ Tax Act”) was enacted into law, which significantly
changed existing U.S. tax law and included many provisions applicable to the Company, such as reducing
the U.S. federal statutory tax rate, imposing a one-time transition tax on deemed repatriation of deferred
foreign income, and adopting a territorial tax system. The Tax Act reduced the U.S. federal statutory tax rate
from 35% to 21% effective January 1, 2018. The Tax Act also includes a provision to tax global intangible
low-taxed income of foreign subsidiaries, a special tax deduction for foreign-derived intangible income, and
a base erosion anti-abuse tax measure that may tax certain payments between a U.S. corporation and its
subsidiaries. These additional provisions of the Tax Act were effective beginning January 1, 2018. In future
periods, our effective tax rate could be subject to additional uncertainty as a result of regulatory developments
related to the Tax Act. Furthermore, changes in the earnings mix or applicable foreign tax laws may result
in significant fluctuations in our effective tax rates. Refer to Note 5, "Income Taxes," to the Consolidated
Financial Statements in Item 8 of this report for more information regarding income taxes.
Our growth strategy may prove unsuccessful.
We have a stated goal of increasing sales and operating income at a rate greater than growth, if any,
in global vehicle production by increasing content per vehicle with innovative new components and through
select acquisitions.
21
We may not meet our goal because of any of the risks in the following paragraph, or other factors such
as the failure to develop new products that our customers will purchase and technology changes rendering
our products obsolete; and 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 can be limited, and we can give no assurance that past or future business ventures, acquisitions,
and strategic alliances will positively affect our financial performance or will perform as planned. We may
not be able to successfully assimilate or integrate companies that we have acquired or acquire in the future,
including their personnel, financial systems, distribution, operations and general operating procedures. The
integration of companies that we have acquired or will 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 we may not be
able to retain key employees at the acquired company. 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 2018, 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 typically the functional currency for 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.
Because we are a U.S. holding company, one significant source of our 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.
22
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
volumes in China. In fact, recently, economic growth has slowed in China. If we are unable to maintain our
position in the Chinese market or if vehicle sales in China decrease, our business and financial results could
be adversely affected.
A downgrade in the ratings of our debt could restrict our ability to access the debt capital markets.
Changes in the ratings that rating agencies assign to our debt may ultimately impact our access to the
debt capital markets and the costs we incur to borrow funds. If ratings for our debt fall below investment
grade, our access to the debt capital markets could become restricted and our cost of borrowing or the
interest rate for any subsequently issued debt would likely increase.
Our revolving credit agreement includes an increase in interest rates if the ratings for our debt are
downgraded. The interest costs on our revolving credit agreement are based on a rating grid agreed to in
our credit agreement. Further, an increase in the level of our indebtedness and related interest costs may
increase our vulnerability to adverse general economic and industry conditions and may affect our ability
to obtain additional financing.
We could incur additional restructuring charges as we continue to execute actions in an effort to
improve future profitability and competitiveness and to optimize our product portfolio and may not
achieve the anticipated savings and benefits from these actions.
We have initiated and may continue to initiate restructuring actions designed to improve future profitability
and 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. Among other things, the level of production orders we receive is dependent on
the ability of our OEM customers to design and sell products that consumers desire to purchase. 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 2018 to Ford and Volkswagen constituted
approximately 14% and 12% of our 2018 consolidated net sales, respectively.
23
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. We select 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, industry shortages, 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 that our suppliers experience will not
result in occasional shortages or delays in their supply of components to us. If we were to experience a
significant or prolonged shortage of critical components from any of our suppliers and could not procure the
components from other sources, we would be unable to meet the production schedules for some of our key
products and could miss customer delivery expectations. In addition, with fewer sources of supply for certain
components, each supplier may perceive that it has greater leverage and, therefore, some ability to seek
higher prices from us at a time that we face substantial pressure from OEMs to reduce the prices of our
products. 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; our need to seek price
reductions from our suppliers as a result of the substantial pressure we face from OEMs to reduce the prices
of our products; credit tightness; changes in foreign currencies; raw material, commodity, tariffs,
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 financial counterparties.
We engage in numerous financial transactions and contracts including insurance policies, letters of
credit, credit line agreements, financial derivatives, and investment management agreements involving
various counterparties. We are 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.
24
A variety of other factors could adversely affect our business.
Other risks
Any of the following could materially and adversely affect our business: the loss of or changes in supply
contracts or sourcing strategies of our major customers or suppliers; start-up expenses associated with new
vehicle programs or delays or cancellation of such programs; utilization of our manufacturing facilities, which
can be dependent on a single product line or customer; inability to recover engineering and tooling costs;
market and financial consequences of recalls that may be required on products we supplied; delays or
difficulties in new product development; the possible introduction of similar or superior technologies by
others; global excess capacity and vehicle platform proliferation; and the impact of fire, flood or other natural
disasters.
Item 1B. Unresolved Staff Comments
The Company has received no written comments regarding its periodic or current reports from the staff
of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its
2018 fiscal year that remain unresolved.
25
Item 2. Properties
As of December 31, 2018, the Company had 68 manufacturing, assembly, and technical
locations worldwide. In addition to its 16 U.S. locations, the Company had nine 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, Japan and the United Kingdom; two locations in Italy; and one location in each
of Canada, France, Hungary, Ireland, Poland, Portugal, Spain, Sweden, and Thailand. 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)
Noblesville, Indiana (b)
San Luis Potosi, Mexico (b)
Seneca, South Carolina
Water Valley, Mississippi
Waterloo, Ontario, Canada
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
Gateshead, England (UK)
Heidelberg, Germany
Ketsch, Germany
Landskrona, Sweden (b)
Tulle, France
Wrexham, Wales (UK)
Taicang, China (b)
Kakkalur, India
Manesar, India
Nabari City, Japan
Ningbo, China (b) (e)
Pune, India
Pyongtaek, South Korea (b) (c)
Rayong, Thailand (d)
Asia
Beijing, China (b)
Dae-Gu, South Korea (b)
Dalian, China (b)
Eumsung, South Korea
Fukuroi City, Japan
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
26
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 15, "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.
On July 31, 2018, the Division of Enforcement of the SEC informed the Company that it is conducting
an investigation related to the Company's accounting for asbestos-related claims not yet asserted. The
Company is fully cooperating with the SEC in connection with its investigation.
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 8, 2019, there were 1,602 holders of record of Common Stock.
While the Company currently expects that quarterly cash dividends will continue to be paid in the future
at levels comparable to recent historical levels, the dividend policy is subject to review and change at the
discretion of the Board of Directors.
27
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 12/31/2013 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2019 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,
2013
2014
2015
2016
2017
2018
$
100.00 $
99.14 $
78.80 $
73.02 $
95.81 $
66.14
100.00
100.00
113.69
113.23
115.26
115.70
129.05
132.31
157.22
176.25
150.33
146.65
(1) BorgWarner Inc.
(2) S&P 500 — Standard & Poor’s 500 Total Return Index
(3) Standard Industrial Code (“SIC”) 3714-Motor Vehicle Parts
28
Purchase of Equity Securities
On February 11, 2015, the Company's Board of Directors authorized the purchase of up to $1.0 billion
of the Company's common stock up to 79.6 million shares in the aggregate. As of December 31, 2018, the
Company had repurchased 72.8 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 stock withheld to offset statutory minimum tax withholding that
occurs upon vesting of restricted stock. The BorgWarner Inc. 2014 Stock Incentive Plan, as amended and
the BorgWarner Inc. 2018 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, 2018:
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, 2018
Common Stock Repurchase Program
Employee transactions
Month Ended November 30, 2018
Common Stock Repurchase Program
Employee transactions
Month Ended December 31, 2018
Common Stock Repurchase Program
Employee transactions
Equity Compensation Plan Information
— $
— $
— $
695
$
— $
— $
—
—
—
38.87
—
—
—
—
—
—
—
—
6,819,833
6,819,833
6,819,833
As of December 31, 2018, 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
1,515,984
$
— $
1,515,984
$
42.97
—
42.97
6,963,017
—
6,963,017
29
Item 6. Selected Financial Data
(in millions, except share and per share data)
Operating results
Net sales
Operating income (a)
Net earnings attributable to BorgWarner Inc.(a)
Earnings per share — basic
Earnings per share — diluted
Net R&D expenditures
Capital expenditures, including tooling outlays
Depreciation and amortization
2018
2017
2016
2015
2014
Year Ended December 31,
$ 10,529.6
$
$
$
$
$
9,799.3
1,072.0
439.9
2.09
2.08
$
$
$
$
$
9,071.0
973.2
595.0
2.78
2.76
$
$
$
$
$
8,023.2
888.3
577.2
2.57
2.56
$
$
$
$
$
8,305.1
908.7
628.5
2.77
2.75
1,189.9
930.7
4.47
4.44
440.1
$
407.5
$
343.2
$
307.4
$
336.2
546.6
431.3
$
$
560.0
407.8
$
$
500.6
391.4
$
$
577.3
320.2
$
$
563.0
330.4
$
$
$
$
$
$
$
Number of employees
30,000
29,000
27,000
30,000
22,000
Financial position
Cash
Total assets
Total debt
$
739.4
$ 10,095.3
$
2,113.3
$
$
$
545.3
9,787.6
2,188.3
$
$
$
443.7
8,834.7
2,219.5
$
$
$
577.7
9,210.5
2,550.3
$
$
$
797.8
7,636.3
1,337.2
Common share information
Cash dividend declared and paid per share
Market prices of the Company's common stock
High
Low
$
$
$
Weighted average shares outstanding (thousands)
0.68
$
0.59
$
0.53
$
0.52
$
0.51
57.91
33.20
$
$
55.68
37.99
$
$
42.25
27.69
$
$
63.01
38.89
$
$
67.38
50.24
Basic
Diluted
208,197
209,496
210,429
211,548
214,374
215,325
224,414
225,648
227,150
228,924
________________
(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, 2018, 2017 and 2016.
30
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, 2018, 2017 and 2016 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
Other postretirement income
Earnings before income taxes and noncontrolling interest
Provision for income taxes
Net earnings
Net earnings attributable to the noncontrolling interest, net of tax
Net earnings attributable to BorgWarner Inc.
Earnings per share — diluted
Year Ended December 31,
2018
$ 10,529.6 $
8,300.2
2,229.4
945.7
93.8
1,189.9
(48.9)
(6.4)
58.7
(9.4)
1,195.9
211.3
984.6
53.9
$
$
930.7 $
4.44 $
2017
9,799.3 $
7,683.7
2,115.6
899.1
144.5
1,072.0
(51.2)
(5.8)
70.5
(5.1)
1,063.6
580.3
483.3
43.4
439.9 $
2.08 $
2016
9,071.0
7,142.3
1,928.7
818.0
137.5
973.2
(42.9)
(6.3)
84.6
(4.9)
942.7
306.0
636.7
41.7
595.0
2.76
31
Non-comparable items impacting the Company's earnings per diluted share and net earnings
The Company's earnings per diluted share were $4.44, $2.08 and $2.76 for the years ended December
31, 2018, 2017 and 2016, 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:
Restructuring expense
Asset impairment and loss on divestiture
Asbestos-related adjustments
Merger, acquisition and divestiture expense
Gain on sale of building
Officer stock awards modification
Gain on commercial settlement
Intangible asset impairment
Contract expiration gain
Tax reform adjustments
Tax adjustments
Total impact of non-comparable items per share — diluted:
$
Year Ended December 31,
2018
2017
2016
(0.24) $
(0.09)
(0.08)
(0.03)
0.07
(0.04)
0.01
—
—
0.06
0.30
(0.04) $
(0.23) $
(0.25)
—
(0.05)
—
—
—
—
—
(1.29)
0.02
(1.80) $
(0.10)
(0.48)
0.14
(0.11)
—
—
—
(0.04)
0.02
—
0.04
(0.53)
A summary of non-comparable items impacting the Company’s net earnings for the years ended
December 31, 2018, 2017 and 2016 is as follows:
Year ended December 31, 2018:
• The Company recorded restructuring expense of $67.1 million related to Engine and Drivetrain
segment actions designed to improve future profitability and competitiveness, primarily related to
employee termination benefits, professional fees, and manufacturing footprint rationalization
activities. The Company will continue to explore improving the future profitability and competitiveness
of its Engine and Drivetrain business and these actions may result in the recognition of additional
restructuring charges that could be material. Refer to Note 16, "Restructuring," to the Consolidated
Financial Statements in Item 8 of this report for more information.
• During the year ended December 31, 2018, the Company recorded an additional asset impairment
expense of $25.6 million to adjust the net book value of the pipe and thermostat product lines to fair
value less costs to sell. Additionally, the Company recorded $5.8 million of merger, acquisition and
divestiture expense primarily related to professional fees associated with divestiture activities for the
non-core pipe and thermostat product lines. Refer to Note 20, "Assets and Liabilities Held for Sale,"
to the Consolidated Financial Statements in Item 8 of this report for more information.
• During the year ended December 31, 2018, the Company recorded asbestos-related adjustments
resulting in an increase to Other Expense of $22.8 million. This increase was the result of actuarial
valuation changes of $22.8 million associated with the Company's estimate of liabilities for asbestos-
related claims asserted but not yet resolved and potential claims not yet asserted. Refer to Note 15,
"Contingencies," to the Consolidated Financial Statements in Item 8 of this report for more
information.
• During the fourth quarter of 2018, the Company recorded a gain of $19.4 million related to the sale
of a building at a manufacturing facility located in Europe.
32
• The Company recorded net restricted stock and performance share unit compensation expense of
$8.3 million in the year ended December 31, 2018 as the Company modified the vesting provisions
of restricted stock and performance share unit grants made to retiring executive officers to allow
certain of the outstanding awards, that otherwise would have been forfeited, to vest upon retirement.
Refer to Note 13, "Stock-Based Compensation," to the Consolidated Financial Statements in Item
8 of this report for more information.
• During the year ended December 31, 2018, the Company recorded a gain of approximately $4.0
million related to the settlement of a commercial contract for an entity acquired in the 2015 Remy
acquisition.
• The Company's provision for income taxes for the year ended December 31, 2018, includes
reductions of income tax expense of $15.0 million related to restructuring expense, $0.3 million
related to merger, acquisition and divestiture expense, $5.5 million related to the asbestos-related
adjustments, and $7.7 million related to asset impairment expense, offset by increases to tax expense
of $0.9 million and $5.8 million related to a gain on commercial settlement and a gain on the sale of
a building, respectively, discussed in Note 4, "Other Expense, Net," to the Consolidated Financial
Statements. The provision for income taxes also includes reductions of income tax expense of $12.6
million related to final adjustments made to measurement period provisional estimates associated
with the Tax Act, $22.0 million related to a decrease in our deferred tax liability due to a tax benefit
for certain foreign tax credits now available due to actions the Company took during the year, $9.1
million related to valuation allowance releases, $2.8 million related to tax reserve adjustments, and
$29.8 million related to changes in accounting methods and tax filing positions for prior years primarily
related to the Tax Act. Refer to Note 5, "Income Taxes," to the Consolidated Financial Statements
in Item 8 of this report for more information.
Year ended December 31, 2017:
• The Company determined that the assets and liabilities of the pipe 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 20, "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 also
recorded restructuring expense of $6.8 million primarily related to contractually-required severance
associated with Sevcon, Inc. ("Sevcon") executive officers and other employee termination benefits.
Refer to Note 16, "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 completed on September 27, 2017.
Refer to Note 19, "Recent Transactions," to the Consolidated Financial Statements in Item 8 of this
report for more information.
• The Company recorded reductions of income tax expense 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 Note 4, "Other Expense,
Net," to the Consolidated Financial Statements in Item 8 of this report. Additionally, the Company
recorded a tax expense of $273.5 million for the change in the tax law related to tax effects of the
Tax Act. Refer to Note 5, "Income Taxes," to the Consolidated Financial Statements in Item 8 of this
report for more information.
33
Year ended December 31, 2016:
• The Company recorded asbestos-related adjustments resulting in a net decrease to expense of
$48.6 million in Other Expense. This is comprised of actuarial valuation changes of $45.5 million
associated with the Company's estimate of liabilities for asbestos-related claims asserted but not
yet resolved and potential claims not yet asserted and a gain of $6.1 million from cash received from
insolvent insurance carriers, offset by related consulting fees. Refer to Note 15, "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 19, "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 were 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 reductions of income tax expense of $22.7 million, $8.6 million, $6.0 million
and $4.4 million primarily related to the loss on Remy light vehicle aftermarket divestiture, other one-
time tax adjustments, restructuring expense and intangible asset impairment loss, respectively, as
well as tax expenses of $17.5 million associated with asbestos-related adjustments and $2.2 million
associated with a gain on the release of certain Remy light vehicle aftermarket liabilities due to the
expiration of a customer contract.
Net Sales
Net sales for the year ended December 31, 2018 totaled $10,529.6 million, an 7.5% increase from the
year ended December 31, 2017. Excluding the impact of stronger foreign currencies and the net impact of
acquisitions and divestitures, net sales increased 4.8%.
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%.
34
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
Other postretirement income
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,
2018
2017
2016
100.0%
100.0%
100.0%
78.8
21.2
9.0
0.9
11.3
(0.5)
(0.1)
0.6
(0.1)
11.4
2.0
9.4
0.5
78.4
21.6
9.2
1.5
10.9
(0.5)
(0.1)
0.7
(0.1)
10.9
5.9
5.0
0.4
78.7
21.3
9.0
1.5
10.8
(0.5)
(0.1)
0.9
(0.1)
10.4
3.4
7.0
0.4
Net earnings attributable to BorgWarner Inc.
8.9%
4.6%
6.6%
Cost of sales as a percentage of net sales was 78.8%, 78.4% and 78.7% in the years ended December
31, 2018, 2017 and 2016, respectively. The reduction of gross margin in 2018 compared to 2017 was
primarily due to the cost of recently enacted tariffs and limited ability to reduce costs in response to the rapid
decline in industry volumes in the second half of the year. The Company's material cost of sales was
approximately 55% of net sales in the years ended December 31, 2018, 2017 and 2016. The Company's
remaining cost to convert raw material to finished product, which includes direct labor and manufacturing
overhead, were comparable in the years ended December 31, 2018, 2017 and 2016. Gross profit as a
percentage of net sales was 21.2%, 21.6% and 21.3% in the years ended December 31, 2018, 2017 and
2016, 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 $945.7 million, $899.1 million and $818.0
million or 9.0%, 9.2% and 9.0% of net sales for the years ended December 31, 2018, 2017 and 2016,
respectively. Excluding the impact of the 2017 acquisition of Sevcon, SG&A and SG&A as a percentage of
net sales were $919.7 million and 8.8% for the year ended December 31, 2018. 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.
Research and development ("R&D") costs, net of customer reimbursements, was $440.1 million, or
4.2% of net sales, in the year ended December 31, 2018, compared to $407.5 million, or 4.2% of net sales,
and $343.2 million, or 3.8% of net sales, in the years ended December 31, 2017 and 2016, respectively.
The increase of R&D costs, net of customer reimbursements, in the year ended December 31, 2018
compared with the years ended December 31, 2017 and 2016 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 $93.8 million, $144.5 million and $137.5 million for the years ended December
31, 2018, 2017 and 2016, respectively. This line item is primarily comprised of non-income tax items
35
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 $48.9 million, $51.2 million and $42.9 million in the years
ended December 31, 2018, 2017 and 2016, 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”). Equity in affiliates' earnings in the year ended December 31, 2018 was comparable
to the year ended December 31, 2017. The increase in the year ended December 31, 2017 to 2016 was
primarily driven by higher earnings from NSK-Warner as a result of improved business conditions in Asia.
Refer to Note 6, "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 $58.7 million, $70.5 million and $84.6 million in the years
ended December 31, 2018, 2017 and 2016, respectively. The decrease in interest expense for the year
ended December 31, 2018 compared with the year ended December 31, 2017 was primarily due to the
cross-currency swaps executed in 2018 and an increase in capitalized interest. 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.
Provision for income taxes the provision for income taxes resulted in an effective tax rate of 17.7%
for the year ended December 31, 2018, compared with rates of 54.6% and 32.5% for the years ended
December 31, 2017 and 2016, respectively. As of December 31, 2018, the Company has completed its
accounting for the tax effects of the Tax Act. For further details, see Note 5, "Income Tax," to the Consolidated
Financial Statements in Item 8.
The effective tax rate of 17.7% for the year ended December 31, 2018 includes reductions of income
tax expense of $15.0 million related to restructuring expense, $0.3 million related to merger, acquisition and
divestiture expense, $5.5 million related to the asbestos-related adjustments, and $7.7 million related to
asset impairment expense, offset by increases to tax expense of $0.9 million and $5.8 million related to a
gain on commercial settlement and a gain on the sale of a building, respectively, discussed in Note 4, "Other
Expense, Net," to the Consolidated Financial Statements. The provision for income taxes also includes
reductions of income tax expense of $12.6 million related to final adjustments made to measurement period
provisional estimates associated with the Tax Act, $22.0 million related to a decrease in our deferred tax
liability due to a tax benefit for certain foreign tax credits now available due to actions the Company took
during the year, $9.1 million related to valuation allowance releases, $2.8 million related to tax reserve
adjustments, and $29.8 million related to changes in accounting methods and tax filing positions for prior
years primarily related to the Tax Act. Excluding the impact of these non-comparable items, the Company's
annual effective tax rate associated with ongoing operations for 2018 was 23.8%.
The effective tax rate of 54.6% for the year ended December 31, 2017 includes reductions of income
tax expense 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 Note 4, "Other Expense, Net," to the Consolidated Financial Statements in Item
8 of this report for more information. Additionally, the Company recorded a tax expense of $273.5 million
for the change in the tax law related to tax effects of the Tax 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 32.5% for the year ended December 31, 2016 includes reductions of income
tax expense of $22.7 million, $8.6 million, $6.0 million and $4.4 million associated with a loss on divestiture,
other one-time tax adjustments, restructuring expense and intangible asset impairment loss, respectively,
as well as tax expenses of $17.5 million associated with asbestos-related adjustments and $2.2 million
36
associated with a gain on 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 30.4%.
Net earnings attributable to the noncontrolling interest, net of tax of $53.9 million for the year ended
December 31, 2018 increased by $10.5 million and $12.2 million compared to the years ended December
31, 2017 and 2016, respectively. The increase during the year ended December 31, 2018 compared to the
years ended December 31, 2017 and 2016 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
$
2018
6,447.4 $
4,139.4
(57.2)
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
$ 10,529.6 $
segments.
Net Sales by Reporting Segment
(millions of dollars)
Engine
Drivetrain
Inter-segment eliminations
Net sales
37
Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest ("Adjusted EBIT")
Year Ended December 31,
2017
2016
2018
1,039.9 $
$
(millions of dollars)
Engine
Drivetrain
Adjusted EBIT
Restructuring expense
Asset impairment and loss on divestiture
Asbestos-related adjustments
Gain on sale of building
Other postretirement income
CEO stock awards modification
Merger, acquisition and divestiture expense
Lease termination settlement
Intangible asset impairment
Contract expiration gain
Other expense, net
Corporate, including equity in affiliates' earnings and stock-based
compensation
Interest income
Interest expense and finance charges
475.4
1,515.3
67.1
25.6
22.8
(19.4)
(9.4)
8.3
5.8
—
—
—
(3.3)
169.6
(6.4)
58.7
992.1 $
448.3
1,440.4
58.5
71.0
—
—
(5.1)
—
10.0
5.3
—
—
2.1
170.3
(5.8)
70.5
Earnings before income taxes and noncontrolling interest
1,195.9
1,063.6
Provision for income taxes
Net earnings
Net earnings attributable to the noncontrolling interest, net of tax
211.3
984.6
53.9
580.3
483.3
43.4
Net earnings attributable to BorgWarner Inc.
$
930.7 $
439.9 $
943.9
363.0
1,306.9
26.9
127.1
(48.6)
—
(4.9)
—
23.7
—
12.6
(6.2)
—
155.3
(6.3)
84.6
942.7
306.0
636.7
41.7
595.0
The Engine segment's net sales for the year ended December 31, 2018 increased $385.9 million, or
6.4%, and segment Adjusted EBIT increased $47.8 million, or 4.8%, from the year ended December 31,
2017 due to higher sales of light vehicle turbochargers, thermal products, engine timing systems and
stronger commercial vehicle markets around the world. Excluding the impact of strengthening foreign
currencies, primarily the Euro, Chinese Renminbi, and the net impact of acquisitions and divestitures, net
sales increased 3.6% from the year ended December 31, 2017. The segment Adjusted EBIT margin was
16.1% for the year ended December 31, 2018, down from 16.4% in the year ended December 31, 2017.
The Adjusted EBIT margin decrease was primarily related to the rapid industry volume declines in Europe
and China in the second half of 2018.
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 $48.2 million, or 5.1%, from the year ended December 31,
2017 due to higher sales of light vehicle turbochargers, thermal products, engine timing systems and
stronger commercial vehicle markets around the world. 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. 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. Refer to Note 16, "Restructuring," to the Consolidated
Financial Statements in Item 8 of this report for more information.
38
The Drivetrain segment's net sales for the year ended December 31, 2018 increased $349.1 million,
or 9.2%, and segment Adjusted EBIT increased $27.1 million, or 6.0%, from the year ended December 31,
2017 primarily due to higher sales of all-wheel drive systems and transmission components. Excluding the
impact of strengthening foreign currencies, primarily the Euro and Chinese Renminbi, and the net impact
of acquisitions and divestitures, net sales increased 6.8% from the year ended December 31, 2017. The
segment Adjusted EBIT margin was 11.5% in the year ended December 31, 2018, compared to 11.8% in
the year ended December 31, 2017. The Adjusted EBIT margin decrease was primarily due to the impact
of the Sevcon acquisition.
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 23.5%, from the year ended December 31,
2016 primarily due to higher sales of all-wheel drive systems and transmission components. 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. The
segment Adjusted EBIT margin was 11.8% 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.
Corporate represents headquarters' expenses not directly attributable to the individual segments and
equity in affiliates' earnings. This net expense was $169.6 million, $170.3 million and $155.3 million for the
years ended December 31, 2018, 2017 and 2016, respectively. The increase of Corporate expenses in 2018
and 2017 compared to 2016 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 2019 is neutral. Net new business-related sales growth, due to increased
penetration of BorgWarner products around the world, is expected to drive flat to increasing growth excluding
the impact of foreign currencies and the net impact of acquisitions and divestitures, despite the declining
global industry production expected in 2019.
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 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, 2018, the Company had $739.4
million of cash, of which $484.8 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. The Tax Act reduced
the U.S. federal corporate tax rate from 35 percent to 21 percent and required companies to pay a one-time
transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. As of January 1,
2018, funds repatriated from foreign subsidiaries will generally no longer be taxable for U.S. federal tax
purposes. In light of the treatment of foreign earnings under the Tax Act, the Company 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. A deferred tax liability has been recorded for substantially all estimated
39
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 Company has 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, 2018. At December 31, 2018 and December
31, 2017, the Company had no outstanding borrowings under this facility.
The Company's commercial paper program allows the Company to issue short-term, unsecured
commercial paper notes up to a maximum aggregate principal amount outstanding of $1.2 billion. Under
this program, the Company may issue notes from time to time and will use the proceeds for general corporate
purposes. The Company had no outstanding borrowings under this program as of December 31, 2018 and
December 31, 2017.
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 provides the ability to issue
various debt and equity instruments.
On February 7, 2018, April 25, 2018, July 25, 2018 and November 7, 2018, the Company’s Board of
Directors declared quarterly cash dividends of $0.17 per share of common stock. These dividends were
paid on March 15, 2018, June 15, 2018, September 17, 2018 and December 17, 2018.
The Company's net debt to net capital ratio was 24.0% at December 31, 2018 versus 30.0% at December
31, 2017.
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, Moody's and Fitch
Ratings is stable. None of the Company's debt agreements require accelerated repayment in the event of
a downgrade in credit ratings.
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,
2018
2017
$
172.6
$
84.6
1,940.7
2,113.3
739.4
1,373.9
4,344.8
2,103.7
2,188.3
545.3
1,643.0
3,825.9
$ 5,718.7
$ 5,468.9
24.0%
30.0%
Balance sheet debt decreased by $75.0 million and cash increased by $194.1 million compared with
December 31, 2017. The $269.1 million decrease in balance sheet debt (net of cash) was primarily due to
cash flow from operations.
40
Total equity increased by $518.9 million in the year ended December 31, 2018 as follows:
(millions of dollars)
Balance, January 1, 2018
Adoption of accounting standards
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, 2018
Operating Activities
$
3,825.9
1.9
984.6
(150.0)
37.7
(178.0)
(141.5)
(35.8)
$
4,344.8
Net cash provided by operating activities was $1,126.5 million, $1,180.3 million and $1,035.7 million in
the years ended December 31, 2018, 2017 and 2016, respectively. The decrease for the year ended
December 31, 2018 compared with the year ended December 31, 2017 primarily reflected changes in
working capital, offset by higher earnings adjusted for noncash charges to operations. 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.
Investing Activities
Net cash used in investing activities was $514.5 million, $752.3 million and $404.2 million in the years
ended December 31, 2018, 2017 and 2016, respectively. The decrease in the year ended December 31,
2018 compared with the year ended December 31, 2017 was primarily due to the 2017 acquisition of Sevcon,
higher proceeds from asset disposals and lower capital expenditures, including tooling outlays in 2018. 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 divestitures of Divgi-Warner and the Remy light vehicle aftermarket business. Year over year
capital spending decrease of $13.4 million during the year ended December 31, 2018 was primarily due to
timing of the investment activity in the Drivetrain segment. Year over year capital spending increase of $59.4
million during the year ended December 31, 2017 was due to higher spending required for new program
awards within the Drivetrain segment.
Financing Activities
Net cash used in financing activities was $383.4 million, $362.5 million and $733.8 million in the years
ended December 31, 2018, 2017 and 2016, respectively. The increase in the year ended December 31,
2018 compared with the year ended December 31, 2017 was primarily driven by lower borrowings, higher
share repurchases and dividend payments. 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 share repurchases.
41
The Company's significant contractual obligation payments at December 31, 2018 are as follows:
(millions of dollars)
Total
2019
2020-2021
2022-2023
After 2023
Other postretirement employee benefits, excluding
pensions (a)
$
76.8 $
11.0 $
19.8 $
17.1 $
Defined benefit pension plans (b)
Notes payable and long-term debt
Projected interest payments
Non-cancelable operating leases
Capital spending obligations
Total
54.8
2,125.7
838.3
121.3
103.7
4.0
172.6
79.5
24.3
103.7
9.9
258.6
124.2
36.1
—
10.9
573.8
104.2
23.0
—
28.9
30.0
1,120.7
530.4
37.9
—
$ 3,320.6 $ 395.1 $ 448.6 $ 729.0 $ 1,747.9
________________
(a) Other postretirement employee benefits, excluding pensions, include anticipated future payments to cover retiree medical
and life insurance benefits. Amount contained in “After 2023” column includes estimated payments through 2028. Refer to
Note 12, "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 2023” column is for unfunded plans and
includes estimated payments through 2028. Refer to Note 12, "Retirement Benefit Plans," to the Consolidated Financial
Statements in Item 8 of this report for disclosures related to the Company’s pension benefits.
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.
Asbestos-related Liability
During 2018 and 2017, the Company paid $46.0 million and $51.7 million, respectively, in asbestos-
related claim resolution costs and associated defense costs. These gross payments are before tax benefits
and any insurance receipts. Asbestos-related claim resolution costs and associated defense costs are
reflected in the Company's operating cash flows and will continue to be in the future.
Refer to Note 15, "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, 2018 is $121.3 million. Refer to Note 17,
"Leases and Commitments," to the Consolidated Financial Statements in Item 8 of this report for more
information on operating leases, including future minimum payments.
42
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, 2018, all
legal funding requirements had been met. The Company contributed $25.8 million, $18.3 million and $19.7
million to its defined benefit pension plans in the years ended December 31, 2018, 2017 and 2016,
respectively. The Company expects to contribute a total of $15 million to $25 million into its defined benefit
pension plans during 2019. Of the $15 million to $25 million in projected 2019 contributions, $4 million are
contractually obligated, while any remaining payments would be discretionary.
The funded status of all pension plans was a net unfunded position of $210.9 million and $188.6 million
at December 31, 2018 and 2017, respectively. Of these amounts, $95.4 million and $75.7 million at December
31, 2018 and 2017, 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 $86.5 million and
$107.0 million at December 31, 2018 and 2017, 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 12, "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
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 28 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
43
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 15 - 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 $805.3 million as of
December 31, 2018 for asbestos-related claim resolution costs and associated defense costs through 2074,
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, 2018, it has aggregate insurance
coverage available in the amount of $386.4 million to satisfy asbestos-related claim resolution costs and
associated defense costs. As with any estimates, the actual experience may differ.
Refer to "Note 15 - 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.
Revenue recognition The Company recognizes revenue when performance obligations under the terms
of a contract are satisfied, which generally occurs with the transfer of control of our products. Although the
Company may enter into long-term supply arrangements with its major customers, the prices and volumes
are not fixed over the life of the arrangements, and a contract does not exist for purposes of applying ASC
606 until volumes are contractually known. For most of our products, transfer of control occurs upon shipment
or delivery, however, a limited number of our customer arrangements for our highly customized products
with no alternative use provide us with the right to payment during the production process. As a result, for
these limited arrangements, revenue is recognized as goods are produced and control transfers to the
customer. Revenue is measured at the amount of consideration we expect to receive in exchange for
transferring the good.
The Company continually seeks business development opportunities and at times provides customer
incentives for new program awards. Customer incentive payments are capitalized when the payments are
incremental and incurred only if the new business is obtained and these amounts are expected to be
recovered from the customer over the term of the new business arrangement. The Company recognizes a
reduction to revenue as products that the upfront payments are related to are transferred to the customer,
based on the total amount of products expected to be sold over the term of the arrangement (generally 3
to 7 years). The Company evaluates the amounts capitalized each period end for recoverability and expenses
any amounts that are no longer expected to be recovered over the term of the business arrangement.
44
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
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 20, "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 assigned to each of its reporting units. This qualitative
45
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.
Similar to goodwill, the Company can elect to perform the impairment test for indefinite-lived intangibles
other than goodwill (primarily trade names) using a qualitative analysis, considering similar factors as outlined
in the goodwill discussion in order to determine if it is more-likely-than-not that the fair value of the trade
names is less than the respective carrying values. If the Company elects to perform or is required to perform
a quantitative analysis, the test consists of a comparison of the fair value of the indefinite-lived intangible
asset to the carrying value of the asset as of the impairment testing date. We estimate the fair value of
indefinite-lived intangibles using the relief-from-royalty method, which we believe is an appropriate and
widely used valuation technique for such assets. The fair value derived from the relief-from-royalty method
is measured as the discounted cash flow savings realized from owning such trade names and not being
required to pay a royalty for their use.
During the fourth quarter of 2018, 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, 2018 goodwill quantitative, "step one," impairment review are as
follows:
• Discount rate: the Company used a 10.9% 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.
46
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
2018 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 substantially higher than the reporting
unit's carrying value. 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 7, "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:
(millions of dollars)
Net sales
Warranty provision
Year Ended December 31,
2018
2017
2016
$ 10,529.6
$ 9,799.3
$ 9,071.0
$
69.0
$
73.1
$
62.2
Warranty provision as a percentage of net sales
0.7%
0.7%
0.7%
The following table illustrates the sensitivity of a 25 basis point change (as a percentage of net sales)
in the assumed warranty trend on the Company's accrued warranty liability:
(millions of dollars)
25 basis point decrease (income)/expense
25 basis point increase (income)/expense
December 31,
2018
2017
2016
$
$
(26.3) $
26.3 $
(24.5) $
24.5 $
(22.7)
22.7
At December 31, 2018, the total accrued warranty liability was $103.2 million. The accrual is represented
as $56.2 million in current liabilities and $47.0 million in non-current liabilities on our Consolidated Balance
Sheet.
Refer to Note 8, "Product Warranty," to the Consolidated Financial Statements in Item 8 of this report
for more information regarding product warranties.
Asbestos 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. With the assistance of a third party actuary, the
47
Company estimates the liability and corresponding insurance recovery for pending and future claims not
yet asserted to extend through December 31, 2064 with a runoff through 2074 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. As with any estimates, actual experience may
differ. This estimate is not discounted to present value. The Company currently believes that December 31,
2074 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 not yet asserted and defense costs on an ongoing basis by
evaluating actual experience regarding claims filed, settled and dismissed, and amounts paid in claim
resolution costs. In addition to claims 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 insurance carriers, potential remaining recoveries
from insolvent insurance carriers, the impact of previous insurance settlements, and coverage available
from solvent insurance carriers not party to the coverage litigation.
Refer to Note 15, "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.
Pension and other postretirement defined benefits The Company provides postretirement defined
benefits to a number of its current and former employees. Costs associated with postretirement defined
benefits include pension and postretirement health care expenses for employees, retirees and surviving
spouses and dependents.
The Company's defined benefit pension and other postretirement plans are accounted for in accordance
with ASC Topic 715. The determination of the Company's obligation and expense for its pension and other
postretirement employee benefits, such as retiree health care, is dependent on certain assumptions used
by actuaries in calculating such amounts. Certain assumptions, including the expected long-term rate of
return on plan assets, discount rate, rates of increase in compensation and health care costs trends are
described in Note 12, "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.
48
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, 2018 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, 2018, the Company used long-term rates of return on plan
assets ranging from 1.75% to 6.0% outside of the U.S. and 6.0% in the U.S.
Actual returns on U.S. pension assets were -4.1%, 11.5% and 5.9% for the years ended December 31,
2018, 2017 and 2016, respectively, compared to the expected rate of return assumption of 6.0% for the
same years ended.
Actual returns on U.K. pension assets were -3.1%, 9.7% and 22.0% for the years ended December 31,
2018, 2017 and 2016, respectively, compared to the expected rate of return assumption of 6.0% for the
same years ended.
Actual returns on German pension assets were -4.2%, 7.0% and 8.6% for the years ended December
31, 2018, 2017 and 2016, 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 10.75% to determine its pension and other benefit obligations
as of December 31, 2018, including weighted average discount rates of 4.24% in the U.S., 2.28% outside
of the U.S., and 4.05% for U.S. other postretirement health care plans. The U.S. discount rate reflects
the fact that our U.S. pension plan has been closed for new participants since 1989 (1999 for our U.S.
health care plan).
• Health care cost trend: For postretirement employee health care plan accounting, the Company reviews
external data and Company specific historical trends for health care cost to determine the health care
cost trend rate assumptions. In determining the projected benefit obligation for postretirement employee
health care plans as of December 31, 2018, the Company used health care cost trend rates of 6.50%,
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.
49
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 2019 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. 2019
pre-tax pension
(expense)/income
Impact on Non-U.S.
2019 pre-tax pension
(expense)/income
$
$
$
$
— * $
— * $
(2.0)
2.0
$
$
(6.2)
6.2
(4.4)
4.4
________________
* A one percentage point increase or decrease in the discount rate would have a negligible impact on the Company’s U.S. 2019
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 2019 pre-
tax OPEB interest
(expense)/income
$
$
(0.6)
0.6
The sensitivity to a change in the discount rate assumption related to the Company's total 2019 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
$
$
5.5 $
0.2 $
(4.9)
(0.2)
Refer to Note 12, "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
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
50
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, 2018, the Company has a liability for significant tax
positions the Company estimates are not more-likely-than-not to be sustained based on the technical merits,
which is included in other current and 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 Act that was signed into law in December 2017 constitutes a major change to the US tax system.
The impact of the Tax Act on the Company is based on management’s current interpretations of the Tax
Act, recently issued regulations and related analysis. The Company's tax liability may be materially different
based on regulatory developments. 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 5, "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.
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 11, "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.
51
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, 2018, the amount
of debt with fixed interest rates was 99.8% 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
resulted in a change in pre-tax interest expense of approximately $0.1 million and $0.1 million in the years
ended December 31, 2018 and 2017, 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 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 $47.2 million and $59.2 million as of December 31,
2018 and 2017, 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 2018. 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, 2018 and 2017, the Company recorded a deferred gain related to
foreign currency derivatives of $1.7 million and $1.6 million, respectively, and deferred loss related to foreign
currency derivatives of $1.5 million and $3.9 million, respectively.
The foreign currency translation adjustment loss of $147.6 million, foreign currency translation
adjustment gain of $236.5 million and foreign currency translation adjustment loss of $109.1 million for the
year ended December 31, 2018, 2017 and 2016, 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 2018 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 approximately 4% and 5% and increased other
comprehensive loss by approximately $102 million and $48 million, respectively. 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 $266
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.
52
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, 2018 and
2017, the Company had commodity swap contracts with a total notional value of $1.7 million and a recorded
short-term deferred loss of $0.2 million. As of December 31, 2017, the Company had no commodity swap
contracts outstanding.
Disclosure Regarding Forward-Looking Statements
The matters discussed in this Item 7 include forward looking statements. See "Forward Looking
Statements" at the beginning of this Annual Report on Form 10-K.
53
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 Note 11, "Financial Instruments," to the Consolidated Financial Statements in Item 8 of this report.
For information regarding the levels of indebtedness subject to interest rate fluctuation, refer to Note 9,
"Notes Payable and Long-Term Debt," to the Consolidated Financial Statements in Item 8 of this report. For
information regarding the level of business outside the United States, which is subject to foreign currency
exchange rate market risk, refer to Note 21, "Reporting Segments and Related Information," to the
Consolidated Financial Statements in Item 8 of this report.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data
Page No.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to Consolidated Financial Statements
55
57
58
59
60
61
62
54
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 (the
“Company”) as of December 31, 2018 and 2017, 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, 2018, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2018 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, 2018, 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.
55
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 19, 2019
We have served as the Company’s auditor since 2008.
56
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
ASSETS
Cash
Receivables, net
Inventories, net
Prepayments and other current assets
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: (2018 -
246,387,057; 2017 - 246,387,057); outstanding shares: (2018- 208,214,934; 2017 -
210,812,793)
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,
2018
2017
$
739.4
$
545.3
1,987.4
2,018.9
780.8
250.0
47.0
766.3
145.4
67.3
3,804.6
3,543.2
2,903.8
591.7
1,853.4
439.5
502.3
2,863.8
547.4
1,881.8
492.7
458.7
$ 10,095.3
$
9,787.6
$
172.6
$
84.6
2,144.3
2,270.3
58.9
23.1
40.8
29.5
2,398.9
2,425.2
1,940.7
2,103.7
755.3
298.3
357.3
775.7
301.6
355.5
1,410.9
1,432.8
—
2.5
—
—
2.5
—
1,145.8
5,336.1
(674.1)
1,118.7
4,531.0
(490.0)
Common stock held in treasury, at cost: (2018 - 38,172,123 shares; 2017 - 35,574,264 shares)
(1,584.8)
(1,445.4)
Total BorgWarner Inc. stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
4,225.5
119.3
4,344.8
3,716.8
109.1
3,825.9
$ 10,095.3
$
9,787.6
See Accompanying Notes to Consolidated Financial Statements.
57
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share and per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other expense, net
Operating income
Equity in affiliates’ earnings, net of tax
Interest income
Interest expense and finance charges
Other postretirement income
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,
2018
$ 10,529.6
8,300.2
2,229.4
2017
$ 9,799.3
7,683.7
2,115.6
2016
$ 9,071.0
7,142.3
1,928.7
945.7
93.8
1,189.9
(48.9)
(6.4)
58.7
(9.4)
1,195.9
899.1
144.5
1,072.0
(51.2)
(5.8)
70.5
(5.1)
1,063.6
211.3
984.6
53.9
930.7
4.47
4.44
$
$
$
580.3
483.3
43.4
439.9
2.09
2.08
$
$
$
$
$
$
818.0
137.5
973.2
(42.9)
(6.3)
84.6
(4.9)
942.7
306.0
636.7
41.7
595.0
2.78
2.76
208,197
209,496
210,429
211,548
214,374
215,328
See Accompanying Notes to Consolidated Financial Statements.
58
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of dollars)
Net earnings attributable to BorgWarner Inc.
Other comprehensive (loss) income
Foreign currency translation adjustments
Hedge instruments*
Defined benefit postretirement plans*
Other*
Year Ended December 31,
2018
2017
2016
$
930.7
$
439.9
$
595.0
(147.6)
1.6
(23.0)
(1.1)
236.5
(6.3)
0.5
1.4
(109.1)
7.0
(8.2)
(1.6)
Total other comprehensive (loss) income attributable to BorgWarner Inc.
(170.1)
232.1
(111.9)
Comprehensive income attributable to BorgWarner Inc.*
760.6
672.0
483.1
Net earnings attributable to noncontrolling interest, net of tax*
Other comprehensive (loss) income attributable to the noncontrolling interest*
Comprehensive income
____________________________________
* Net of income taxes.
53.9
(7.9)
43.4
11.4
41.7
(5.1)
$
806.6
$
726.8
$
519.7
See Accompanying Notes to Consolidated Financial Statements.
59
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of dollars)
OPERATING
Net earnings
Adjustments to reconcile net earnings to net cash flows from operations:
Non-cash charges (credits) to operations:
Asset impairment and loss on divestiture
Asbestos-related adjustments
Gain on sale of building
Depreciation and amortization
Stock-based compensation expense
Restructuring expense, net of cash paid
Deferred income tax (benefit) provision
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
Prepaid taxes and income taxes payable
Other assets and liabilities
Net cash provided by operating activities
INVESTING
Capital expenditures, including tooling outlays
Proceeds from sale of businesses, net of cash divested
Proceeds from asset disposals and other
Payments for businesses acquired, including restricted cash, net of cash acquired
Proceeds from (payments for) settlement of net investment hedges
Payments for venture capital investment
Net cash used in investing activities
FINANCING
Net decrease in notes payable
Additions to debt, net of debt issuance costs
Repayments of 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 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
Year Ended December 31,
2018
2017
2016
$
984.6
$
483.3
$
636.7
25.6
22.8
(19.4)
431.3
52.9
33.0
(57.2)
(12.6)
(15.0)
1,446.0
(42.9)
(53.3)
(18.7)
(76.1)
(84.7)
(43.8)
1,126.5
(546.6)
—
36.0
—
2.1
(6.0)
(514.5)
(34.2)
58.7
(65.7)
—
—
(150.0)
(15.2)
(141.5)
(35.5)
(383.4)
(34.5)
194.1
545.3
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
$
$
$
$
739.4
$
545.3
$
83.6
315.7
$
$
92.0
279.8
— $
18.0
$
$
$
127.1
(48.6)
—
391.4
43.6
12.0
6.8
—
(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
—
See Accompanying Notes to Consolidated Financial Statements.
60
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Number of shares
BorgWarner Inc. stockholder's equity
(in millions of dollars, except share data)
Issued
common
stock
Common
stock held in
treasury
Issued
common
stock
Capital in
excess of
par value
Treasury
stock
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Noncontrolling
interests
Balance, January 1, 2016
246,387,057
(27,062,236) $
2.5
$
1,109.7
$
(1,158.4) $
3,733.6
$
(610.2) $
Dividends declared ($0.53 per share) *
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)
—
—
—
—
—
595.0
—
—
—
—
—
—
—
—
(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 ($0.59 per share) *
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) $
Adoption of accounting standards (Note 1)
Dividends declared ($0.68 per share) *
Net issuance for executive stock plan
Net issuance of restricted stock
Purchase of treasury stock
Net earnings
Other comprehensive loss
—
—
—
—
—
—
—
—
—
154,642
284,946
(3,037,447)
—
—
—
—
—
—
—
—
—
—
—
17.5
9.6
—
—
—
—
—
4.5
6.1
(150.0)
—
—
15.9
(141.5)
—
—
—
930.7
—
(14.0)
—
—
—
—
—
(170.1)
77.8
(26.0)
—
—
—
—
(4.8)
41.7
(5.1)
83.6
(29.3)
—
—
—
—
43.4
11.4
109.1
—
(35.8)
—
—
—
53.9
(7.9)
Balance, December 31, 2018
246,387,057
(38,172,123) $
2.5
$
1,145.8
$
(1,584.8) $
5,336.1
$
(674.1) $
119.3
____________________________________
*
The dividends declared relate to BorgWarner common stock.
See Accompanying Notes to Consolidated Financial Statements.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
BorgWarner Inc. (together with it 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. We manufacture and sell these products 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 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.
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 performance obligations under the
terms of a contract are satisfied, which generally occurs with the transfer of control of our products. Although
the Company may enter into long-term supply arrangements with its major customers, the prices and volumes
are not fixed over the life of the arrangements, and a contract does not exist for purposes of applying ASC
606 until volumes are contractually known. For most of our products, transfer of control occurs upon shipment
or delivery, however, a limited number of our customer arrangements for our highly customized products
with no alternative use provide us with the right to payment during the production process. As a result, for
these limited arrangements, revenue is recognized as goods are produced and control transfers to the
customer. Revenue is measured at the amount of consideration we expect to receive in exchange for
transferring the good.
The Company continually seeks business development opportunities and at times provides customer
incentives for new program awards. Customer incentive payments are capitalized when the payments are
incremental and incurred only if the new business is obtained and these amounts are expected to be
recovered from the customer over the term of the new business arrangement. The Company recognizes a
reduction to revenue as products that the upfront payments are related to are transferred to the customer,
based on the total amount of products expected to be sold over the term of the arrangement (generally 3
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to 7 years). The Company evaluates the amounts capitalized each period end for recoverability and expenses
any amounts that are no longer expected to be recovered over the term of the business arrangement.
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.
Refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements for more
information.
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 or net realizable value. Inventory held by U.S. operations using
the LIFO method was $137.9 million and $147.4 million at December 31, 2018 and 2017, respectively. Such
inventories, if valued at current cost instead of LIFO, would have been greater by $16.7 million and $13.1
million at December 31, 2018 and 2017, respectively.
Refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements of this report
for more information.
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 has title to the assets 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.
Refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements for more
information.
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
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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 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.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Similar to goodwill, the Company can elect to perform the impairment test for indefinite-lived intangibles
other than goodwill (primarily trade names) using a qualitative analysis, considering similar factors as outlined
in the goodwill discussion in order to determine if it is more-likely-than-not that the fair value of the trade
names is less than the respective carrying values. If the Company elects to perform or is required to perform
a quantitative analysis, the test consists of a comparison of the fair value of the indefinite-lived intangible
asset to the carrying value of the asset as of the impairment testing date. We estimate the fair value of
indefinite-lived intangibles using the relief-from-royalty method, which we believe is an appropriate and
widely used valuation technique for such assets. The fair value derived from the relief-from-royalty method
is measured as the discounted cash flow savings realized from owning such trade names and not being
required to pay a royalty for their use.
Refer to Note 7, "Goodwill and Other Intangibles," to the Consolidated Financial Statements for more
information.
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.
Refer to Note 8, "Product Warranty," to the Consolidated Financial Statements for more information.
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 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. With the assistance of a third party actuary, the
Company estimates the liability and corresponding insurance recovery for pending and future claims not
yet asserted through December 31, 2064 with a runoff through 2074 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, 2074 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 not
yet asserted and defense costs on an ongoing basis by evaluating actual experience regarding claims filed,
settled and dismissed, and amounts paid in claim resolution costs. In addition to claims 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
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and amount of claims on our insurance from co-insured parties, ongoing litigation against the Company’s
insurance carriers, potential remaining recoveries from insolvent insurance carriers, the impact of previous
insurance settlements, and coverage available from solvent insurance carriers not party to the coverage
litigation.
Refer to Note 15, "Contingencies," to the Consolidated Financial Statements for more information.
Environmental contingencies The Company accounts for environmental costs in accordance with
ASC Topic 450. Costs related to environmental assessments and remediation efforts at operating facilities
are accrued when it is probable that a liability has been incurred and the amount of that liability can be
reasonably estimated. Estimated costs are recorded at undiscounted amounts, based on experience and
assessments and are regularly evaluated. The liabilities are recorded in accounts payable and accrued
expenses and other non-current liabilities in the Company's Consolidated Balance Sheets.
Refer to Note 15, "Contingencies," to the Consolidated Financial Statements for more information.
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.
Refer to Note 11, "Financial Instruments," to the Consolidated Financial Statements for more information.
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.
Refer to Note 14, "Accumulated Other Comprehensive Income," to the Consolidated Financial
Statements for more information.
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.
Refer to Note 12, "Retirement Benefit Plans," to the Consolidated Financial Statements for more
information.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Refer to Note 16, "Restructuring," to the Consolidated Financial Statements for more information.
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.
Refer to Note 5, "Income Taxes," to the Consolidated Financial Statements for more information.
New Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)."
It requires implementation costs incurred by customers in cloud computing arrangements to be deferred
and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a
software licensing arrangement under the internal-use software guidance (Subtopic 350-40). This guidance
is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted.
The Company is currently assessing the impact of this guidance on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-14, "Compensation
- Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)." The new standard (i) requires
the removal of disclosures that are no longer considered cost beneficial; (ii) clarifies specific requirements
of certain disclosures; (iii) adds new disclosure requirements, including the weighted average interest
crediting rates for cash balance plans and other plans with promised interest crediting rates, and reasons
for significant gains and losses related to changes in the benefit obligation. This guidance is effective for
annual periods beginning after December 15, 2020 and early adoption is permitted. The Company is currently
assessing the guidance and will include enhanced disclosures in the consolidated financial statements upon
adoption.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820)." It removes
disclosure requirements on fair value measurements including the amount of and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels,
and the valuation processes for Level 3 fair value measurements. It also amends and clarifies certain
disclosures and adds new disclosure requirements including the changes in unrealized gains and losses
for the period included in other comprehensive income for recurring Level 3 fair value measurements, and
the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements. This guidance is effective for interim and annual periods beginning after December 15,
2019. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the
additional disclosures until the effective date. The Company is currently assessing the guidance and does
not expect this guidance to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic
718)." It expands the scope of the employee share-based payments guidance, which currently only includes
share-based payments issued to employees, to also include share-based payments issued to nonemployees
for goods and services. This guidance is effective for interim and annual periods beginning after December
15, 2018. Early adoption is permitted. The Company does not expect this guidance to have any impact on
its Consolidated Financial Statements.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive
Income (Topic 220)." It allows a reclassification from accumulated other comprehensive income to retained
earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 ("the Tax Act"). This
guidance is effective for interim and annual periods beginning after December 15, 2018, but early adoption
is permitted. The Company early adopted this guidance in the fourth quarter of 2018 and recorded a transition
adjustment as of January 1, 2018, which increased retained earnings and decreased accumulated other
comprehensive income by $14.0 million on its consolidated balance sheet.
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. In addition, the new guidance requires expanded disclosures as it pertains to the effect of
hedging on individual income statement lines, including the effects of components excluded from the
assessment of effectiveness. The guidance is effective prospectively for interim and annual periods
beginning after December 15, 2018. Early adoption is permitted. The Company adopted this guidance during
the first quarter of 2018 and the impact on the consolidated financial statements was not material. Refer to
Note 11, "Financial Instruments," to the Consolidated Financial Statements for more information.
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. During the first quarter of 2018, the
Company retrospectively adopted the presentation of service cost separate from the other components of
net benefit costs. As a result, Cost of sales of $4.5 million and $4.4 million and Selling, general and
administrative expenses of $0.6 million and $0.5 million for the year ended December 31, 2017 and 2016,
respectively, have been reclassified to Other postretirement income as a separate line item in the Condensed
Consolidated Statements of Operations.
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 adopted this guidance
in the first quarter of 2018 and there was no impact to the consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, "Restricted Cash." It requires that amounts
generally described as restricted cash and restricted cash equivalents should be included with cash and
cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2017. The Company adopted this guidance in the first quarter of 2018 and there was no
impact to the 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. The Company adopted this
guidance in the first quarter of 2018 and there was no impact to the consolidated financial statements.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)."
It replaces the current incurred loss impairment method with a new method that reflects expected credit
losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate
of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years
beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating
the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Under this guidance,
lessees will be required to recognize a right-of-use asset and a lease liability for leases with a term more
than 12 months, including operating leases defined under previous GAAP. This guidance is effective for
interim and annual reporting periods beginning after December 15, 2018. The Company has elected not to
restate comparative periods upon adoption, but record a cumulative-effect adjustment to the opening balance
of retained earnings at January 1, 2019. As permitted under the standard, the Company will elect the package
of practical expedients, which does not require the Company to reassess whether existing contracts contain
leases, classification of leases identified, nor classification and treatment of initial direct costs capitalized
under ASC 840. The Company will also elect the practical expedients to combine the lease and non-lease
components. The Company will not elect the practical expedient to apply hindsight as part of the leases
evaluation. Additionally, the Company will elect the practical expedient under ASU No. 2018-01, which allows
an entity to not reassess whether any existing land easements are or contain leases.
The Company has performed an assessment, which included evaluating all forms of leasing
arrangements. The majority of the Company’s global lease portfolio represents leases of real estate, such
as manufacturing facilities, warehouses, and office buildings, while the remainder represents leases of
personal property, such as vehicle leases, manufacturing and IT equipment. Based on the results of the
assessment, the Company has refined its internal policy to include criteria for evaluating the impact of the
new standard and related controls to support the requirements of this new standard. The Company is
currently implementing system solutions as part of the adoption process. The Company is in the process
of finalizing its assessment of the impact upon adoption and estimates that the adoption of this guidance
will result in the addition of right-of-use assets and corresponding lease obligations to the consolidated
balance sheet between $100 million - $120 million. The adoption will not have a material impact to the
consolidated statements of operations or cash flows.
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 adopted this guidance in the first quarter
of 2018 with no impact to the consolidated financial statements and elected the measurement alternative
for equity investments without readily determinable fair values.
In May 2014, the FASB amended the Accounting Standards Codification to add Topic 606 and issued
ASU 2014-09, "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 the then applicable
revenue recognition guidance. The new guidance requires new disclosures about the nature, amount, timing
and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this new
standard and all the related amendments (“new revenue standard”) effective January 1, 2018 and applied
it to all contracts using the modified retrospective method. We recognized the cumulative effect of initially
applying the new revenue standard as an adjustment to the opening balance of retained earnings. The
comparative information has not been restated and continues to be reported under the accounting standards
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in effect for those periods. We expect the impact of adoption of the new standard to be immaterial to our
sales and net income on an ongoing basis.
Revenue is recognized when performance obligations under the terms of a contract are satisfied, which
generally occurs with the transfer of control of our products. For most of our products, transfer of control
occurs upon shipment or delivery, however, a limited number of our customer arrangements for our highly
customized products with no alternative use provide us with the right to payment during the production
process. As a result, for these limited arrangements, under the new revenue standard, revenue is recognized
as goods are produced and control transfers to the customer. The Company recorded a transition adjustment
as of January 1, 2018, which increased retained earnings by $2.0 million related to these arrangements.
The Company also has a limited number of arrangements with customers where the price paid by the
customer is dependent on the volume of product purchased over the term of the arrangement. Under the
new revenue standard, the Company estimates the volumes to be sold over the term of the arrangement
and recognizes revenue based on the estimated amount of consideration to be received from these
arrangements. The Company recorded a transition adjustment, which decreased the opening balance of
retained earnings by $0.1 million related to these arrangements.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the
adoption of new revenue standard was as follows:
(In millions)
Inventories, net
Prepayments and other current assets (including contract assets)
Accounts payable and other accrued expenses (including contract
liabilities)
Retained earnings
Balance at
December 31, 2017
Adjustments due to
ASC 606
Balance at
January 1, 2018
$
$
$
$
766.3
145.4
2,270.3
4,531.0
$
$
$
$
(7.4)
9.4
0.1
1.9
$
$
$
$
758.9
154.8
2,270.4
4,532.9
The impact from adopting the new revenue standard as compared to the previous revenue guidance is
immaterial to our Consolidated Statements of Operations and Consolidated Balance Sheets for the year
ended December 31, 2018.
NOTE 2 REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers
and all the related amendments to all contracts using the modified retrospective method effective January
1, 2018. The Company manufactures and sells products, primarily to OEMs of light vehicles, and to a lesser
extent, to other OEMs of commercial vehicles, off-highway vehicles, certain Tier One vehicle systems
suppliers and into the aftermarket. Although the Company may enter into long-term supply arrangements
with its major customers, the prices and volumes are not fixed over the life of the arrangements, and a
contract does not exist for purposes of applying ASC 606 until volumes are contractually known. Revenue
is recognized when performance obligations under the terms of a contract are satisfied, which generally
occurs with the transfer of control of our products. For most of our products, transfer of control occurs upon
shipment or delivery, however, a limited number of our customer arrangements for our highly customized
products with no alternative use provide us with the right to payment during the production process. As a
result, for these limited arrangements, revenue is recognized as goods are produced and control transfers
to the customer using the input cost-to-cost method. The Company recorded a contract asset of $11.4 million
and $9.4 million at December 31, 2018 and January 1, 2018 for these arrangements. These amounts are
reflected in Prepayments and other current assets in our consolidated balance sheet.
Revenue is measured at the amount of consideration we expect to receive in exchange for transferring
the goods. The Company has a limited number of arrangements with customers where the price paid by
the customer is dependent on the volume of product purchased over the term of the arrangement. In other
limited arrangements, the Company will provide a rebate to customers based on the volume of products
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
purchased during the course of the arrangement. The Company estimates the volumes to be sold over the
term of the arrangement and recognizes revenue based on the estimated amount of consideration to be
received from these arrangements. As a result of these arrangements, the Company recognized a liability
of $5.8 million and $18.4 million at December 31, 2018 and December 31, 2017. These amounts are reflected
in Accounts payable and accrued expenses in our consolidated balance sheet.
The Company’s payment terms with customers are customary and vary by customer and geography
but typically range from 30 to 90 days. We have evaluated the terms of our arrangements and determined
that they do not contain significant financing components. The Company provides warranties on some of
its products. Provisions for estimated expenses related to product warranty are made at the time products
are sold. Refer to Note 8, "Product Warranty," to the Consolidated Financial Statements for more information.
Shipping and handling fees billed to customers are included in sales, while costs of shipping and handling
are included in cost of sales. The Company has elected to apply the accounting policy election available
under ASC 606 and accounts for shipping and handling activities as a fulfillment cost.
In limited instances, certain customers have provided payments in advance of receiving related products,
typically at the onset of an arrangement prior to the beginning of production. These contract liabilities are
reflected as Accounts payable and accrued expenses and Other non-current liabilities in our consolidated
balance sheet and were $13.4 million and $17.3 million at December 31, 2018 and $12.1 million and $21.9
million at December 31, 2017, respectively. These amounts are reflected as revenue over the term of the
arrangement (typically 3 to 7 years) as the underlying products are shipped.
The Company continually seeks business development opportunities and at times provides customer
incentives for new program awards. The Company evaluates the underlying economics of each amount of
consideration payable to a customer to determine the proper accounting by understanding the reasons for
the payment, the rights and obligations resulting from the payment, the nature of the promise in the contract,
and other relevant facts and circumstances. When the Company determines that the payments are
incremental and incurred only if the new business is obtained and expects to recover these amounts from
the customer over the term of the new business arrangement, the Company capitalizes these amounts. The
Company recognizes a reduction to revenue as products that the upfront payments are related to are
transferred to the customer, based on the total amount of products expected to be sold over the term of the
arrangement (generally 3 to 7 years). The Company evaluates the amounts capitalized each period end for
recoverability and expenses any amounts that are no longer expected to be recovered over the term of the
business arrangement. The Company had $29.4 million and $18.2 million recorded in Prepayments and
other current assets, and $187.4 million and $180.4 million recorded in Other non-current assets in the
consolidated balance sheet at December 31, 2018 and December 31, 2017.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table represents a disaggregation of revenue from contracts with customers by segment
and region:
(In millions)
North America
Europe
Asia
Other
Total
(In millions)
North America
Europe
Asia
Other
Total
(In millions)
North America
Europe
Asia
Other
Total
Twelve months ended December 31, 2018
Engine
Drivetrain
Total
$ 1,573.3
$ 1,798.6
$ 3,371.9
3,074.1
1,620.8
121.7
947.8
1,361.9
31.4
4,021.9
2,982.7
153.1
$ 6,389.9
$ 4,139.7
$ 10,529.6
Twelve months ended December 31, 2017
Engine
Drivetrain
Total
$ 1,509.0
2,783.1
1,614.5
$ 1,691.2
952.4
1,116.0
$ 3,200.2
3,735.5
2,730.5
102.4
30.7
133.1
$ 6,009.0
$ 3,790.3
$ 9,799.3
Twelve months ended December 31, 2016
Engine
Drivetrain
Total
$ 1,299.3
$ 1,745.0
$ 3,044.3
2,622.0
1,551.3
74.7
848.1
909.4
21.2
3,470.1
2,460.7
95.9
$ 5,547.3
$ 3,523.7
$ 9,071.0
NOTE 3
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. 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,
2018
2017
2016
$
$
511.7 $
473.1 $
(71.6)
(65.6)
440.1 $
407.5 $
417.8
(74.6)
343.2
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net R&D expenditures as a percentage of net sales were 4.2%, 4.2% and 3.8% for the years ended
December 31, 2018, 2017 and 2016, respectively. None of the Company's R&D related contracts exceeded
5% of net R&D expenditures in any of the years presented.
NOTE 4
OTHER EXPENSE, NET
Items included in other expense, net consist of:
(millions of dollars)
Restructuring expense
Asset impairment and loss on divestiture
Asbestos-related adjustments
Gain on sale of building
Merger, acquisition and divestiture expense
Lease termination settlement
Intangible asset impairment
Gain on commercial settlement
Other income
Other expense, net
Year Ended December 31,
2018
2017
2016
67.1 $
25.6
22.8
(19.4)
5.8
—
—
(4.0)
(4.1)
93.8 $
58.5 $
71.0
—
—
10.0
5.3
—
—
(0.3)
144.5 $
26.9
127.1
(48.6)
—
23.7
—
12.6
—
(4.2)
137.5
$
$
During the years ended December 31, 2018, 2017 and 2016, the Company recorded restructuring
expense of $67.1 million, $58.5 million and $26.9 million, respectively, primarily related to Drivetrain and
Engine segment actions designed to improve future profitability and competitiveness. Refer to Note 16,
"Restructuring," to the Consolidated Financial Statements for more information.
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 pipe 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 its fair value less cost to sell. In December 2018, the Company reached an agreement
to sell its thermostat product lines for approximately $28 million subject to customary adjustment. Completion
of the sale is expected in the first quarter of 2019, subject to satisfaction of customary closing conditions.
As a result, the Company recorded an additional asset impairment expense of $25.6 million in the year
ended December 31, 2018 to adjust the net book value of this business to fair value less costs to sell. Refer
to Note 20, "Assets and Liabilities Held for Sale," to the Consolidated Financial Statements for more
information.
During the year ended December 31, 2018, the Company recorded asbestos-related adjustments
resulting in an increase to Other Expense of $22.8 million. This increase was the result of actuarial valuation
changes of $22.8 million associated with the Company's estimate of liabilities for asbestos-related claims
asserted but not yet resolved and potential claims not yet asserted. During the year ended December 31,
2016, the Company recorded asbestos-related adjustments resulting in a net decrease to Other Expense
of $48.6 million. This net decrease was comprised of actuarial valuation changes of $45.5 million associated
with the Company's estimate of liabilities for asbestos-related claims asserted but not yet resolved and
potential claims not yet asserted and a gain of $6.1 million from cash received from insolvent insurance
carriers, offset by related consulting fees. Refer to Note 15, "Contingencies," to the Consolidated Financial
Statements for more information.
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
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recorded a loss on divestiture of $127.1 million in the year ended December 31, 2016. Refer to Note 19,
"Recent Transactions," to the Consolidated Financial Statements for more information.
During the fourth quarter of 2018, the Company recorded a gain of $19.4 million related to the sale of
a building at a manufacturing facility located in Europe.
During the years ended December 31, 2018, 2017 and 2016, the Company recorded $5.8 million, $10.0
million and $23.7 million of merger, acquisition and divestiture expenses. The merger, acquisition and
divestiture expense in the year ended December 31, 2018 primarily related to professional fees associated
with divestiture activities for the non-core pipe and thermostat product lines. Refer to Note 20, "Assets and
Liabilities Held For Sale," to the Consolidated Financial Statements for more information. The merger and
acquisition expense in the years ended December 31, 2017 and 2016 primarily related to the acquisition of
Sevcon and Remy, respectively. Refer to Note 19, "Recent Transactions," to the Consolidated Financial
Statements for more information.
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.
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 year ended December 31, 2018, the Company recorded a gain of approximately $4.0
million related to the settlement of a commercial contract for an entity acquired in the 2015 Remy acquisition.
NOTE 5
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,
2018
2017
2016
220.0 $
975.9
1,195.9 $
203.0 $
860.6
1,063.6 $
27.5
915.2
942.7
17.1 $
36.4 $
5.4
258.8
281.3
(39.6)
(8.5)
(21.9)
(70.0)
211.3 $
4.6
247.4
288.4
323.7
2.1
(33.9)
291.9
580.3 $
37.4
6.1
251.7
295.2
23.5
(0.8)
(11.9)
10.8
306.0
$
$
$
$
The provision for income taxes resulted in an effective tax rate of 17.7%, 54.6% and 32.5% for the years
ended December 31, 2018, 2017 and 2016, respectively. An analysis of the differences between the effective
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
tax rate and the U.S. statutory rate for the years ended December 31, 2018, 2017 and 2016 is presented
below.
On December 22, 2017, the Tax Act was enacted into law, which significantly changed existing U.S. tax
law and included many provisions applicable to the Company, such as reducing the U.S. federal statutory
tax rate, imposing a one-time transition tax on deemed repatriation of deferred foreign income, and adopting
a territorial tax system. The Tax Act reduced the U.S. federal statutory tax rate from 35% to 21% effective
January 1, 2018. The Tax Act also includes a provision to tax Global Intangible Low-Taxed Income (“GILTI”)
of foreign subsidiaries, a special tax deduction for Foreign-Derived Intangible Income (“FDII”), and a Base
Erosion Anti-Abuse (“BEAT”) tax measure that may tax certain payments between a U.S. corporation and
its subsidiaries. These additional provisions of the Tax Act were effective beginning January 1, 2018.
In accordance with guidance provided by Staff Accounting Bulletin No 118 (SAB 118), as of December
31, 2017, we had not completed our accounting for the tax effects of the Tax Act and had recorded provisional
estimates for significant items including the following: (i) the effects on our existing deferred balances,
including executive compensation, (ii) the one-time transition tax, and (iii) our indefinite reinvestment
assertion. The measurement period begins in the reporting period that includes the Tax Act’s enactment
date and ends when the additional information is obtained, prepared, or analyzed to complete the accounting
requirements under ASC Topic 740. The measurement period should not extend beyond one year from the
enactment date. In light of the treatment of foreign earnings under the Tax Act, we reconsidered our indefinite
reinvestment position and concluded we would no longer assert indefinite reinvestment with respect to our
foreign unremitted earnings as of December 31, 2017. We recognized income tax expense of $273.5 million
for the year ended December 31, 2017 for the significant items we could reasonably estimate associated
with the Tax Act. This amount was comprised of (i) a revaluation of our U.S. deferred tax assets and liabilities
at December 31, 2017, resulting in a tax charge of $74.7 million, including $11.0 million for executive
compensation (ii) a one-time transition tax resulting in a tax charge of $104.7 million and (iii) a tax charge
of $94.1 million for additional provisional deferred tax liabilities with respect to the expected future remittance
of foreign earnings.
For the year ended December 31, 2018, the Company completed its accounting for the tax effects of
the Tax Act. The final SAB 118 adjustments resulted in: (i) an increase in the Company's existing deferred
tax asset balances of $12.9 million, including $8.7 million for executive compensation (ii) a tax charge of
$7.6 million for the one-time transition tax, and (iii) a decrease in the deferred tax liability associated with
our indefinite reinvestment assertion of $7.3 million. The total impact to tax expense from these adjustments
was a net tax benefit of $12.6 million. Compared to the year ended December 31, 2017, this additional tax
benefit from the final adjustments was a result of further analysis performed by the Company and the
issuance of additional regulatory guidance.
We have made an accounting policy election to treat the future tax impacts of the GILTI provisions of
the Tax Act as a period cost to the extent applicable.
In January 2019, the U.S. Department of the Treasury and the Internal Revenue Service issued final
Section 965 regulations subsequent to the reporting period which provide additional guidance related to the
calculation of the one-time transition tax. The tax effect of this subsequent event will be recorded in 2019
is not material.
As discussed above, in light of the treatment of foreign earnings under the Tax Act, we reconsidered our
indefinite reinvestment position with respect to our foreign unremitted earnings in 2017 and we are no longer
asserting indefinite reinvestment with respect to our foreign unremitted earnings. The Company has recorded
a deferred tax liability of $57.4 million with respect to our foreign unremitted earnings at December 31, 2018.
With respect to certain book versus tax basis differences not represented by undistributed earnings of
approximately $300 million as of December 31, 2018, the Company continues to assert indefinite
reinvestment of these basis differences. These basis differences would become taxable upon the sale or
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
liquidation of the foreign subsidiaries. The Company's best estimate of the unrecognized deferred tax liability
on these basis differences is approximately $30 million as of December 31, 2018.
The following table provides a reconciliation of tax expense based on the U.S. statutory tax rate to final
tax expense.
(millions of dollars)
Year Ended December 31,
2018
2017
2016
Income taxes at U.S. statutory rate of 21% (35% for 2016 and 2017)
$
251.2 $
372.3 $
330.0
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
Net tax on remittance of foreign earnings
Tax credits
Reserve adjustments, settlements and claims
Valuation allowance adjustments
Non-deductible transaction costs
Changes in accounting methods and filing positions
Impact of transactions
Other foreign taxes
Revaluation of U.S. deferred taxes
Impact of FDII
Other
5.6
36.5
(10.3)
27.5
(28.0)
(21.5)
(26.0)
32.5
(10.6)
2.6
(29.8)
(0.1)
8.4
(4.2)
(15.3)
(7.2)
2.3
170.6
(17.9)
(100.2)
(31.0)
80.3
(24.2)
8.0
12.2
10.9
(1.9)
4.0
8.1
63.7
—
23.1
Provision for income taxes, as reported
$
211.3 $
580.3 $
1.8
32.2
(15.0)
(93.3)
(25.5)
21.8
(3.2)
11.6
(2.7)
8.3
0.3
16.3
12.9
—
—
10.5
306.0
The change in the effective tax rate for 2018, as compared to 2017, was primarily due to items related
to the Tax Act. The Tax Act includes a reduction in the US income tax rate from 35% to 21%, as of January
1, 2018. Tax expense includes a provision for GILTI of $28.9 million, net of foreign tax credits and a tax
benefit for FDII of $15.3 million that was not applicable in 2017. The one-time transition tax that resulted
in a tax charge of $104.7 million in 2017 was not applicable in 2018. There was also a tax charge of $74.7
million related to a revaluation of U.S. deferred tax assets and liabilities, including $11.0 million for executive
compensation in 2017 and the initial tax charge of $94.1 million related to the Company’s change in indefinite
reinvestment assertion with respect to the expected future remittance of undistributed foreign earnings in
2017.
The Company's provision for income taxes for the year ended December 31, 2018, includes reductions
of income tax expense of $15.0 million related to restructuring expense, $0.3 million related to merger,
acquisition and divestiture expense, $5.5 million related to the asbestos-related adjustments, and $7.7
million related to asset impairment expense, offset by increases to tax expense of $0.9 million and $5.8
million related to a gain on commercial settlement and a gain on the sale of a building, respectively, discussed
in Note 4, "Other Expense, Net," to the Consolidated Financial Statements. The provision for income taxes
also includes reductions of income tax expense of $12.6 million related to final adjustments made to
measurement period provisional estimates associated with the Tax Act, $22.0 million related to a decrease
in our deferred tax liability due to a tax benefit for certain foreign tax credits now available due to actions
the Company took during the year, $9.1 million related to valuation allowance releases, $2.8 million related
to tax reserve adjustments, and $29.8 million related to changes in accounting methods and tax filing
positions for prior years primarily related to the Tax Act.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company's provision for income taxes for the year ended December 31, 2017, includes reductions
of income tax expense 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 Note 4, "Other Expense, Net," to the Consolidated Financial Statements.
The Company's provision for income taxes for the year ended December 31, 2016, includes reductions
of income tax expense of $22.7 million, $8.6 million, $6.0 million and $4.4 million associated with a loss on
divestiture, other one-time adjustments, restructuring expense and intangible asset impairment loss,
respectively, discussed in Note 4, "Other Expense," to the Consolidated Financial Statements. The provision
also includes additional tax expenses of $17.5 million associated with asbestos-related adjustments and
$2.2 million associated with a gain on the release of certain Remy light vehicle aftermarket liabilities due to
the expiration of a customer contract.
A roll forward of the Company's total gross unrecognized tax benefits for the years ended December
31, 2018 and 2017, respectively, is presented below.
(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
2018
2017
2016
$
92.0 $
91.1 $
127.3
24.1
17.7
(7.7)
—
(5.7)
16.8
(2.4)
(19.9)
(0.8)
7.2
16.1
1.6
(45.7)
(5.0)
(3.2)
$
120.4 $
92.0 $
91.1
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax
expense. The amount recognized in income tax expense for 2018 and 2017 is $10.4 million and $6.4 million,
respectively. The Company has an accrual of approximately $31.5 million and $22.6 million for the payment
of interest and penalties at December 31, 2018 and 2017, respectively. As of December 31, 2018,
approximately $111.6 million represents the amount that, if recognized, would affect the Company's effective
income tax rate in future periods. This amount includes a decrease in U.S. federal income taxes which would
occur upon recognition of the state tax benefits and U.S. foreign tax credits included therein. The Company
estimates that payments of approximately $9.7 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 Note 6, "Balance Sheet Information," to the Consolidated Financial Statements.
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
2014 and prior
2012 and prior
2015 and prior
2011 and prior
2013 and prior
Tax jurisdiction
Japan
Mexico
Poland
South Korea
Years no longer subject to audit
2015 and prior
2012 and prior
2013 and prior
2012 and prior
In the U.S., certain tax attributes created in years prior to 2015 were subsequently utilized. Even though
the U.S. federal statute of limitations has expired for years prior to 2015, 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.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of deferred tax assets and liabilities as of December 31, 2018 and 2017 consist of the
following:
(millions of dollars)
Deferred tax assets:
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,
2018
2017
23.9
63.9
91.8
83.8
18.8
172.7
155.2
610.1 $
(86.3)
523.8 $
(183.3)
(117.5)
(57.4)
(19.2)
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)
(377.4) $
(409.0)
146.4 $
59.8
$
$
$
$
At December 31, 2018, certain non-U.S. subsidiaries have net operating loss carryforwards totaling
$222.7 million available to offset future taxable income. Of the total $222.7 million, $155.1 million expire at
various dates from 2019 through 2038 and the remaining $67.6 million have no expiration date. The Company
has a valuation allowance recorded against $143.3 million of the $222.7 million of non-U.S. net operating
loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling $824.9
million which are partially offset by a valuation allowance of $756.8 million. The state net operating loss
carryforwards expire at various dates from 2019 to 2038. Certain U.S. subsidiaries also have state tax credit
carryforwards of $19.8 million which are partially offset by a valuation allowance of $17.9 million. Certain
non-U.S. subsidiaries located in China had tax exemptions or tax holidays, which reduced local tax expense
approximately $28.0 million and $31.0 million in 2018 and 2017, respectively. The tax holidays for these
subsidiaries are issued in three year terms with expirations for certain subsidiaries ranging from 2018 to
2020. The Company is in the process of renewing the tax holidays for certain subsidiaries that expired as
of December 31, 2018.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 6 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 asbestos-related insurance receivables
Other long-term receivables
Total investments and other long-term receivables
Other non-current assets:
Deferred income taxes
Deferred asbestos-related insurance asset
Other
Total other non-current assets
79
December 31,
2018
2017
1,727.7 $
114.1
152.2
1,994.0
(6.6)
1,987.4 $
1,735.7
152.1
136.8
2,024.6
(5.7)
2,018.9
485.0 $
113.6
198.9
797.5
(16.7)
780.8 $
82.9 $
84.4
82.7
250.0 $
469.7
126.7
183.0
779.4
(13.1)
766.3
81.9
5.3
58.2
145.4
107.9 $
762.6
2,851.2
2.6
425.8
4,150.1
(1,473.5)
2,676.6
227.2
2,903.8 $
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
243.5 $
303.3
44.9
591.7 $
197.7 $
83.1
221.5
502.3 $
239.6
258.7
49.1
547.4
121.2
127.7
209.8
458.7
$
$
$
$
$
$
$
$
$
$
$
$
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
Severance
Interest
Dividends payable to noncontrolling shareholders
Retirement related
Insurance
Derivatives
Other
Total accounts payable and accrued expenses
Other non-current liabilities:
Deferred income taxes
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,
2018
2017
$
$
$
$
1,485.4 $
232.6
72.9
56.2
49.2
50.0
25.0
19.1
17.2
15.9
11.7
1.8
107.3
2,144.3 $
51.4 $
47.0
258.9
357.3 $
1,545.6
239.7
111.0
69.0
75.7
52.5
5.8
22.9
17.7
17.2
10.1
5.0
98.1
2,270.3
61.4
42.5
251.6
355.5
2018
2017
2016
$
(5.7) $
(5.3)
4.2
—
0.2
(2.9) $
(2.7)
0.1
—
(0.2)
(1.9)
(3.2)
0.2
2.0
—
$
(6.6) $
(5.7) $
(2.9)
As of December 31, 2018 and December 31, 2017, accounts payable of $103.7 million and $106.5
million, respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the years ended December 31, 2018, 2017 and 2016 were $22.3 million,
$19.7 million and $14.1 million, respectively.
NSK-Warner KK ("NSK-Warner")
The Company has two equity method investments, the largest is 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 $40.5 million, $20.2 million
and $34.3 million in calendar years ended December 31, 2018, 2017 and 2016, respectively.
80
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, 2018, 2017 and
2016 (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,
2018
2017
$
116.6 $
316.9
283.3
215.3
88.9
296.0
104.6
289.2
231.9
154.9
68.1
298.1
Year Ended November 30,
2018
2017
2016
$
731.8 $
669.6 $
152.3
86.4
149.2
85.2
601.8
134.1
71.7
Purchases by the Company from NSK-Warner were $9.7 million, $12.3 million and $23.9 million for the
years ended December 31, 2018, 2017 and 2016, respectively.
NOTE 7 GOODWILL AND OTHER INTANGIBLES
During the fourth quarter of each year, the Company qualitatively assesses its goodwill 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 2018, 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.
81
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, 2018 goodwill quantitative, "step one," impairment review are as
follows:
• Discount rate: the Company used a 10.9% 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
2018 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 substantially higher than the reporting
unit's carrying value. 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, 2018 and 2017 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
Translation adjustment and other
Ending balance, December 31
2018
2017
Engine
Drivetrain
Engine
Drivetrain
1,359.6 $
1,024.2 $
1,324.0 $
880.2
(501.8)
(0.2)
(501.8)
(0.2)
857.8 $
1,024.0 $
822.2 $
880.0
$
$
—
—
1.7
—
(16.5)
(13.6)
—
(7.3)
42.9
125.8
—
18.2
$
841.3 $
1,012.1 $
857.8 $
1,024.0
________________
* Acquisitions relate to the Company's 2017 purchase of Sevcon.
82
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
Unamortized trade names
December 31, 2018
December 31, 2017
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
$
151.9 $
489.7
8.3
649.9
55.4
60.7 $
91.2 $
157.7 $
52.9 $
201.2
3.9
265.8
—
288.5
4.4
384.1
55.4
507.6
8.7
674.0
55.8
181.0
3.2
237.1
—
104.8
326.6
5.5
436.9
55.8
Total other intangible assets
$
705.3 $
265.8 $
439.5 $
729.8 $
237.1 $
492.7
Amortization of other intangible assets was $40.1 million, $40.0 million and $40.4 million for the years
ended December 31, 2018, 2017 and 2016, 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: $38.8 million in 2019, $38.5
million in 2020, $38.0 million in 2021, $36.8 million in 2022 and $31.0 million in 2023.
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
Translation adjustment
Ending balance, December 31
2018
2017
$
729.8 $
—
—
(24.5)
$
705.3 $
649.6
72.6
(32.7)
40.3
729.8
________________
* Acquisitions primarily relate to the Company's 2017 purchase of Sevcon.
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
Translation adjustment
Ending balance, December 31
2018
2017
$
237.1 $
40.1
—
(11.4)
$
265.8 $
186.1
40.0
(11.6)
22.6
237.1
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 8 PRODUCT WARRANTY
The changes in the carrying amount of the Company’s total product warranty liability for the years ended
December 31, 2018 and 2017 were as follows:
(millions of dollars)
Beginning balance, January 1
Provisions
Acquisitions
Held for sale
Payments
Translation adjustment
Ending balance, December 31
2018
2017
$
111.5 $
69.0
0.2
—
(73.4)
(4.1)
95.3
73.1
1.0
(3.6)
(60.6)
6.3
$
103.2 $
111.5
Acquisition activity in 2018 and 2017 of $0.2 million and $1.0 million relates to the warranty liability
associated with the Company's purchase of Sevcon.
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 9 NOTES PAYABLE AND LONG-TERM DEBT
December 31,
2018
2017
$
$
56.2 $
47.0
69.0
42.5
103.2 $
111.5
As of December 31, 2018 and 2017, 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
December 31,
2018
2017
$
32.8 $
68.8
135.4
250.9
570.0
496.6
119.1
493.7
14.8
137.4
251.4
595.7
496.1
118.9
493.5
26.5
$
$
2,080.5 $
2,119.5
139.8
15.8
1,940.7 $
2,103.7
In July 2016, the Company terminated interest rate swaps which had the effect of converting $384.0
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, 2018 was $1.9 million and $0.4 million on the 4.625% and 8.00% notes, respectively, as an increase to
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the notes. The value of these interest rate swaps as of December 31, 2017 was $2.9 million and $0.8 million
on the 4.625% and 8.00% notes, respectively, as a decrease to the notes.
The Company terminated fixed to floating interest rate swaps in 2009. The gain on the termination is
being amortized into interest expense over the remaining term of the note. The value related to this swap
termination at December 31, 2018 was $1.2 million on the 8.00% note as an increase to the note. The value
related to these swap terminations at December 31, 2017 was $2.7 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, 2018 and
2017 was 4.3% and 3.1%, respectively. The weighted average interest rate on all borrowings outstanding,
including the effects of outstanding swaps, as of December 31, 2018 and 2017 was 3.4% and 3.8%,
respectively.
Annual principal payments required as of December 31, 2018 are as follows :
(millions of dollars)
2019
2020
2021
2022
2023
After 2023
Total payments
Less: unamortized discounts
Total
$
$
$
172.6
257.3
1.3
573.7
0.1
1,120.7
2,125.7
12.4
2,113.3
The Company's long-term debt includes various covenants, none of which are expected to restrict future
operations.
The Company has 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, 2018. At December 31, 2018 and December
31, 2017, the Company had no outstanding borrowings under this facility.
The Company's commercial paper program allows the Company to issue short-term, unsecured
commercial paper notes up to a maximum aggregate principal amount outstanding of $1.2 billion. Under
this program, the Company may issue notes from time to time and will use the proceeds for general corporate
purposes. The Company had no outstanding borrowings under this program as of December 31, 2018 and
December 31, 2017.
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, 2018 and 2017, the estimated fair values of the Company's senior unsecured notes
totaled $2,058.1 million and $2,209.1 million, respectively. The estimated fair values were $7.6 million less
than carrying value at December 31, 2018 and $116.1 million higher than their carrying value at December
31, 2017. 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
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $42.7 million and $31.4 million at December 31, 2018
and 2017, respectively. The letters of credit typically act as guarantees of payment to certain third parties
in accordance with specified terms and conditions.
NOTE 10 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).
86
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, 2018 and 2017:
(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, 2018
Foreign currency contracts
Other long-term receivables
(insurance settlement agreement note
receivable)
Net investment hedge contracts
Liabilities:
Foreign currency contracts
Commodity contracts
$
$
$
$
$
3.0 $
— $
3.0 $
34.0 $
11.9 $
1.7 $
0.2 $
— $
— $
— $
— $
34.0 $
11.9 $
1.7 $
0.2 $
—
—
—
—
—
A
C
A
A
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, 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
The following tables classify the Company's defined benefit plan assets measured at fair value on a
recurring basis as of December 31, 2018 and 2017:
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, 2018
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)
$
$
$
$
122.1 $
1.2 $
— $
71.0
22.7
11.1
17.8
—
0.2
215.8 $
30.1 $
0.2 $
239.4 $
— $
— $
162.7
36.4
92.9
—
—
—
438.5 $
92.9 $
— $
A
A
A
A
A
A
—
—
—
—
—
—
—
—
120.9
59.9
4.7
$
185.5
239.4
69.8
36.4
$
345.6
87
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, 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
________________
(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 Note 12, "Retirement Benefit Plans," 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 11 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 derivative contracts. All derivative contracts are placed with counterparties
that have an S&P, or equivalent, investment grade credit rating at the time of the contracts’ placement. At
December 31, 2018 and 2017, 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 component purchases. The Company primarily utilizes forward and
option contracts, which are designated as cash flow hedges. At December 31, 2018, the following commodity
derivative contracts were outstanding. At December 31, 2017, there were no commodity derivative contracts
outstanding.
Commodity
Copper
Commodity derivative contracts
Volume hedged
December 31, 2018
Units of measure
Duration
256.7
Metric Tons
Dec - 19
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, 2018 and December
31, 2017, the Company had no outstanding interest rate swaps.
88
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, 2018 and December 31,
2017, the following foreign currency derivative contracts were outstanding:
Foreign currency derivatives (in millions)
Notional in traded currency
December 31, 2018
Notional in traded currency
December 31, 2017
Ending Duration
Functional currency
Traded currency
Brazilian real
Brazilian real
Euro
US dollar
Chinese renminbi
Euro
Chinese renminbi
Euro
US dollar
British pound
Euro
Euro
Euro
Euro
Japanese yen
Japanese yen
Japanese yen
Korean won
Korean won
Korean won
Swedish krona
US dollar
US dollar
Chinese renminbi
Japanese yen
Swedish krona
US dollar
Chinese renminbi
Korean won
US dollar
Euro
Japanese yen
US dollar
Euro
Euro
Mexican peso
3.6
5.3
—
—
7.0
—
—
539.6
18.9
88.8
5,785.2
2.8
6.4
266.4
7.1
56.0
—
574.5
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
—
Jun - 19
Jun - 19
Jun - 18
Sep - 18
Oct - 19
Dec - 18
Dec - 18
Jun - 19
Dec - 19
Dec - 19
Dec - 19
Dec - 19
Dec - 19
Dec - 19
Dec - 19
Jan - 20
Dec - 18
Dec - 19
The Company selectively uses cross-currency swaps to hedge the foreign currency exposure associated
with our net investment in certain foreign operations (net investment hedges). At December 31, 2018, the
following cross-currency swap contracts were outstanding. At December 31, 2017, there were no cross-
currency swap derivative contracts outstanding.
(in millions)
Fixed $ to fixed €
Fixed $ to fixed ¥
Notional
in USD
Cross-Currency Swaps
Notional
in Local Currency
$
$
250.0
100.0
¥
206.2
10,977.5
Duration
Sep - 20
Feb - 23
89
€
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2018 and 2017, the following amounts were recorded in the Consolidated Balance
Sheets as being payable to or receivable from counterparties under ASC Topic 815:
(in millions)
Derivatives
designated as
hedging
instruments Under
Topic 815:
Foreign currency
Commodity
Net investment
hedges
Derivatives not
designated as
hedging
instruments
Location
Prepayments and other
current assets
Other non-current
assets
Prepayments and other
current assets
Prepayments and other
current assets
Other non-current
assets
Foreign currency
Prepayments and other
current assets
Assets
Liabilities
December 31,
2018
December 31,
2017
Location
December 31,
2018
December 31,
2017
$
$
$
$
$
$
1.9
$
— $
— $
— $
11.9
$
0.9
0.8
—
—
—
Accounts payable and
accrued expenses
Other non-current
liabilities
Accounts payable and
accrued expenses
Accounts payable and
accrued expenses
Other non-current
liabilities
$
$
$
$
$
1.6
0.1
0.2
$
$
$
— $
— $
3.9
—
—
—
—
1.1
$
Accounts payable and
accrued expenses
$
—
— $
1.1
Effectiveness for cash flow hedges is assessed at the inception of the hedging relationship and quarterly,
thereafter. Gains and losses arising from these contracts that are included in the assessment of effectiveness
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. The initial value of any
component excluded from the assessment of effectiveness will be recognized in income using a systematic
and rational method over the life of the hedging instrument. Any difference between the change in fair value
of the excluded component and amounts recognized in income under that systematic and rational method
will be recognized in AOCI.
Effectiveness for net investment hedges is assessed at the inception of the hedging relationship and
quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of
effectiveness are deferred into foreign currency translation adjustments and only released when the
subsidiary being hedged is sold or substantially liquidated. The initial value of any component excluded
from the assessment of effectiveness will be recognized in income using a systematic and rational method
over the life of the hedging instrument. Any difference between the change in fair value of the excluded
component and amounts recognized in income under that systematic and rational method will be recognized
in AOCI.
90
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, 2018 market rates.
(in millions)
Contract Type
Foreign currency
Commodity
Net investment hedges:
Foreign currency
Cross-currency swaps
Foreign currency denominated debt
Total
Deferred gain (loss) in AOCI at
December 31, 2018
December 31, 2017
Gain (loss)
expected to be
reclassified to
income in one
year or less
$
$
0.1
$
(2.3)
$
(0.2)
—
4.5
11.9
(30.4)
(14.1)
$
—
2.9
—
(57.1)
(56.5)
$
—
(0.2)
—
—
—
(0.2)
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:
(in millions)
Total amounts of earnings and other
comprehensive income line items in which the
effects of cash flow hedges are recorded
Gain (loss) on cash flow hedging relationships:
Foreign currency
Gain (loss) recognized in other
comprehensive income
Gain (loss) reclassified from AOCI to income
Gain (loss) reclassified from AOCI to income
as a result that a forecasted transaction is no
longer probable of occurring
Commodity
Gain (loss) recognized in other
comprehensive income
Gain (loss) reclassified from AOCI to income
Gain (loss) reclassified from AOCI to income
as a result that a forecasted transaction is no
longer probable of occurring
Year Ended December 31, 2018
Net sales
Cost of sales
Selling, general and
administrative expenses
Other comprehensive
income
$
10,529.6
$
8,300.2
$
945.7
$
(170.1)
$
$
$
$
$
$
— $
(2.3)
$
— $
(1.1)
$
— $
(0.3)
$
— $
— $
— $
— $
— $
— $
(0.2)
$
— $
— $
— $
— $
— $
(1.3)
—
—
(0.4)
—
—
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in millions)
Total amounts of earnings and other
comprehensive income line items in which the
effects of cash flow hedges are recorded
Gain (loss) on cash flow hedging relationships:
Foreign currency
Gain (loss) recognized in other
comprehensive income
Gain (loss) reclassified from AOCI to income
Gain (loss) reclassified from AOCI to income
as a result that a forecasted transaction is no
longer probable of occurring
Commodity
Gain (loss) recognized in other
comprehensive income
Gain (loss) reclassified from AOCI to income
Gain (loss) reclassified from AOCI to income
as a result that a forecasted transaction is no
longer probable of occurring
(in millions)
Total amounts of earnings and other
comprehensive income line items in which the
effects of cash flow hedges are recorded
Gain (loss) on cash flow hedging relationships:
Year Ended December 31, 2017
Net sales
Cost of sales
Selling, general and
administrative expenses
Other comprehensive
income
$
9,799.3
$
7,683.7
$
899.1
$
232.1
$
$
$
$
$
$
— $
3.4
$
— $
(0.1)
$
— $
— $
— $
— $
(0.1)
$
— $
— $
— $
0.5
$
— $
— $
— $
— $
— $
(4.7)
—
—
0.6
—
—
Year Ended December 31, 2016
Net sales
Cost of sales
Selling, general and
administrative expenses
Other comprehensive
income
$
9,071.0
$
7,142.3
$
818.0
$
(111.9)
Foreign currency
Gain (loss) recognized in other
comprehensive income
Gain (loss) reclassified from AOCI to income
Gain (loss) reclassified from AOCI to income
as a result that a forecasted transaction is no
longer probable of occurring
Commodity
Gain (loss) recognized in other
comprehensive income
Gain (loss) reclassified from AOCI to income
Gain (loss) reclassified from AOCI to income
as a result that a forecasted transaction is no
longer probable of occurring
$
$
$
$
$
$
— $
(0.1)
$
— $
1.4
$
— $
— $
— $
— $
0.3
$
— $
— $
— $
(1.4)
— $
(0.3)
$
$
— $
— $
— $
7.0
—
—
0.6
—
—
There were no gains and (losses) recorded in income related to components excluded from the
assessment of effectiveness for derivative instruments designated as cash flow hedges.
Gains and (losses) on derivative instruments designated as net investment hedges were recognized in
other comprehensive income during the periods presented below.
(in millions)
Net investment hedges
Foreign currency
Cross-currency swaps
Foreign currency denominated debt
Year Ended December 31,
2018
2017
2016
1.6
11.9
26.7
$
$
$
(7.9)
$
— $
(83.7)
$
0.4
—
16.8
$
$
$
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivatives designated as net investment hedge instruments as defined by ASC Topic 815 held during
the period resulted in the following gains and (losses) recorded in Interest expense and finance charges on
components excluded from the assessment of effectiveness:
(in millions)
Net investment hedges
Foreign currency
Cross-currency swaps
Year Ended December 31,
2018
2017
2016
$
$
0.6
8.7
$
$
1.3
$
— $
—
—
There were no gains and (losses) recorded in income related to components excluded from the
assessment of effectiveness for foreign currency denominated debt designated as net investment hedges.
There were no gains and losses reclassified from AOCI for net investment hedges during the periods
presented.
(in millions)
2018
2017
2016
Contract Type
Location
Interest rate
swap
Interest expense and
finance charges
$
Gain (loss)
on swaps
Gain (loss)
on
borrowings
Gain (loss)
on swaps
Gain (loss)
on
borrowings
Gain (loss)
on swaps
Gain (loss)
on
borrowings
— $
— $
— $
— $
8.5
$
(8.5)
Year Ended December 31,
Derivatives not designated as hedging instruments are used to hedge remeasurement exposures of
monetary assets and liabilities denominated in currencies other than the operating units' functional currency.
The gains and (losses) recorded in income from derivative instruments not designated as hedging
instruments were immaterial for the periods presented.
NOTE 12 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 $34.9 million, $33.5 million and $28.3 million in the years ended December 31, 2018, 2017 and
2016, 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. Our U.S. and U.K. defined benefit plans are
frozen and no additional service cost is being accrued. 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.
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
93
Year Ended December 31,
2018
2017
2016
$
$
34.9 $
33.5 $
8.5
0.1
12.5
0.5
43.5 $
46.5 $
28.3
10.1
1.4
39.8
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
2018
2017
Change in projected benefit obligation:
Projected benefit obligation, January 1
$
283.3
$
628.8
$
282.5
$
528.2
$
107.0
$
119.9
Pension benefits
Year Ended December 31,
Other postretirement
employee benefits
2018
2017
Year Ended December 31,
Service cost
Interest cost
Plan participants’ contributions
Plan amendments
Settlement and curtailment
Actuarial (gain) loss
Currency translation
Acquisition
Benefits paid
Projected benefit obligation, December 31
Change in plan assets:
Fair value of plan assets, January 1
Actual return on plan assets
Employer contribution
Plan participants’ contribution
Settlements
Currency translation
Acquisition
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:
—
8.5
—
—
—
(18.2)
—
—
17.9
12.0
0.3
1.7
(4.3)
4.9
(29.4)
—
—
8.9
—
—
—
8.7
—
4.0
18.0
11.0
0.3
—
(3.7)
(7.8)
63.4
37.0
0.1
2.9
—
—
—
(6.7)
—
—
0.1
3.2
—
(0.7)
—
2.2
—
—
(20.7)
(19.6)
(20.8)
(17.6)
(16.8)
(17.7)
252.9
$
612.3
$
283.3
$
628.8
$
86.5
$
107.0
240.1
$
483.4
$
229.5
$
393.8
(10.7)
7.0
—
—
—
—
—
(18.1)
18.8
0.3
(4.3)
(22.0)
—
—
23.5
4.0
—
—
—
3.8
—
30.7
14.3
0.3
(3.6)
46.8
18.1
0.6
(20.6)
(19.6)
(20.7)
(17.6)
215.8
$
438.5
$
240.1
$
483.4
(37.1) $ (173.8) $
(43.2) $ (145.4) $
(86.5) $
(107.0)
— $
16.7
$
— $
23.2
$
— $
(0.5)
(36.6)
(4.4)
(186.1)
(0.1)
(43.1)
(3.9)
(164.7)
(11.0)
(75.5)
—
(13.2)
(93.8)
$
$
$
$
$
$
(37.1) $ (173.8) $
(43.2) $ (145.4) $
(86.5) $
(107.0)
Net actuarial loss
Net prior service (credit) cost
Net amount*
$
$
113.1
$
193.0
$
111.0
$
159.0
$
13.2
$
(5.8)
2.2
(6.6)
0.8
(11.8)
107.3
$
195.2
$
104.4
$
159.8
$
1.4
$
20.8
(15.8)
5.0
Total accumulated benefit obligation for all plans $
252.9
$
583.3
$
283.3
$
602.0
________________
*
AOCI shown above does not include our equity investee, NSK-Warner. NSK-Warner had an AOCI loss of $9.2 million and
$9.7 million at December 31, 2018 and 2017, respectively.
94
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,
2018
2017
(649.9) $
(681.2)
449.9
494.8
(200.0) $
(186.4)
(37.1) $
(95.4)
(67.5)
(43.2)
(75.7)
(67.5)
(200.0) $
(186.4)
$
$
$
$
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,
2018
2017
Target
Allocation
11%
56%
33%
11% 0% - 15%
53% 45% - 65%
36% 25% - 45%
100%
100%
8%
55%
37%
8% 0% - 10%
44% 43% - 65%
48% 30% - 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, 2018 and
2017. 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 2019. Of the $15 million to $25 million in projected 2019 contributions, $4.0 million are
contractually obligated, while any remaining payments would be discretionary.
Refer to Note 10, "Fair Value Measurements," 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, 2018 and 2017.
95
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
2018
2017
2016
Year Ended December 31,
US
Non-US
US
Non-US
US
Non-US
2018
2017
2016
$
— $
8.5
17.9
12.0
$
— $
18.0
$
— $
8.9
9.6
$
16.2
12.5
Expected return on plan assets
(13.6)
(27.0)
(13.2)
Settlements, curtailments and other
Amortization of unrecognized prior service
(credit) cost
Amortization of unrecognized loss
—
(0.8)
4.2
0.3
0.1
6.9
—
(0.8)
4.2
11.0
(23.8)
0.3
—
7.9
(15.0)
(24.3)
—
(0.8)
5.1
—
0.6
6.2
Net periodic (income) cost
$
(1.7) $
10.2
$
(0.9) $
13.4
$
(1.1) $
11.2
$
$
0.1
2.9
—
—
$
0.1
3.2
—
—
0.2
4.0
—
—
(4.1)
(4.1)
(4.9)
1.2
0.1
$
1.3
0.5
$
2.1
1.4
The components of net periodic benefit cost other than the service cost component are included in Other
postretirement income in the Condensed Consolidated Statements of Operations.
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 $14.1 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 $0.6
million and $3.6 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, 2018 and 2017 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,
2018
2017
4.24
N/A
4.05
N/A
2.28
2.99
3.55
N/A
3.32
N/A
2.25
2.98
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company's weighted-average assumptions used to determine the net periodic benefit cost/(income)
for its defined benefit pension and other postretirement employee benefit plans for the years ended December
31, 2018 and 2017 were as follows:
(percent)
U.S. pension plans:
Discount rate - service cost
Effective interest rate on benefit obligation
Expected long-term rate of return on assets
Average rate of increase in compensation
U.S. other postretirement plans:
Discount rate - service cost
Effective interest rate on benefit obligation
Expected long-term rate of return on assets
Average rate of increase in compensation
Non-U.S. pension plans:
Discount rate - service cost
Effective interest rate on benefit obligation
Expected long-term rate of return on assets
Average rate of increase in compensation
Year Ended December 31,
2018
2017
3.55
3.13
6.00
N/A
2.65
2.86
N/A
N/A
2.71
1.98
5.73
2.98
3.94
3.26
6.01
N/A
2.68
2.85
N/A
N/A
2.55
1.96
5.68
3.00
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
2019
2020
2021
2022
2023
2024-2028
Pension benefits
U.S.
Non-U.S.
Other
postretirement
employee
benefits
$
22.5 $
19.6 $
19.8
18.9
18.3
17.8
84.2
21.7
21.9
22.6
23.8
134.0
11.0
10.3
9.5
9.1
8.0
28.9
The weighted-average rate of increase in the per capita cost of covered health care benefits is projected
to be 6.50% in 2019 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:
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(millions of dollars)
Effect on other postretirement employee benefit obligation
Effect on total service and interest cost components
NOTE 13 STOCK-BASED COMPENSATION
One Percentage Point
Increase
Decrease
$
$
5.5 $
0.2 $
(4.9)
(0.2)
The Company has granted restricted common stock and restricted stock units (collectively, "restricted
stock") and performance share units as long-term incentive awards to employees and non-employee
directors under the BorgWarner Inc. 2014 Stock Incentive Plan, as amended ("2014 Plan") and the
BorgWarner Inc. 2018 Stock Incentive Plan ("2018 Plan"). The Company's Board of Directors adopted the
2018 Plan as a replacement to the 2014 Plan in February 2018, and the Company's stockholders approved
the 2018 Plan at the annual meeting of stockholders on April 25, 2018. After stockholders approved the
2018 Plan, the Company could no longer make grants under the 2014 Plan. The shares that were available
for issuance under the 2014 Plan were cancelled upon approval of the 2018 Plan. The 2018 Plan authorizes
the issuance of a total of 7 million shares, of which approximately 6.9 million shares were available for future
issuance as of December 31, 2018.
Stock Options A summary of the plans’ shares under option at December 31, 2018, 2017 and 2016 is
as follows:
Outstanding at January 1, 2016
Exercised
Outstanding at December 31, 2016
Exercised
Outstanding at December 31, 2017
Exercised
Outstanding at December 31, 2018
Options exercisable at December 31, 2018
Shares
(thousands)
Weighted
average
exercise price
Weighted average
remaining
contractual life
(in years)
Aggregate intrinsic
value
(in millions)
1,267 $
(794) $
473 $
(473) $
— $
— $
— $
— $
16.59
16.07
17.47
17.47
—
—
—
—
0.9 $
$
0.1 $
$
0.0 $
$
0.0 $
0.0 $
33.7
14.4
10.4
10.4
—
—
—
—
Proceeds from stock option exercises for the years ended December 31, 2018, 2017 and 2016 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,
2018
2017
2016
$
$
— $
—
8.3 $
8.2
— $
16.5 $
12.7
0.3
13.0
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 2018, restricted stock in the amount of 717,833 shares and 19,656
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, 2018, there
was $29.3 million of unrecognized compensation expense that will be recognized over a weighted average
period of approximately 2 years.
98
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,
2018
2017
2016
$
$
25.9 $
19.7 $
27.0 $
19.7 $
26.7
19.5
A summary of the status of the Company’s nonvested restricted stock for employees and non-employee
directors at December 31, 2018, 2017 and 2016 is as follows:
Nonvested at January 1, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2018
Shares subject
to restriction
(thousands)
Weighted
average grant
date fair value
1,326 $
724 $
(551) $
(70) $
1,429 $
804 $
(521) $
(119) $
1,593 $
737 $
(556) $
(258) $
1,516 $
53.18
30.07
47.55
43.05
44.12
40.10
56.53
38.97
38.86
51.70
42.25
44.51
42.97
Total Shareholder Return Performance Share Units The 2014 and 2018 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, 2018, 2017 and 2016 were as follows:
(millions of dollars, except share data)
Expense
Number of shares
Year Ended December 31,
2018
2017
2016
$
9.0 $
9.9 $
—
—
9.6
—
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company's nonvested total shareholder return performance share units
at December 31, 2018, 2017 and 2016 is as follows:
Nonvested at January 1, 2016
Granted
Forfeited
Nonvested at December 31, 2016
Granted
Forfeited
Nonvested at December 31, 2017
Granted
Forfeited
Nonvested at December 31, 2018
Number of
shares
(thousands)
Weighted
average grant
date fair value
475 $
171 $
(236) $
410 $
201 $
(256) $
355 $
287 $
(345) $
297 $
56.55
16.61
49.37
43.99
45.57
61.40
32.35
68.38
38.26
60.35
As of December 31, 2018, there was $7.5 million of unrecognized compensation expense that will be
recognized over a weighted average period of approximately 1.4 years.
Relative Revenue Growth Performance Share Units 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, 2018, 2017 and 2016 were as follows:
(millions of dollars, except share data)
Expense
Number of shares
Year Ended December 31,
2018
2017
2016
$
18.0 $
15.9 $
249,000
126,000
7.1
—
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company’s nonvested relative revenue growth performance shares at
December 31, 2018, 2017 and 2016 is as follows:
Nonvested at January 1, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2018
Number of
shares
(thousands)
Weighted
average grant
date fair value
— $
485 $
(126) $
(39) $
320 $
198 $
(156) $
(7) $
355 $
287 $
(166) $
(179) $
297 $
—
38.62
38.62
38.62
38.62
40.08
38.62
39.20
39.42
50.82
38.62
45.82
47.03
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, 2018, there was $8.6 million of unrecognized compensation expense that will be recognized
over a weighted average period of approximately 1.4 years. The unrecognized amount of compensation
expense is based on projected performance as of December 31, 2018.
In 2018, the Company modified the vesting provisions of restricted stock and performance share unit
grants made to retiring executive officers to allow certain of the outstanding awards, that otherwise would
have been forfeited, to vest upon retirement. This resulted in net restricted stock and performance share
unit compensation expense of $8.3 million in the year ended December 31, 2018. Additional incremental
compensation expense of $4.0 million related to these modified awards will be recognized ratably through
February 2019.
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 14 ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the activity within accumulated other comprehensive loss during the
years ended December 31, 2018, 2017 and 2016:
(millions of dollars)
Foreign
currency
translation
adjustments
Hedge
instruments
Defined benefit
postretirement
plans
Other
Total
Beginning Balance, January 1, 2016
$
(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
—
—
—
Ending Balance December 31, 2017
$
(293.8) $
(1.3) $
(197.6) $
2.7
$
Adoption of Accounting Standard
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
—
(152.8)
5.2
—
—
—
(1.7)
0.2
3.9
(0.8)
(14.0)
(41.9)
13.5
7.5
(2.1)
—
(1.1)
—
—
—
228.4
0.5
4.7
(1.5)
(490.0)
(14.0)
(197.5)
18.9
11.4
(2.9)
Ending Balance December 31, 2018
$
(441.4) $
0.3
$
(234.6) $
1.6
$
(674.1)
NOTE 15 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. The PRPs may currently be liable for the cost of
clean-up and other remedial activities at 28 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an allocation formula.
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
The Company has an accrual for environmental liabilities of $9.0 million and $8.3 million as of December
31, 2018 and December 31, 2017, respectively. This accrual is 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).
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. The Company vigorously defends against these claims, and
has been successful in obtaining the dismissal of the majority of the claims asserted against it without any
payment. Due to the nature of the fibers used in certain types of automotive products, the encapsulation of
the asbestos, and the manner of the products’ use, the Company believes 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 likewise expects that no payment will be made by the Company or its insurance
carriers in the vast majority of current and future asbestos-related claims.
The Company’s asbestos-related claims activity for the year ended December 31, 2018 and 2017 is
as follows:
Beginning claims January 1
New claims received
Dismissed claims
Settled claims
Ending claims December 31
2018
2017
9,225
1,932
(2,189)
(370)
8,598
9,385
2,116
(1,866)
(410)
9,225
Through December 31, 2018 and December 31, 2017, the Company incurred $574.4 million and $528.7
million, respectively, in asbestos-related claim resolution costs (including settlement payments and
judgments) and associated defense costs. During 2018 and 2017, the Company paid $46.0 million and
$51.7 million, respectively, in asbestos-related claim resolution costs and associated defense costs. These
gross payments are before tax benefits and any insurance receipts. Asbestos-related claim resolution costs
and associated defense costs are reflected in the Company's operating cash flows and will continue to be
in the future.
The Company reviews, on an ongoing basis, its own experience in handling asbestos-related claims
and trends affecting asbestos-related claims in the U.S. tort system generally, for the purposes of assessing
the value of pending asbestos-related claims and the number and value of those that may be asserted in
the future, as well as potential recoveries from the Company’s insurance carriers with respect to such claims
and defense costs.
As part of its review and assessment of asbestos-related claims, the Company utilizes a third party
actuary to further assist in the analysis of potential future asbestos-related claim resolution costs and
associated defense costs. The actuary’s work utilizes data and analysis resulting from the Company’s claim
review process, including input from national coordinating counsel and local counsel, and includes the
development of an estimate of the potential value of asbestos-related claims asserted but not yet resolved
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 actuary projects a potential number of future claims based
on the Company’s historical claim filings and patterns and compares that to anticipated levels of unique
plaintiff asbestos-related claims asserted in the U.S. tort system against all defendants. The actuary also
utilizes assumptions based on the Company’s historical proportion of claims resolved without payment,
historical claim resolution costs for those claims that result in a payment, and historical defense costs. The
liabilities are then estimated by multiplying the pending and projected future claim filings by projected
payments rates and average claim resolution 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
actuary, 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 estimated defense costs,
was $805.3 million and $828.2 million as of December 31, 2018 and December 31, 2017, respectively. This
liability reflects the actuarial central estimate, which is intended to represent an expected value of the most
probable outcome. As of December 31, 2018 and 2017, the Company estimates that its aggregate liability
for such claims, including defense costs, is as follows:
(millions of dollars)
Beginning asbestos liability as of January 1
Actuarial revaluation
Claim resolution costs and defense related costs
Ending asbestos liability as of December 31
2018
2017
$
$
828.2
$
22.8
(45.7)
805.3
$
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, 2064 with a runoff through 2074. The Company
currently believes that December 31, 2074 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.
During the year ended December 31, 2018, the Company recorded an increase to its asbestos-related
liabilities of $22.8 million as a result of actuarial valuation changes. This increase was the result of higher
future defense costs resulting from recent trends in the ratio of defense costs to claim resolution costs.
During the year ended December 31, 2017, the Company with the assistance of counsel and its third party
actuary reviewed the Company's claims experience against external data sources and concluded no actuarial
valuation adjustment to the liability in 2017 was necessary. During the year ended December 31, 2016, the
Company recorded a decrease to its asbestos-related liabilities of $45.5 million as a result of actuarial
valuation changes. This decrease was the result of lower future claim resolution costs resulting from changes
in the Company's defense strategy in recent years and docket control measures which were implemented
in a significant jurisdiction in 2016.
The Company’s estimate of the claim resolution costs and associated 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 currently 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
has concluded that it is reasonably possible that it may incur additional losses through 2074 for asbestos-
related claims, in addition to amounts recorded, of up to approximately $100.0 million as of December 31,
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2018 and 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 including primary
insurance and excess insurance coverage. Prior to June 2004, the claim resolution costs 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 insurance carriers. The Cook County court
has issued a number of interim rulings and discovery is continuing in this proceeding. The Company is
vigorously pursuing the litigation against all insurance carriers that continue to be parties to it, which currently
includes excess insurance carriers, as well as pursuing settlement discussions with its insurance carriers
where appropriate. The Company has entered into settlement agreements with certain of its insurance
carriers, resolving such insurance carriers’ coverage disputes through the insurance carriers’ agreement to
pay specified amounts to the Company, either immediately or over a specified period. Through December
31, 2018 and December 31, 2017, the Company received $271.1 million and $270.0 million, respectively,
in cash and notes from insurance carriers on account of asbestos-related claim resolution costs and
associated defense costs.
As of December 31, 2018 and December 31, 2017, 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. The Company has recorded this insurance coverage as a long-term receivable for asbestos-
related claim resolution costs and associated defense costs that have been incurred, less cash and notes
received, and remaining limits as a deferred insurance asset with respect to liabilities recorded for potential
future costs for asbestos-related claims. 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 insurance carriers, the impact of
previous insurance settlements, and coverage available from solvent insurance carriers not party to the
coverage litigation. The Company’s estimated remaining insurance coverage relating to asbestos-related
claims and their associated defense costs is the subject of disputes with its insurance carriers, 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 insurance carriers 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 insurance carriers that they are
not liable to indemnify the Company, and the fact that the Company has recovered a substantial portion of
its insurance coverage, $271.1 million through December 31, 2018, from its insurance carriers 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.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amounts recorded in the Condensed Consolidated Balance Sheets respecting asbestos-related
claims are as follows:
(millions of dollars)
Assets:
Other long-term asbestos-related insurance receivables
Deferred asbestos-related insurance asset
Total insurance assets
Liabilities:
Accounts payable and accrued expenses
Other non-current liabilities
Total accrued liabilities
December 31,
2018
2017
$
$
$
$
303.3 $
83.1
386.4 $
50.0 $
755.3
805.3 $
258.7
127.7
386.4
52.5
775.7
828.2
On July 31, 2018, the Division of Enforcement of the SEC informed the Company that it is conducting
an investigation related to the Company's accounting for asbestos-related claims not yet asserted. The
Company is fully cooperating with the SEC in connection with its investigation.
NOTE 16 RESTRUCTURING
In 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 within its
emissions business 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. As a continuation of these actions, the Company recorded restructuring expense of $53.5 million
in the year ended December 31, 2018, primarily related to employee termination benefits and professional
fees. The largest portion of this was a voluntary termination program in the European emissions business
where approximately 140 employees accepted the termination packages. As a result, the Company recorded
approximately $28.4 million of employee severance expense during the year ended December 31, 2018.
In addition, the Company recorded $6.0 million employee termination benefits in other locations in the Engine
segment in the year ended December 31, 2018.
Additionally, the Company recorded restructuring expense of $10.3 million in the year ended December
31, 2018 in the Drivetrain segment primarily related to manufacturing footprint rationalization activities.
The Company will continue to explore improving the future profitability and competitiveness of its Engine
and Drivetrain business. 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 in
the year ended December 31, 2016. Included in this restructuring expense are employee termination benefits
of $3.0 million and other expense of $5.2 million.
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 in the year ended December 31, 2016. This
restructuring expense was primarily related to employee termination benefits.
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 in the year ended December 31, 2016. 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 in the year ended
December 31, 2016 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.
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, 2018 and
2017:
(millions of dollars)
Balance at January 1, 2017
Provision
Cash payments
Translation adjustment
Balance at December 31, 2017
Provision
Cash payments
Translation adjustment
Balance at December 31, 2018
Severance Accruals
Drivetrain
Engine
Total
3.7 $
2.7 $
4.7
(4.6)
0.3
4.1
7.1
(7.3)
—
1.4
(2.9)
0.1
1.3
34.4
(14.5)
(0.4)
3.9 $
20.8 $
6.4
6.1
(7.5)
0.4
5.4
41.5
(21.8)
(0.4)
24.7
$
$
NOTE 17 LEASES AND COMMITMENTS
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 $42.0 million, $39.6 million and
$38.2 million in the years ended December 31, 2018, 2017 and 2016, respectively. The Company does not
have any material capital leases.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Future minimum operating lease payments at December 31, 2018 were as follows:
(millions of dollars)
2019
2020
2021
2022
2023
After 2023
Total minimum lease payments
NOTE 18 EARNINGS PER SHARE
$
24.3
20.6
15.5
12.6
10.4
37.9
$
121.3
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, and 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
of performance-based stock awards described in Note 13, "Stock-Based Compensation," to the Consolidated
Financial Statements 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 share and 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,
2018
2017
2016
930.7 $
439.9 $
208.197
210.429
4.47 $
2.09 $
595.0
214.374
2.78
930.7 $
439.9 $
595.0
$
$
$
Weighted average shares of common stock outstanding
Effect of stock-based compensation
208.197
1.299
210.429
1.119
Weighted average shares of common stock outstanding including
dilutive shares
Diluted earnings per share of common stock
209.496
211.548
$
4.44 $
2.08 $
214.374
0.954
215.328
2.76
Antidilutive stock-based awards excluded from the calculation of diluted
earnings per share
0.139
—
—
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 19 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 provider of electrification technologies, serving customers in the U.S., U.K., France,
Germany, Italy, China and the Asia Pacific region. Sevcon products complement BorgWarner’s power
electronics capabilities utilized to provide electrified propulsion solutions. Sevcon's operating results and
assets are reported within the Company's Drivetrain reporting segment.
The following table summarizes the aggregated 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
16.7
2.8
7.3
127.6
70.7
(9.2)
(0.7)
(2.9)
(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.
In the third quarter of 2018, the Company finalized all purchase accounting adjustments related to the
acquisition and 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
$6.0 million from the Company's initial estimate.
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.
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Divgi-Warner Private Limited
In August 2016, the Company sold its 60% ownership interest in Divgi-Warner Private Limited ("Divgi-
Warner") to the joint venture partner. This former joint venture was formed in 1995 to develop and manufacture
transfer cases and synchronizer rings in India. As a result of the sale, the Company received cash proceeds
of approximately $5.4 million, net of capital gains tax and cash divested, which is classified as an investing
activity within the Condensed Consolidated Statement of Cash Flows. Furthermore, the Company wrote off
noncontrolling interest of $4.8 million as result of the sale and recognized a negligible gain in the year ended
December 31, 2016.
Remy International, Inc.
On November 10, 2015, the Company acquired 100% of the equity interests in Remy for $29.50 per
share in cash. The Company also settled approximately $361.0 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.
NOTE 20 ASSETS AND LIABILITIES HELD FOR SALE
In 2017, the Company started exploring strategic options for non-core emission product lines in the
Engine segment and launched an active program to locate a buyer and initiated all other actions required
to complete the plan to sell and exit the non-core pipe and thermostat product lines. The Company determined
that the assets and liabilities of the non-core emission product lines met the held for sale criteria 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 in the year
ended December 31, 2017. During 2018, the Company continued its marketing efforts with interested parties
and engaged in active discussions with these parties. In December 2018, after finalizing negotiations
regarding various aspects of the sale, the Company entered into a definitive agreement to sell its thermostat
product lines for approximately $28 million subject to customary adjustments. Completion of the sale is
expected in the first quarter of 2019, subject to satisfaction of customary closing conditions. The fair value
of the assets and liabilities based on anticipated proceeds upon sale, less costs to sell of $3.5 million, was
determined to be less than the carrying value, therefore, the Company recorded an additional asset
impairment expense of $25.6 million in the year ended December 31,2018 in Other expense, net to adjust
the net book value of this business to its fair value less cost to sell. As of December 31, 2018 and December
31, 2017, assets of $47.0 million and $67.3 million, including allocated goodwill of $7.0 million and $7.3
million, and liabilities of $23.1 million and $29.5 million, respectively, were reclassified as held for sale on
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Consolidated Balance Sheets. The business did not meet the criteria to be classified as a discontinued
operation.
The assets and liabilities classified as held for sale 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
December 31,
December 31,
2018
2017
$
$
$
$
14.8
41.6
11.9
44.9
7.0
20.2
0.1
(93.5)
47.0
18.3
4.8
23.1
$
$
$
$
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 21 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.
2018 Segment information
Net sales
(millions of dollars)
Customers
Inter-segment
Net
Year-end assets
Depreciation/
amortization
Long-lived asset
expenditures (a)
Engine
Drivetrain
Inter-segment eliminations
Total
Corporate (b)
Consolidated
$
6,389.9
$
57.5
$
6,447.4
$
4,730.7
$
225.7
$
4,139.7
—
10,529.6
—
(0.3)
(57.2)
—
—
4,139.4
(57.2)
10,529.6
—
3,919.9
—
8,650.6
1,444.7
175.6
—
401.3
30.0
$ 10,529.6
$
— $ 10,529.6
$
10,095.3
$
431.3
$
278.1
254.4
—
532.5
14.1
546.6
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2017 Segment information
Net sales
(millions of dollars)
Customers
Inter-segment
Net
Year-end assets
Depreciation/
amortization
Long-lived asset
expenditures (a)
Engine
Drivetrain
Inter-segment eliminations
Total
Corporate (b)
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
2016 Segment information
Net sales
(millions of dollars)
Customers
Inter-segment
Net
Year-end assets
Depreciation/
amortization
Long-lived asset
expenditures (a)
Engine
Drivetrain
Inter-segment eliminations
Total
Corporate (b)
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
_______________
(a) Long-lived asset expenditures include capital expenditures and tooling outlays.
(b) Corporate assets include investments and other long-term receivables and deferred income taxes.
112
943.9
363.0
1,306.9
26.9
127.1
(48.6)
—
(4.9)
—
23.7
—
12.6
(6.2)
—
155.3
(6.3)
84.6
942.7
306.0
636.7
41.7
595.0
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Adjusted earnings before interest, income taxes and noncontrolling interest ("Adjusted EBIT")
Year Ended December 31,
2018
2017
2016
(millions of dollars)
Engine
Drivetrain
Adjusted EBIT
Restructuring expense
Asset impairment and loss on divestiture
Asbestos-related adjustments
Gain on sale of building
Other postretirement income
Officer stock awards modification
Merger, acquisition and divestiture expense
Lease termination settlement
Intangible asset impairment
Contract expiration gain
Other (income) expense, net
Corporate, including equity in affiliates' earnings and stock-based compensation
Interest income
Interest expense and finance charges
$
1,039.9
$
992.1
$
475.4
1,515.3
448.3
1,440.4
67.1
25.6
22.8
(19.4)
(9.4)
8.3
5.8
—
—
—
(3.3)
169.6
(6.4)
58.7
58.5
71.0
—
—
(5.1)
—
10.0
5.3
—
—
2.1
170.3
(5.8)
70.5
Earnings before income taxes and noncontrolling interest
1,195.9
1,063.6
Provision for income taxes
Net earnings
Net earnings attributable to the noncontrolling interest, net of tax
211.3
984.6
53.9
580.3
483.3
43.4
Net earnings attributable to BorgWarner Inc.
$
930.7
$
439.9
$
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographic Information
During the year ended December 31, 2018, 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. Outside the U.S., only Germany, China, South Korea, Mexico and Hungary exceeded 5%
of consolidated net sales during the year ended December 31, 2018. Also, the Company's 50% equity
investment in NSK-Warner (refer to Note 6, "Balance Sheet Information," to the Consolidated Financial
Statements for more information) of $184.1 million, $185.1 million and $172.9 million at December 31, 2018,
2017 and 2016, 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
2018
2,393.5 $
2017
2,280.0 $
2016
2,236.0 $
$
2018
2017
2016
728.9 $
719.3 $
799.3
1,665.1
687.3
1,669.5
4,021.9
1,801.1
858.8
978.4
475.9
$ 10,529.6 $
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 $
371.1
153.0
452.5
976.6
589.3
235.1
223.1
150.8
2,903.8 $
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
Sales to Major Customers
Consolidated net sales to Ford (including its subsidiaries) were approximately 14%, 15%, and 15% for
the years ended December 31, 2018, 2017 and 2016, respectively; and to Volkswagen (including its
subsidiaries) were approximately 12%, 13% and 13% for the years ended December 31, 2018, 2017 and
2016, respectively. Both of the Company's reporting segments had significant sales to Volkswagen and Ford
in 2018, 2017 and 2016. 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 27%, 28% and 28% of total net sales
for the years ended December 31, 2018, 2017 and 2016, 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.
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 22 INTERIM FINANCIAL INFORMATION (Unaudited)
The following table presents summary quarterly financial data:
(millions of dollars, except per share
amounts)
Quarter ended
Net sales
Cost of sales
Gross profit
Selling, general and administrative
expenses
Other expense (income), net
Operating income
Equity in affiliates’ earnings, net of
tax
Interest income
Interest expense and finance
charges
Other postretirement income
Earnings before income taxes and
noncontrolling interest
2018
2017
Mar-31
Jun-30
Sep-30
Dec-31
Year
Mar-31
Jun-30
Sep-30
Dec-31
Year
$ 2,784.3
$ 2,694.0
$ 2,478.5
$ 2,572.8
$ 10,529.6
$ 2,407.0
$ 2,389.7
$ 2,416.2
$ 2,586.4
$ 9,799.3
2,192.5
2,114.8
1,962.9
2,030.0
8,300.2
1,890.7
1,876.8
1,894.6
2,021.6
591.8
579.2
515.6
542.8
2,229.4
516.3
512.9
521.6
564.8
253.4
4.9
333.5
(10.2)
(1.5)
16.1
(2.6)
236.0
30.4
312.8
(13.0)
(1.4)
14.9
(2.4)
230.5
7.1
278.0
(15.2)
(1.5)
14.4
(2.4)
225.8
51.4
265.6
(10.5)
(2.0)
13.3
(2.0)
945.7
93.8
1,189.9
(48.9)
(6.4)
58.7
(9.4)
219.0
5.8
291.5
(9.7)
(1.5)
18.0
(1.2)
215.1
(0.3)
298.1
(14.4)
(1.4)
18.0
(1.4)
225.0
22.0
274.6
(14.4)
(1.3)
17.6
(1.3)
240.0
117.0
207.8
(12.7)
(1.6)
16.9
(1.2)
7,683.7
2,115.6
899.1
144.5
1,072.0
(51.2)
(5.8)
70.5
(5.1)
331.7
314.7
282.7
266.8
1,195.9
285.9
297.3
274.0
206.4
1,063.6
Provision for income taxes
Net earnings (loss)
94.9
236.8
30.4
284.3
66.8
215.9
19.2
247.6
211.3
984.6
86.3
199.6
76.2
221.1
79.4
194.6
338.4
(132.0)
580.3
483.3
11.7
12.5
12.1
17.6
53.9
10.4
9.1
9.7
14.2
43.4
Net earnings attributable to the
noncontrolling interest, net of tax
Net earnings (loss) attributable to
BorgWarner Inc. (a)
$ 225.1
$ 271.8
$ 203.8
$ 230.0
Earnings per share — basic
Earnings per share — diluted
$
$
1.07
1.07
$
$
1.30
1.30
$
$
0.98
0.98
$
$
1.11
1.10
_______________
(a) The Company's results were impacted by the following:
$
$
$
930.7
$ 189.2
$ 212.0
$ 184.9
$ (146.2)
$
439.9
4.47
4.44
$
$
0.89
0.89
$
$
1.01
1.00
$
$
0.88
0.88
$
$
(0.70)
(0.70)
$
$
2.09
2.08
• Quarter ended December 31, 2018: The Company recorded an asset impairment expense of $25.6 million to adjust
the net book value of the pipe and thermostat product lines to fair value. The Company recorded asbestos-related
adjustments resulting in a net increase to Other Expense of $22.8 million. The Company recorded restructuring
expense of $22.7 million primarily related to the Engine and Drivetrain segment actions designed to improve future
profitability and competitiveness. The Company recorded a gain of $19.4 million related to the sale of a building at a
manufacturing facility located in Europe. The Company also recorded merger and acquisition expense of $1.0 million
primarily related to professional fees associated with divestiture activities for the non-core pipes and thermostat product
line. The Company recorded reductions of income tax expense of $5.5 million related to restructuring expense, $0.1
million related to merger, acquisition and divestiture expense, $5.5 million related to asbestos-related adjustments,
$7.7 million related to asset impairment expense, $0.4 million related to a decrease in our deferred tax liability due
to the Company's ability to record a tax benefit for certain foreign tax credits available due to actions the Company
took during the year, $9.1 million related to valuation allowance releases, $2.8 million related to tax reserve adjustments,
and $18.5 million related to changes in accounting methods and tax filing positions for prior years primarily related to
the Tax Act. Additionally, the Company recorded income tax expense of $5.8 million related to a gain on the sale of
a building, $7.4 million related to adjustments to measurement period provisional estimates associated with the Tax
Act and $0.4 million related to other expense.
• Quarter ended September 30, 2018: The Company recorded restructuring expense of $5.7 million primarily related
to the actions within its Engine segment designed to improve future profitability and competitiveness. The Company
also recorded merger and acquisition expense of $1.6 million primarily related to professional fees associated with
divestiture activities for the non-core pipes and thermostat product line. The Company recorded reductions of income
tax expense of $1.3 million related to restructuring expense, $0.4 million related to other expense, $6.6 million related
to adjustments to measurement period provisional estimates associated with the Tax Act, $0.5 million related to a
decrease in our deferred tax liability due to the Company's ability to record a tax benefit for certain foreign tax credits
available due to actions the Company took during the year, and $1.8 million related to other one-time tax adjustments,
primarily due to changes in tax filing positions. Additionally, the Company recorded income tax expense of $0.1 million
related to merger, acquisition and divestiture expense.
115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
• Quarter ended June 30, 2018: The Company recorded restructuring expense of $31.2 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 $1.0 million primarily related
to professional fees associated with divestiture activities for the non-core pipes and thermostat product line. The
Company recorded reductions of income tax expenses of $7.6 million associated with restructuring expense, $13.4
million related to adjustments to measurement period provisional estimates associated with the Tax Act, $21.1 million
related to a decrease in our deferred tax liability due to the Company's ability to record a tax benefit for certain foreign
tax credits available due to actions the Company took in the second quarter, and $9.9 million related to other one-
time tax adjustments.
• Quarter ended March 31, 2018: The Company recorded restructuring expense of $7.5 million primarily related to
Engine and Drivetrain segment actions designed to improve future profitability and competitiveness. The Company
recorded a gain of approximately $4.0 million related to the settlement of a commercial contract for an entity acquired
in the 2015 Remy acquisition. The Company also recorded merger and acquisition expense of $2.2 million primarily
related to professional fees associated with divestiture activities for the non-core pipe product line. The Company
recorded income tax expenses of $0.9 million and $0.4 million related to a commercial settlement gain and other one-
time tax adjustments, and reductions of income tax expense of $0.6 million and $0.3 million which are associated
with restructuring expense, and merger and acquisition expense.
• Quarter ended December 31, 2017: The Company recorded an asset impairment expense of $71.0 million to adjust
the net book value of the pipe 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 Tax Act.
• 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.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints and the benefits of controls must be considered relative
to costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have been
detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected. However, our disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives.
The Company has adopted and maintains disclosure controls and procedures that are designed
to provide reasonable assurance that information required to be disclosed in the reports filed or submitted
under the Exchange Act, such as this Form 10-K, is collected, recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
The Company's disclosure controls and procedures are also designed to ensure that such information is
accumulated and communicated to management to allow timely decisions regarding required disclosure.
As required under Exchange Act Rule 13a-15, the Company's management, including the Chief Executive
116
Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls
and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are
effective.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control
over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an assessment
of the Company's internal control over financial reporting based on the framework and criteria established
by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated
Framework (2013). Based on the assessment, management concluded that, as of December 31, 2018, 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 control over financial reporting
as of December 31, 2018 as stated in its report included herein.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control 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 control over financial reporting.
Item 9B. Other Information
Not applicable.
117
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 2019 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 2019 Annual Meeting of Stockholders under the captions “Director Compensation,”
“Compensation Committee Interlocks and Insider Participation,” “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 2019 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 2019 Annual Meeting of Stockholders under the caption
“Certain Relationships and Related Transactions, and Director Independence” 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 2019 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.
118
Item 16. Form 10-K Summary
Not applicable.
119
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/ Frederic B. Lissalde
Frederic B. Lissalde
President and Chief Executive Officer
Date: February 19, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
person on behalf of the registrant and in the capacities indicated on the 19th day of February, 2019.
Signature
/s/ Frederic B. Lissalde
Frederic B. Lissalde
/s/ Thomas J. McGill
Thomas J. McGill
/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/ Deborah D. McWhinney
Deborah D. McWhinney
/s/ Paul A. Mascarenas
Paul A. Mascarenas
/s/ Alexis P. Michas
Alexis P. Michas
/s/ Vicki L. Sato
Vicki L. Sato
/s/ Thomas T. Stallkamp
Thomas T. Stallkamp
Title
President and Chief Executive Officer
(Principal Executive Officer) and Director
Vice President and Interim Chief Financial
Officer
(Principal Financial Officer)
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director and Non-Executive Chairman
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 through April 26, 2018
(incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2018 filed July 26, 2018).
Amended and Restated By-Laws of the Company, as amended through April 25, 2018
(incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2018 filed July 26, 2018).
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. 2018 Stock Incentive Plan (incorporated by reference to Appendix A to the
Company’s Definitive Proxy Statement filed March 16, 2018).
†10.3
Form of 2018 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for Non-
Employee Directors*
†10.4
†10.5
Form of 2018 BorgWarner Inc. 2018 Stock Incentive Plan Stock Units Award Agreement for
Non-U.S. Directors*
Form of 2018 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for
Employees*
†10.6
BorgWarner Inc. 2014 Stock Incentive Plan (incorporated by reference to Annex A to the
Company’s Definitive Proxy Statement filed March 21, 2014).
A - 1
Exhibit Number
Description
†10.7
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).
†10.8
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 filed April 27, 2017).
†10.9
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 filed April 27, 2017).
†10.10
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 filed April 27, 2017).
†10.11
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 filed April 28, 2016).
†10.12
†10.13
†10.14
†10.15
†10.16
†10.17
†10.18
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 filed April 28, 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 filed July 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 filed July 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 filed April 30, 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 filed April 30, 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 filed April 30, 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 filed July 27, 2017).
†10.19
Form of 2017 BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement for
Non-U.S. Directors (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2017 filed July 27, 2017).
A - 2
Exhibit Number
Description
†10.20
Form of 2018 BorgWarner Inc. 2014 Stock Incentive Plan Performance Share Award Agreement
(incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2018 filed April 26, 2018.
†10.21
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).
†10.22
Amended and Restated BorgWarner Inc. Management Incentive Bonus Plan, effective as of
December 31, 2008.*
†10.23
BorgWarner Inc. Retirement Savings Excess Benefit Plan, as amended and restated, effective
January 1, 2009.*
†10.24
BorgWarner Inc. Board of Directors Deferred Compensation Plan, as amended and restated,
effective January 1, 2009.*
†10.25
First Amendment, dated as of January 1, 2011, to BorgWarner Inc. Board of Directors Deferred
Compensation Plan.*
†10.26
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 filed February 9, 2017).
†10.27
Form of Amended and Restated Change of Control Employment Agreement for Executive
Officers.*
†10.28
Form of Amended and Restated Change of Control Employment Agreement for Executive
Officers (effective 2009).*
†10.29
BorgWarner Inc. 2004 Deferred Compensation Plan, as amended and restated, effective January
1, 2009.*
†10.30
†10.31
Transition and Retirement Agreement, dated as of June 5, 2018, between BorgWarner Inc. and
James R. Verrier (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2018 filed July 26, 2018).
Agreement, dated as of May 9, 2018, between BorgWarner Inc. and John J. Gasparovic
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2018 filed July 26, 2018).
†10.32
Retention Bonus Agreement, dated as of December 7, 2018, between BorgWarner Inc. and
Anthony D. Hensel.*
10.33
10.34
Distribution and Indemnity Agreement, dated as of January 27, 1993, between Borg-Warner
Automotive, Inc. and Borg-Warner Security (incorporated by reference to Exhibit 10.25 to the
Company’s Annual Report on Form 10-K/A for the year ended December 31, 2017 filed
September 28, 2018).
Assignment of Trademarks and License Agreement, dated as of November 2, 1994, between
Borg-Warner Security Corporation and Borg-Warner Automotive, Inc. (incorporated by reference
to Exhibit 10.26 to the Company’s Annual Report on Form 10-K/A for the year ended December
31, 2017 filed September 28, 2018).
A - 3
Exhibit Number
Description
10.35
Amendment to Assignment of Trademarks and License Agreement, dated as of July 31, 1998,
between Borg-Warner Security Corporation and Borg-Warner Automotive, Inc. (incorporated by
reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K/A for the year ended
December 31, 2017 filed September 28, 2018).
21.1
Subsidiaries of the Company.*
23.1
Independent Registered Public Accounting Firm's Consent.*
31.1
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.*
31.2
Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.*
32.1
Section 1350 Certifications.*
101.INS
XBRL Instance Document.*
101.SCH
XBRL Taxonomy Extension Schema Document.*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.*
*Filed herewith.
† Indicates a management contract or compensatory plan or arrangement.
A - 4
Wherever the journey leads
we deliver the propulsion
solutions of tomorrow.
BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
borgwarner.com