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
 
13-3404508
State or other jurisdiction of Incorporation or organization
 
(I.R.S. Employer Identification No.)
 
3850 Hamlin Road,
Auburn Hills, Michigan 48326
(Address of principal executive offices) (Zip Code)
  Registrant’s telephone number, including area code: (248) 754-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
New York Stock Exchange
 
Securities registered Pursuant to Section 12(g) of the Act: None
_________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  þ     No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  o   No þ
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  þ     No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   
Yes   þ     No o
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    þ

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
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
 
 
 
 
 
 
 (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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes  o     No   þ
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 approxim ately $8.9 billion .

As of February 8, 2019, t he registrant had 207,700,721 shares of voting common stock outstanding.

 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated.
Document
Part of Form 10-K into which incorporated
Portions of the BorgWarner Inc. Proxy Statement for the 2019 Annual Meeting of Stockholders
Part III
 
 



BORGWARNER INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2018
INDEX
 
 
Page No.
 
 
 
 
 
 
 




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
  


PART I

ITEM 1. BUSINESS

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:

 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Engine
$
6,447.4

 
$
6,061.5

 
$
5,590.1

Drivetrain
4,139.4

 
3,790.3

 
3,523.7

Inter-segment eliminations
(57.2
)
 
(52.5
)
 
(42.8
)
Net sales
$
10,529.6

 
$
9,799.3

 
$
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
 
Products
 
Year organized
 
Percentage
owned by the
Company
 
Location of
operation
 
Joint venture partner
 
Fiscal 2018 net sales
(millions of dollars) (a)
Unconsolidated:
 
 
 
 
 
 

 
 
 
 
 
 
NSK-Warner 
 
Transmission components
 
1964
 
50
%
 
Japan/China
 
NSK Ltd.
 
$
731.8

Turbo Energy Private Limited (b)
 
Turbochargers
 
1987
 
32.6
%
 
India
 
Sundaram Finance Limited; Brakes India Limited
 
$
215.3

Consolidated:
 
 
 
 
 
 

 
 
 
 
 
 
BorgWarner Transmission Systems Korea Ltd. (c)
 
Transmission components
 
1987
 
60
%
 
Korea
 
NSK-Warner
 
$
270.1

Borg-Warner Shenglong (Ningbo) Co. Ltd. 
 
Fans and fan drives
 
1999
 
70
%
 
China
 
Ningbo Shenglong Automotive Powertrain Systems Co., Ltd.
 
$
70.6

BorgWarner TorqTransfer Systems Beijing Co. Ltd. 
 
Transfer cases
 
2000
 
80
%
 
China
 
Beijing Automotive Components Stock Co. Ltd.
 
$
204.3

SeohanWarner Turbo Systems Ltd. 
 
Turbochargers
 
2003
 
71
%
 
Korea
 
Korea Flange Company
 
$
226.6

BorgWarner United Transmission Systems Co. Ltd. 
 
Transmission components
 
2009
 
66
%
 
China
 
China Automobile Development United Investment Co., Ltd.
 
$
333.1

________________
(a)
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.
(b)
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.
(c)
BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner Transmission Systems Korea Ltd. This gives the Company an additional indirect effective ownership percentage of 20%, 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:
 
Year Ended December 31,
Customer
2018
 
2017
 
2016
Ford
14
%
 
15
%
 
15
%
Volkswagen
12
%
 
13
%
 
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.
 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Gross R&D expenditures
$
511.7

 
$
473.1

 
$
417.8

Customer reimbursements
(71.6
)
 
(65.6
)
 
(74.6
)
Net R&D expenditures
$
440.1

 
$
407.5

 
$
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
 
Names of Competitors
Turbochargers:
 
Cummins Turbo Technology
 
IHI
 
 
Garret Motion, Inc.
 
Mitsubishi Heavy Industries (MHI)
 
 
Bosch Mahle Turbo Systems
 
Continental
 
 
 
 
 
Emissions systems:
 
Mahle
 
T.RAD
 
 
Denso
 
Pierburg
 
 
Bosch
 
NGK
 
 
Eldor
 
Eberspaecher
 
 
 
 
 
Timing devices and chains:
 
Denso
 
Schaeffler Group
 
 
Iwis
 
Tsubaki Group
 
 
Delphi Technologies
 
 
 
 
 
 
 
Thermal systems:
 
Horton
 
Usui
 
 
Mahle
 
Xuelong
 
Product Type: Drivetrain
 
Names of Competitors
Torque transfer:
 
GKN Driveline
 
JTEKT
 
 
Magna Powertrain
 
 
 
 
 
 
 
Rotating electrical machines:
 
Denso
 
Valeo
 
 
Zhengzhou Coal Mining Machinery Group
 
Continental
 
 
Mitsubishi Electric
 
 
 
 
 
 
 
Transmission systems:
 
Bosch
 
FCC
 
 
Dynax
 
Schaeffler Group
 
 
Valeo
 
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
  


W orkforce

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.


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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
 
Age
 
Position with the Company
Frederic B. Lissalde
 
51
 
President and Chief Executive Officer
Thomas J. McGill
 
52
 
Vice President, Interim Chief Financial Officer and Treasurer
Tonit M. Calaway
 
50
 
Executive Vice President, Chief Legal Officer and Secretary
Brady D. Ericson
 
47
 
Executive Vice President and Chief Strategy Officer
Stefan Demmerle
 
54
 
Vice President
Joseph F. Fadool
 
52
 
Vice President
Martin Fischer
 
48
 
Vice President
Anthony D. Hensel
 
60
 
Vice President and Controller
Robin Kendrick
 
54
 
Vice President
Joel Wiegert
 
45
 
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

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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.

Risks related to our industry

Conditions in the automotive industry may adversely affect our business.

Our financial performance depends on conditions in the global automotive industry. Automotive and truck production and sales are cyclical and sensitive to general economic conditions and other factors including interest rates, consumer credit, and consumer spending and preferences. Economic declines that result in significant reduction in automotive or truck production would have 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

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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.


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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.


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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.


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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.

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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.


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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.

Risks related to our customers

We rely on sales to major customers.

We rely on sales to OEMs around the world of varying credit quality 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.   


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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
  


Other risks

A variety of other factors could adversely affect our business.

Any of the following could materially and adversely affect our business: the loss of or changes in supply contracts or sourcing strategies of our major customers or suppliers; start-up expenses associated with new vehicle programs or delays or cancellation of such programs; utilization of our manufacturing facilities, which can be dependent on a single product line or customer; inability to recover engineering and tooling costs; market and financial consequences of recalls that may be required on products we supplied; delays or difficulties in new product development; the possible introduction of similar or superior technologies by others; global excess capacity and vehicle platform proliferation; and the impact of 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
 
Europe
 
Asia
Asheville, North Carolina
 
Arcore, Italy
 
Aoyama, Japan
Auburn Hills, Michigan (d)
 
Bradford, England (UK)
 
Chennai, India (b)
Cadillac, Michigan
 
Kirchheimbolanden, Germany
 
Chungju-City, South Korea
Dixon, Illinois
 
Ludwigsburg, Germany
 
Taicang, China (b)
El Salto Jalisco, Mexico
 
Lugo, Italy (b)
 
Kakkalur, India
Fletcher, North Carolina
 
Markdorf, Germany
 
Manesar, India
Itatiba, Brazil
 
Muggendorf, Germany
 
Nabari City, Japan
Ithaca, New York
 
Oberboihingen, Germany
 
Ningbo, China (b) (e)
Marshall, Michigan
 
Oroszlany, Hungary (d)
 
Pune, India
Piracicaba, Brazil
 
Rzeszow, Poland (d)
 
Pyongtaek, South Korea (b) (c)
Ramos, Mexico
 
Tralee, Ireland
 
Rayong, Thailand (d)
 
 
Viana de Castelo, Portugal
 
 
 
 
Vigo, Spain
 
 
DRIVETRAIN (a)  
Americas
 
Europe
 
Asia
Anderson, Indiana (b)
 
Arnstadt, Germany
 
Beijing, China (b)
Bellwood, Illinois
 
Gateshead, England (UK)
 
Dae-Gu, South Korea (b)
Brusque, Brazil (b)
 
Heidelberg, Germany
 
Dalian, China (b)
Frankfort, Illinois
 
Ketsch, Germany
 
Eumsung, South Korea
Irapuato, Mexico
 
Landskrona, Sweden (b)
 
Fukuroi City, Japan
Laredo, Texas (b)
 
Tulle, France
 
Changnyeong, South Korea
Livonia, Michigan
 
Wrexham, Wales (UK)
 
Ochang, South Korea (b)
Melrose Park, Illinois (b)
 
 
 
Shanghai, China (b)
Noblesville, Indiana (b)
 
 
 
Tianjin, China (b)
San Luis Potosi, Mexico (b)
 
 
 
Wuhan, China (b)
Seneca, South Carolina
 
 
 
 
Water Valley, Mississippi
 
 
 
 
Waterloo, Ontario, Canada
 
 
 
 
________________
(a)
The table excludes joint ventures owned less than 50% and administrative offices.
(b)
Indicates leased land rights or a leased facility.
(c)
City has 2 locations: a wholly owned subsidiary and a joint venture.
(d)
Location serves both segments.
(e)
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
CHART-6F85B485CF335422B54.JPG
___________
*$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
 
December 31,
 
2013
2014
2015
2016
2017
2018
BorgWarner Inc.(1)
$
100.00

$
99.14

$
78.80

$
73.02

$
95.81

$
66.14

S&P 500(2)
100.00

113.69

115.26

129.05

157.22

150.33

SIC Code Index(3)
100.00

113.23

115.70

132.31

176.25

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
 
—

 
$
—

 
—

 
6,819,833

Employee transactions
 
—

 
$
—

 
—

 
 
Month Ended November 30, 2018
 
 
 
 
 
 
 
 
Common Stock Repurchase Program
 
—

 
$
—

 
—

 
6,819,833

Employee transactions
 
695

 
$
38.87

 
—

 
 
Month Ended December 31, 2018
 
 
 
 
 
 
 
 
Common Stock Repurchase Program
 
—

 
$
—

 
—

 
6,819,833

Employee transactions
 
—

 
$
—

 
—

 
 

Equity Compensation Plan Information

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
1,515,984

 
$
42.97

 
6,963,017

Equity compensation plans not approved by security holders
—

 
$
—

 
—

Total
1,515,984

 
$
42.97

 
6,963,017

 

29
  


Item 6.
Selected Financial Data

 
 
Year Ended December 31,
(in millions, except share and per share data)
 
2018
 
2017
 
2016
 
2015
 
2014
Operating results
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
10,529.6

 
$
9,799.3

 
$
9,071.0

 
$
8,023.2

 
$
8,305.1

Operating income  (a)
 
$
1,189.9

 
$
1,072.0

 
$
973.2

 
$
888.3

 
$
908.7

Net earnings attributable to BorgWarner Inc. (a)
 
$
930.7

 
$
439.9

 
$
595.0

 
$
577.2

 
$
628.5

 
 
 
 
 
 
 
 
 
 
 
Earnings per share — basic
 
$
4.47

 
$
2.09

 
$
2.78

 
$
2.57

 
$
2.77

Earnings per share — diluted
 
$
4.44

 
$
2.08

 
$
2.76

 
$
2.56

 
$
2.75

 
 
 
 
 
 
 
 
 
 
 
Net R&D expenditures
 
$
440.1

 
$
407.5

 
$
343.2

 
$
307.4

 
$
336.2

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures, including tooling outlays
 
$
546.6

 
$
560.0

 
$
500.6

 
$
577.3

 
$
563.0

Depreciation and amortization
 
$
431.3

 
$
407.8

 
$
391.4

 
$
320.2

 
$
330.4

 
 
 
 
 
 
 
 
 
 
 
Number of employees
 
30,000

 
29,000

 
27,000

 
30,000

 
22,000

 
 
 
 
 
 
 
 
 
 
 
Financial position
 
 
 
 

 
 

 
 

 
 

Cash
 
$
739.4

 
$
545.3

 
$
443.7

 
$
577.7

 
$
797.8

Total assets
 
$
10,095.3

 
$
9,787.6

 
$
8,834.7

 
$
9,210.5

 
$
7,636.3

Total debt
 
$
2,113.3

 
$
2,188.3

 
$
2,219.5

 
$
2,550.3

 
$
1,337.2

 
 
 
 
 
 
 
 
 
 
 
Common share information
 
 
 
 
 
 
 
 
 
 
Cash dividend declared and paid per share
 
$
0.68

 
$
0.59

 
$
0.53

 
$
0.52

 
$
0.51

 
 
 
 
 
 
 
 
 
 
 
Market prices of the Company's common stock
 
 
 
 
 
 
 
 
 
 
High
 
$
57.91

 
$
55.68

 
$
42.25

 
$
63.01

 
$
67.38

Low
 
$
33.20

 
$
37.99

 
$
27.69

 
$
38.89

 
$
50.24

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding (thousands)
 
 
 
 
 
 
 
 
 
 
Basic
 
208,197

 
210,429

 
214,374

 
224,414

 
227,150

Diluted
 
209,496

 
211,548

 
215,325

 
225,648

 
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:
 
Year Ended December 31,
(millions of dollars, except per share data)
2018
 
2017
 
2016
Net sales
$
10,529.6

 
$
9,799.3

 
$
9,071.0

Cost of sales
8,300.2

 
7,683.7

 
7,142.3

Gross profit
2,229.4

 
2,115.6

 
1,928.7

Selling, general and administrative expenses
945.7

 
899.1

 
818.0

Other expense, net
93.8

 
144.5

 
137.5

Operating income
1,189.9

 
1,072.0

 
973.2

Equity in affiliates’ earnings, net of tax
(48.9
)
 
(51.2
)
 
(42.9
)
Interest income
(6.4
)
 
(5.8
)
 
(6.3
)
Interest expense and finance charges
58.7

 
70.5

 
84.6

Other postretirement income
(9.4
)
 
(5.1
)
 
(4.9
)
Earnings before income taxes and noncontrolling interest
1,195.9

 
1,063.6

 
942.7

Provision for income taxes
211.3

 
580.3

 
306.0

Net earnings
984.6

 
483.3

 
636.7

Net earnings attributable to the noncontrolling interest, net of tax
53.9

 
43.4

 
41.7

Net earnings attributable to BorgWarner Inc. 
$
930.7

 
$
439.9

 
$
595.0

Earnings per share — diluted
$
4.44

 
$
2.08

 
$
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:
 
Year Ended December 31,
Non-comparable items:
2018
 
2017
 
2016
Restructuring expense
$
(0.24
)
 
$
(0.23
)
 
$
(0.10
)
Asset impairment and loss on divestiture
(0.09
)
 
(0.25
)
 
(0.48
)
Asbestos-related adjustments
(0.08
)
 
—

 
0.14

Merger, acquisition and divestiture expense
(0.03
)
 
(0.05
)
 
(0.11
)
Gain on sale of building
0.07

 
—

 
—

Officer stock awards modification
(0.04
)
 
—

 
—

Gain on commercial settlement
0.01

 
—

 
—

Intangible asset impairment
—

 
—

 
(0.04
)
Contract expiration gain
—

 
—

 
0.02

Tax reform adjustments
0.06

 
(1.29
)
 
—

Tax adjustments
0.30

 
0.02

 
0.04

Total impact of non-comparable items per share — diluted:
$
(0.04
)
 
$
(1.80
)
 
$
(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:
 
Year Ended December 31,
(percentage of net sales)
2018
 
2017
 
2016
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
78.8

 
78.4

 
78.7

Gross profit
21.2

 
21.6

 
21.3

Selling, general and administrative expenses
9.0

 
9.2

 
9.0

Other expense, net
0.9

 
1.5

 
1.5

Operating income
11.3

 
10.9

 
10.8

Equity in affiliates’ earnings, net of tax
(0.5
)
 
(0.5
)
 
(0.5
)
Interest income
(0.1
)
 
(0.1
)
 
(0.1
)
Interest expense and finance charges
0.6

 
0.7

 
0.9

Other postretirement income
(0.1
)
 
(0.1
)
 
(0.1
)
Earnings before income taxes and noncontrolling interest
11.4

 
10.9

 
10.4

Provision for income taxes
2.0

 
5.9

 
3.4

Net earnings
9.4

 
5.0

 
7.0

Net earnings attributable to the noncontrolling interest, net of tax
0.5

 
0.4

 
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 segments.

Net Sales by Reporting Segment
 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Engine
$
6,447.4

 
$
6,061.5

 
$
5,590.1

Drivetrain
4,139.4

 
3,790.3

 
3,523.7

Inter-segment eliminations
(57.2
)
 
(52.5
)
 
(42.8
)
Net sales
$
10,529.6

 
$
9,799.3

 
$
9,071.0



37
  


Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest ("Adjusted EBIT")
 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Engine
$
1,039.9

 
$
992.1

 
$
943.9

Drivetrain
475.4

 
448.3

 
363.0

Adjusted EBIT
1,515.3

 
1,440.4

 
1,306.9

Restructuring expense
67.1

 
58.5

 
26.9

Asset impairment and loss on divestiture
25.6

 
71.0

 
127.1

Asbestos-related adjustments
22.8

 
—

 
(48.6
)
Gain on sale of building
(19.4
)
 
—

 
—

Other postretirement income
(9.4
)
 
(5.1
)
 
(4.9
)
CEO stock awards modification
8.3

 
—

 
—

Merger, acquisition and divestiture expense
5.8

 
10.0

 
23.7

Lease termination settlement
—

 
5.3

 
—

Intangible asset impairment
—

 
—

 
12.6

Contract expiration gain
—

 
—

 
(6.2
)
Other expense, net
(3.3
)
 
2.1

 
—

Corporate, including equity in affiliates' earnings and stock-based compensation
169.6

 
170.3

 
155.3

Interest income
(6.4
)
 
(5.8
)
 
(6.3
)
Interest expense and finance charges
58.7

 
70.5

 
84.6

Earnings before income taxes and noncontrolling interest
1,195.9

 
1,063.6

 
942.7

Provision for income taxes
211.3

 
580.3

 
306.0

Net earnings
984.6

 
483.3

 
636.7

Net earnings attributable to the noncontrolling interest, net of tax
53.9

 
43.4

 
41.7

Net earnings attributable to BorgWarner Inc. 
$
930.7

 
$
439.9

 
$
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
 
December 31,
(millions of dollars)
2018
 
2017
Notes payable and short-term debt
$
172.6

 
$
84.6

Long-term debt
1,940.7

 
2,103.7

Total debt
2,113.3

 
2,188.3

Less: cash
739.4

 
545.3

Total debt, net of cash
1,373.9

 
1,643.0

Total equity
4,344.8

 
3,825.9

Total capitalization
$
5,718.7

 
$
5,468.9

Total debt, net of cash, to capital ratio
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
$
3,825.9

Adoption of accounting standards
1.9

Net earnings
984.6

Purchase of treasury stock
(150.0
)
Stock-based compensation
37.7

Other comprehensive income
(178.0
)
Dividends declared to BorgWarner stockholders
(141.5
)
Dividends declared to noncontrolling stockholders
(35.8
)
Balance, December 31, 2018
$
4,344.8


Operating Activities

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

 
$
28.9

Defined benefit pension plans (b)
54.8

 
4.0

 
9.9

 
10.9

 
30.0

Notes payable and long-term debt
2,125.7

 
172.6

 
258.6

 
573.8

 
1,120.7

Projected interest payments
838.3

 
79.5

 
124.2

 
104.2

 
530.4

Non-cancelable operating leases
121.3

 
24.3

 
36.1

 
23.0

 
37.9

Capital spending obligations
103.7

 
103.7

 
—

 
—

 
—

Total
$
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
  


I n 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:
 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Net sales
$
10,529.6

 
$
9,799.3

 
$
9,071.0

Warranty provision
$
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:
 
December 31,
(millions of dollars)
2018
 
2017
 
2016
25 basis point decrease (income)/expense
$
(26.3
)
 
$
(24.5
)
 
$
(22.7
)
25 basis point increase (income)/expense
$
26.3

 
$
24.5

 
$
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)
Impact on U.S. 2019 pre-tax pension (expense)/income
 
 
Impact on Non-U.S. 2019 pre-tax pension (expense)/income
One percentage point decrease in discount rate
$
—

*
 
$
(6.2
)
One percentage point increase in discount rate
$
—

*
 
$
6.2

One percentage point decrease in expected return on assets
$
(2.0
)
 
 
$
(4.4
)
One percentage point increase in expected return on assets
$
2.0

 
 
$
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)
Impact on 2019 pre-tax OPEB interest (expense)/income
One percentage point decrease in discount rate
$
(0.6
)
One percentage point increase in discount rate
$
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:
 
One Percentage Point
(millions of dollars)
Increase
 
Decrease
Effect on other postretirement employee benefit obligation
$
5.5

 
$
(4.9
)
Effect on total service and interest cost components
$
0.2

 
$
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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
 
December 31,
(in millions, except share and per share amounts)
2018
 
2017
ASSETS
 

 
 

Cash
$
739.4

 
$
545.3

Receivables, net
1,987.4

 
2,018.9

Inventories, net
780.8

 
766.3

Prepayments and other current assets
250.0

 
145.4

Assets held for sale
47.0

 
67.3

Total current assets
3,804.6

 
3,543.2

 
 
 
 
Property, plant and equipment, net
2,903.8

 
2,863.8

Investments and other long-term receivables
591.7

 
547.4

Goodwill
1,853.4

 
1,881.8

Other intangible assets, net
439.5

 
492.7

Other non-current assets
502.3

 
458.7

Total assets
$
10,095.3

 
$
9,787.6

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Notes payable and other short-term debt
$
172.6

 
$
84.6

Accounts payable and accrued expenses
2,144.3

 
2,270.3

Income taxes payable
58.9

 
40.8

Liabilities held for sale
23.1

 
29.5

Total current liabilities
2,398.9

 
2,425.2

 
 
 
 
Long-term debt
1,940.7

 
2,103.7

 
 
 
 
Other non-current liabilities:
 

 
 

Asbestos-related liabilities
755.3

 
775.7

Retirement-related liabilities
298.3

 
301.6

Other
357.3

 
355.5

Total other non-current liabilities
1,410.9

 
1,432.8

 
 
 
 
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)
2.5

 
2.5

Non-voting common stock, $0.01 par value; authorized shares: 25,000,000; none issued and outstanding
—

 
—

Capital in excess of par value
1,145.8

 
1,118.7

Retained earnings
5,336.1

 
4,531.0

Accumulated other comprehensive loss
(674.1
)
 
(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
4,225.5

 
3,716.8

Noncontrolling interest
119.3

 
109.1

Total equity
4,344.8

 
3,825.9

Total liabilities and equity
$
10,095.3

 
$
9,787.6



See Accompanying Notes to Consolidated Financial Statements.

57
  


BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS  
 
Year Ended December 31,
(in millions, except share and per share amounts)
2018
 
2017
 
2016
Net sales
$
10,529.6

 
$
9,799.3

 
$
9,071.0

Cost of sales
8,300.2

 
7,683.7

 
7,142.3

Gross profit
2,229.4

 
2,115.6

 
1,928.7

 
 
 
 
 
 
Selling, general and administrative expenses
945.7

 
899.1

 
818.0

Other expense, net
93.8

 
144.5

 
137.5

Operating income
1,189.9

 
1,072.0

 
973.2

 
 
 
 
 
 
Equity in affiliates’ earnings, net of tax
(48.9
)
 
(51.2
)
 
(42.9
)
Interest income
(6.4
)
 
(5.8
)
 
(6.3
)
Interest expense and finance charges
58.7

 
70.5

 
84.6

Other postretirement income
(9.4
)
 
(5.1
)
 
(4.9
)
Earnings before income taxes and noncontrolling interest
1,195.9

 
1,063.6

 
942.7

 
 
 
 
 
 
Provision for income taxes
211.3

 
580.3

 
306.0

Net earnings
984.6

 
483.3

 
636.7

 
 
 
 
 
 
Net earnings attributable to the noncontrolling interest, net of tax
53.9

 
43.4

 
41.7

Net earnings attributable to BorgWarner Inc. 
$
930.7

 
$
439.9

 
$
595.0

 
 
 
 
 
 
Earnings per share — basic
$
4.47

 
$
2.09

 
$
2.78

 
 
 
 
 
 
Earnings per share — diluted
$
4.44


$
2.08

 
$
2.76

 
 
 
 
 
 
Weighted average shares outstanding (thousands):
 

 
 

 
 

Basic
208,197

 
210,429

 
214,374

Diluted
209,496

 
211,548

 
215,328















See Accompanying Notes to Consolidated Financial Statements.

58
  


BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Year Ended December 31,
(in millions of dollars)
2018
 
2017
 
2016
Net earnings attributable to BorgWarner Inc. 
$
930.7

 
$
439.9

 
$
595.0

 
 
 
 
 
 
Other comprehensive (loss) income
 
 
 
 
 
Foreign currency translation adjustments
(147.6
)
 
236.5

 
(109.1
)
Hedge instruments*
1.6

 
(6.3
)
 
7.0

Defined benefit postretirement plans*
(23.0
)
 
0.5

 
(8.2
)
Other*
(1.1
)
 
1.4

 
(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*
53.9

 
43.4

 
41.7

Other comprehensive (loss) income attributable to the noncontrolling interest*
(7.9
)
 
11.4

 
(5.1
)
Comprehensive income
$
806.6

 
$
726.8

 
$
519.7

____________________________________
*
Net of income taxes.






























See Accompanying Notes to Consolidated Financial Statements.

59
  


BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Year Ended December 31,
(in millions of dollars)
2018
 
2017
 
2016
OPERATING
 

 
 

 
 

Net earnings
$
984.6

 
$
483.3

 
$
636.7

Adjustments to reconcile net earnings to net cash flows from operations:
 

 
 

 
 

Non-cash charges (credits) to operations:
 

 
 

 
 

Asset impairment and loss on divestiture
25.6

 
71.0

 
127.1

Asbestos-related adjustments
22.8

 
—

 
(48.6
)
Gain on sale of building
(19.4
)
 
—

 
—

Depreciation and amortization
431.3

 
407.8

 
391.4

Stock-based compensation expense
52.9

 
52.7

 
43.6

Restructuring expense, net of cash paid
33.0

 
27.0

 
12.0

Deferred income tax (benefit) provision
(57.2
)
 
41.8

 
6.8

Tax reform adjustments to provision for income taxes
(12.6
)
 
273.5

 
—

Equity in affiliates’ earnings, net of dividends received, and other
(15.0
)
 
(32.0
)
 
(17.0
)
Net earnings adjusted for non-cash charges to operations
1,446.0

 
1,325.1

 
1,152.0

Changes in assets and liabilities:
 

 
 

 
 

Receivables
(42.9
)
 
(167.9
)
 
(137.5
)
Inventories
(53.3
)
 
(84.5
)
 
(36.5
)
Prepayments and other current assets
(18.7
)
 
0.5

 
8.8

Accounts payable and accrued expenses
(76.1
)
 
232.8

 
134.9

Prepaid taxes and income taxes payable
(84.7
)
 
(42.8
)
 
(14.2
)
Other assets and liabilities
(43.8
)
 
(82.9
)
 
(71.8
)
Net cash provided by operating activities
1,126.5

 
1,180.3

 
1,035.7

INVESTING
 

 
 

 
 

Capital expenditures, including tooling outlays
(546.6
)
 
(560.0
)
 
(500.6
)
Proceeds from sale of businesses, net of cash divested
—

 
—

 
85.8

Proceeds from asset disposals and other
36.0

 
4.5

 
10.6

Payments for businesses acquired, including restricted cash, net of cash acquired
—

 
(185.7
)
 
—

Proceeds from (payments for) settlement of net investment hedges
2.1

 
(8.5
)
 
—

Payments for venture capital investment
(6.0
)
 
(2.6
)
 
—

Net cash used in investing activities
(514.5
)
 
(752.3
)
 
(404.2
)
FINANCING
 

 
 

 
 

Net decrease in notes payable
(34.2
)
 
(88.3
)
 
(129.1
)
Additions to debt, net of debt issuance costs
58.7

 
3.0

 
4.6

Repayments of debt, including current portion
(65.7
)
 
(19.3
)
 
(193.6
)
Payments for debt issuance cost
—

 
(2.4
)
 
—

Proceeds from interest rate swap termination
—

 
—

 
8.9

Payments for purchase of treasury stock
(150.0
)
 
(100.0
)
 
(288.0
)
(Payments for) proceeds from stock-based compensation items
(15.2
)
 
(2.1
)
 
6.7

Dividends paid to BorgWarner stockholders
(141.5
)
 
(124.1
)
 
(113.4
)
Dividends paid to noncontrolling stockholders
(35.5
)
 
(29.3
)
 
(29.9
)
Net cash used in financing activities
(383.4
)
 
(362.5
)
 
(733.8
)
Effect of exchange rate changes on cash
(34.5
)
 
36.1

 
(31.7
)
Net increase (decrease) in cash
194.1

 
101.6

 
(134.0
)
Cash at beginning of year
545.3

 
443.7

 
577.7

Cash at end of year
$
739.4

 
$
545.3

 
$
443.7

 
 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 

 
 

 
 

Cash paid during the year for:
 

 
 

 
 

Interest
$
83.6

 
$
92.0

 
$
100.3

Income taxes, net of refunds
$
315.7

 
$
279.8

 
$
300.5

Non-cash investing transactions
 
 
 
 
 
Liabilities assumed from business acquired
$
—

 
$
18.0

 
$
—

 

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
)
 
$
77.8

Dividends declared ($0.53 per share) *
—

 
—

 
—

 
—

 
—

 
(113.4
)
 
—

 
(26.0
)
Stock incentive plans
—

 
793,230

 
—

 
(19.4
)
 
32.4

 
—

 
—

 
—

Net issuance for executive stock plan
—

 
—

 
—

 
12.8

 
—

 
—

 
—

 
—

Net issuance of restricted stock
—

 
414,464

 
—

 
1.2

 
19.2

 
—

 
—

 
—

Purchase of treasury stock
—

 
(8,269,550
)
 
—

 
—

 
(274.8
)
 
—

 
—

 
—

Business divestiture
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4.8
)
Net earnings
—

 
—

 
—

 
—

 
—

 
595.0

 
—

 
41.7

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(111.9
)
 
(5.1
)
Balance, December 31, 2016
246,387,057

 
(34,124,092
)
 
$
2.5

 
$
1,104.3

 
$
(1,381.6
)
 
$
4,215.2

 
$
(722.1
)
 
$
83.6

Dividends declared ($0.59 per share) *
—

 
—

 
—

 
—

 
—

 
(124.1
)
 
—

 
(29.3
)
Stock incentive plans
—

 
473,419

 
—

 
(10.6
)
 
18.9

 
—

 
—

 
—

Net issuance for executive stock plan
—

 
73,935

 
—

 
21.0

 
2.7

 
—

 
—

 
—

Net issuance of restricted stock
—

 
402,184

 
—

 
4.0

 
14.6

 
—

 
—

 
—

Purchase of treasury stock
—

 
(2,399,710
)
 
—

 
—

 
(100.0
)
 
—

 
—

 
—

Net earnings
—

 
—

 
—

 
—

 
—

 
439.9

 
—

 
43.4

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
232.1

 
11.4

Balance, December 31, 2017
246,387,057

 
(35,574,264
)
 
$
2.5

 
$
1,118.7

 
$
(1,445.4
)
 
$
4,531.0

 
$
(490.0
)
 
$
109.1

Adoption of accounting standards (Note 1)
—

 
—

 
—

 
—

 
—

 
15.9

 
(14.0
)
 
—

Dividends declared ($0.68 per share) *
—

 
—

 
—

 
—

 
—

 
(141.5
)
 
—

 
(35.8
)
Net issuance for executive stock plan
—

 
154,642

 
—

 
17.5

 
4.5

 
—

 
—

 
—

Net issuance of restricted stock
—

 
284,946

 
—

 
9.6

 
6.1

 
—

 
—

 
—

Purchase of treasury stock
—

 
(3,037,447
)
 
—

 
—

 
(150.0
)
 
—

 
—

 
—

Net earnings
—

 
—

 
—

 
—

 
—

 
930.7

 
—

 
53.9

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(170.1
)
 
(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)
 
Balance at December 31, 2017
 
Adjustments due to ASC 606
 
Balance at January 1, 2018
Inventories, net
 
$
766.3

 
$
(7.4
)
 
$
758.9

Prepayments and other current assets (including contract assets)
 
$
145.4

 
$
9.4

 
$
154.8

Accounts payable and other accrued expenses (including contract liabilities)
 
$
2,270.3

 
$
0.1

 
$
2,270.4

Retained earnings
 
$
4,531.0

 
$
1.9

 
$
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:

 
 
Twelve months ended December 31, 2018
(In millions)
 
Engine
 
Drivetrain
 
Total
North America
 
$
1,573.3

 
$
1,798.6

 
$
3,371.9

Europe
 
3,074.1

 
947.8

 
4,021.9

Asia
 
1,620.8

 
1,361.9

 
2,982.7

Other
 
121.7

 
31.4

 
153.1

Total
 
$
6,389.9

 
$
4,139.7

 
$
10,529.6


 
 
Twelve months ended December 31, 2017
(In millions)
 
Engine
 
Drivetrain
 
Total
North America
 
$
1,509.0

 
$
1,691.2

 
$
3,200.2

Europe
 
2,783.1

 
952.4

 
3,735.5

Asia
 
1,614.5

 
1,116.0

 
2,730.5

Other
 
102.4

 
30.7

 
133.1

Total
 
$
6,009.0

 
$
3,790.3

 
$
9,799.3


 
 
Twelve months ended December 31, 2016
(In millions)
 
Engine
 
Drivetrain
 
Total
North America
 
$
1,299.3

 
$
1,745.0

 
$
3,044.3

Europe
 
2,622.0

 
848.1

 
3,470.1

Asia
 
1,551.3

 
909.4

 
2,460.7

Other
 
74.7

 
21.2

 
95.9

Total
 
$
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:
 
 Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Gross R&D expenditures
$
511.7

 
$
473.1

 
$
417.8

Customer reimbursements
(71.6
)
 
(65.6
)
 
(74.6
)
Net R&D expenditures
$
440.1

 
$
407.5

 
$
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:
 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Restructuring expense
$
67.1

 
$
58.5

 
$
26.9

Asset impairment and loss on divestiture
25.6

 
71.0

 
127.1

Asbestos-related adjustments
22.8

 
—

 
(48.6
)
Gain on sale of building
(19.4
)
 
—

 
—

Merger, acquisition and divestiture expense
5.8

 
10.0

 
23.7

Lease termination settlement
—

 
5.3

 
—

Intangible asset impairment
—

 
—

 
12.6

Gain on commercial settlement
(4.0
)
 
—

 
—

Other income
(4.1
)
 
(0.3
)
 
(4.2
)
Other expense, net
$
93.8

 
$
144.5

 
$
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.
 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Earnings before income taxes:
 
 
 
 
 
U.S.
$
220.0

 
$
203.0

 
$
27.5

Non-U.S.
975.9

 
860.6

 
915.2

Total
$
1,195.9

 
$
1,063.6

 
$
942.7

Provision for income taxes:
 

 
 

 
 

Current:
 

 
 

 
 

Federal
$
17.1

 
$
36.4

 
$
37.4

State
5.4

 
4.6

 
6.1

Foreign
258.8

 
247.4

 
251.7

Total current
281.3

 
288.4

 
295.2

Deferred:
 
 
 
 
 
Federal
(39.6
)
 
323.7

 
23.5

State
(8.5
)
 
2.1

 
(0.8
)
Foreign
(21.9
)
 
(33.9
)
 
(11.9
)
Total deferred
(70.0
)
 
291.9

 
10.8

Total provision for income taxes
$
211.3

 
$
580.3

 
$
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.
 
Year Ended December 31,
(millions of dollars)
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
5.6

 
2.3

 
1.8

U.S. tax on non-U.S. earnings
36.5

 
170.6

 
32.2

Affiliates' earnings
(10.3
)
 
(17.9
)
 
(15.0
)
Foreign rate differentials
27.5

 
(100.2
)
 
(93.3
)
Tax holidays
(28.0
)
 
(31.0
)
 
(25.5
)
Net tax on remittance of foreign earnings
(21.5
)
 
80.3

 
21.8

Tax credits
(26.0
)
 
(24.2
)
 
(3.2
)
Reserve adjustments, settlements and claims
32.5

 
8.0

 
11.6

Valuation allowance adjustments
(10.6
)
 
12.2

 
(2.7
)
Non-deductible transaction costs
2.6

 
10.9

 
8.3

Changes in accounting methods and filing positions
(29.8
)
 
(1.9
)
 
0.3

Impact of transactions
(0.1
)
 
4.0

 
16.3

Other foreign taxes
8.4

 
8.1

 
12.9

Revaluation of U.S. deferred taxes
(4.2
)
 
63.7

 
—

Impact of FDII
(15.3
)
 
—

 
—

Other
(7.2
)
 
23.1

 
10.5

Provision for income taxes, as reported
$
211.3

 
$
580.3

 
$
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)
2018
 
2017
 
2016
Balance, January 1
$
92.0

 
$
91.1

 
$
127.3

Additions based on tax positions related to current year
24.1

 
16.8

 
16.1

Additions/(reductions) for tax positions of prior years
17.7

 
(2.4
)
 
1.6

Reductions for closure of tax audits and settlements
(7.7
)
 
(19.9
)
 
(45.7
)
Reductions for lapse in statute of limitations
—

 
(0.8
)
 
(5.0
)
Translation adjustment
(5.7
)
 
7.2

 
(3.2
)
Balance, December 31
$
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
 
Years no longer subject to audit
 
Tax jurisdiction
 
Years no longer subject to audit
U.S. Federal
 
2014 and prior
 
Japan
 
2015 and prior
China
 
2012 and prior
 
Mexico
 
2012 and prior
France
 
2015 and prior
 
Poland
 
2013 and prior
Germany
 
2011 and prior
 
South Korea
 
2012 and prior
Hungary
 
2013 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:
 
December 31,
(millions of dollars)
2018
 
2017
Deferred tax assets:
 

 
 

Employee compensation
23.9

 
26.4

Other comprehensive loss
63.9

 
54.5

Research and development capitalization
91.8

 
76.4

Net operating loss and capital loss carryforwards
83.8

 
74.6

Pension and other postretirement benefits
18.8

 
19.1

Asbestos-related
172.7

 
167.1

Other
155.2

 
146.6

Total deferred tax assets
$
610.1

 
$
564.7

Valuation allowance
(86.3
)
 
(95.9
)
Net deferred tax asset
$
523.8

 
$
468.8

Deferred tax liabilities:
 

 
 

Goodwill and intangible assets
(183.3
)
 
(193.9
)
Fixed assets
(117.5
)
 
(104.6
)
Unremitted foreign earnings
(57.4
)
 
(98.5
)
Other
(19.2
)
 
(12.0
)
Total deferred tax liabilities
$
(377.4
)
 
$
(409.0
)
Net deferred taxes
$
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:
 
December 31,
(millions of dollars)
2018
 
2017
Receivables, net:
 

 
 

Customers
$
1,727.7

 
$
1,735.7

Indirect taxes
114.1

 
152.1

Other
152.2

 
136.8

Gross receivables
1,994.0

 
2,024.6

Bad debt allowance (a)
(6.6
)
 
(5.7
)
Total receivables, net
$
1,987.4

 
$
2,018.9

Inventories, net:
 

 
 

Raw material and supplies
$
485.0

 
$
469.7

Work in progress
113.6

 
126.7

Finished goods
198.9

 
183.0

FIFO inventories
797.5

 
779.4

LIFO reserve
(16.7
)
 
(13.1
)
Total inventories, net
$
780.8

 
$
766.3

Prepayments and other current assets:


 


Prepaid tooling
$
82.9

 
$
81.9

Prepaid taxes
84.4

 
5.3

Other
82.7

 
58.2

Total prepayments and other current assets
$
250.0

 
$
145.4

Property, plant and equipment, net:
 

 
 

Land and land use rights
$
107.9

 
$
115.7

Buildings
762.6

 
783.5

Machinery and equipment
2,851.2

 
2,734.4

Capital leases
2.6

 
1.5

Construction in progress
425.8

 
410.5

Property, plant and equipment, gross
4,150.1

 
4,045.6

Accumulated depreciation
(1,473.5
)
 
(1,391.7
)
Property, plant & equipment, net, excluding tooling
2,676.6

 
2,653.9

Tooling, net of amortization
227.2

 
209.9

Property, plant & equipment, net
$
2,903.8

 
$
2,863.8

Investments and other long-term receivables:
 

 
 

Investment in equity affiliates
$
243.5

 
$
239.6

Other long-term asbestos-related insurance receivables
303.3

 
258.7

Other long-term receivables
44.9

 
49.1

Total investments and other long-term receivables
$
591.7

 
$
547.4

Other non-current assets:
 

 
 

Deferred income taxes
$
197.7

 
$
121.2

Deferred asbestos-related insurance asset
83.1

 
127.7

Other
221.5

 
209.8

Total other non-current assets
$
502.3

 
$
458.7



79
  


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
December 31,
(millions of dollars)
2018
 
2017
Accounts payable and accrued expenses:
 

 
 

Trade payables
$
1,485.4

 
$
1,545.6

Payroll and employee related
232.6

 
239.7

Indirect taxes
72.9

 
111.0

Product warranties
56.2

 
69.0

Customer related
49.2

 
75.7

Asbestos-related liability
50.0

 
52.5

Severance
25.0

 
5.8

Interest
19.1

 
22.9

Dividends payable to noncontrolling shareholders
17.2

 
17.7

Retirement related
15.9

 
17.2

Insurance
11.7

 
10.1

Derivatives
1.8

 
5.0

Other
107.3

 
98.1

Total accounts payable and accrued expenses
$
2,144.3

 
$
2,270.3

Other non-current liabilities:
 

 
 

Deferred income taxes
$
51.4

 
$
61.4

Product warranties
47.0

 
42.5

Other
258.9

 
251.6

Total other non-current liabilities
$
357.3

 
$
355.5


 (a) Bad debt allowance:
2018
 
2017
 
2016
Beginning balance, January 1
$
(5.7
)
 
$
(2.9
)
 
$
(1.9
)
Provision
(5.3
)
 
(2.7
)
 
(3.2
)
Write-offs
4.2

 
0.1

 
0.2

Business divestiture
—

 
—

 
2.0

Translation adjustment and other
0.2

 
(0.2
)
 
—

Ending balance, December 31
$
(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):

 
 
 
November 30,
(millions of dollars)
 
 
2018
 
2017
Balance sheets:
 
 
 

 
 

Cash and securities
 
 
$
116.6

 
$
104.6

Current assets, including cash and securities
 
 
316.9

 
289.2

Non-current assets
 
 
283.3

 
231.9

Current liabilities
 
 
215.3

 
154.9

Non-current liabilities
 
 
88.9

 
68.1

Total equity
 
 
296.0

 
298.1

 
 
 
 
 
 
 
Year Ended November 30,
(millions of dollars)
2018
 
2017
 
2016
Statements of operations:
 

 
 

 
 

Net sales
$
731.8

 
$
669.6

 
$
601.8

Gross profit
152.3

 
149.2

 
134.1

Net earnings
86.4

 
85.2

 
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.

I n 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:
 
2018
 
2017
(millions of dollars)
Engine
 
Drivetrain
 
Engine
 
Drivetrain
Gross goodwill balance, January 1
$
1,359.6

 
$
1,024.2

 
$
1,324.0

 
$
880.2

Accumulated impairment losses, January 1
(501.8
)
 
(0.2
)
 
(501.8
)
 
(0.2
)
Net goodwill balance, January 1
$
857.8

 
$
1,024.0

 
$
822.2

 
$
880.0

Goodwill during the year:
 

 
 

 
 

 
 

Acquisitions*
—

 
1.7

 
—

 
125.8

Held for sale
—

 
—

 
(7.3
)
 
—

Translation adjustment and other
(16.5
)
 
(13.6
)
 
42.9

 
18.2

Ending balance, December 31
$
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:
 
December 31, 2018
 
December 31, 2017
(millions of dollars)
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Amortized intangible assets:
 

 
 

 
 

 
 

 
 

 
 

Patented and unpatented technology
$
151.9

 
$
60.7

 
$
91.2

 
$
157.7

 
$
52.9

 
$
104.8

Customer relationships
489.7

 
201.2

 
288.5

 
507.6

 
181.0

 
326.6

Miscellaneous
8.3

 
3.9

 
4.4

 
8.7

 
3.2

 
5.5

Total amortized intangible assets
649.9

 
265.8

 
384.1

 
674.0

 
237.1

 
436.9

Unamortized trade names
55.4

 
—

 
55.4

 
55.8

 
—

 
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)
2018
 
2017
Beginning balance, January 1
$
729.8

 
$
649.6

Acquisitions*
—

 
72.6

Held for sale
—

 
(32.7
)
Translation adjustment
(24.5
)
 
40.3

Ending balance, December 31
$
705.3

 
$
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)
2018
 
2017
Beginning balance, January 1
$
237.1

 
$
186.1

Amortization
40.1

 
40.0

Held for sale
—

 
(11.6
)
Translation adjustment
(11.4
)
 
22.6

Ending balance, December 31
$
265.8

 
$
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)
2018
 
2017
Beginning balance, January 1
$
111.5

 
$
95.3

Provisions
69.0

 
73.1

Acquisitions
0.2

 
1.0

Held for sale
—

 
(3.6
)
Payments
(73.4
)
 
(60.6
)
Translation adjustment
(4.1
)
 
6.3

Ending balance, December 31
$
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:
 
December 31,
(millions of dollars)
2018
 
2017
Accounts payable and accrued expenses
$
56.2

 
$
69.0

Other non-current liabilities
47.0

 
42.5

Total product warranty liability
$
103.2

 
$
111.5


NOTE 9
NOTES PAYABLE AND LONG-TERM DEBT

As of December 31, 2018 and 2017, the Company had short-term and long-term debt outstanding as follows:
 
December 31,
(millions of dollars)
2018
 
2017
Short-term debt
 
 
 
Short-term borrowings
$
32.8

 
$
68.8

 
 
 
 
Long-term debt
 
 
 
8.00% Senior notes due 10/01/19 ($134 million par value)
135.4

 
137.4

4.625% Senior notes due 09/15/20 ($250 million par value)
250.9

 
251.4

1.80% Senior notes due 11/7/22 (€500 million par value)
570.0

 
595.7

3.375% Senior notes due 03/15/25 ($500 million par value)
496.6

 
496.1

7.125% Senior notes due 02/15/29 ($121 million par value)
119.1

 
118.9

4.375% Senior notes due 03/15/45 ($500 million par value)
493.7

 
493.5

Term loan facilities and other
14.8

 
26.5

Total long-term debt
$
2,080.5

 
$
2,119.5

Less: current portion
139.8

 
15.8

Long-term debt, net of current portion
$
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
$
172.6

2020
257.3

2021
1.3

2022
573.7

2023
0.1

After 2023
1,120.7

Total payments
$
2,125.7

Less: unamortized discounts
12.4

Total
$
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;
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or 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 (replacement cost).
C.
Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).


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:
 
 
 
Basis of fair value measurements
 
 
 
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
(millions of dollars)
 
 
 
 
Assets:
 

 
 

 
 

 
 

 
 
Foreign currency contracts
$
3.0

 
$
—

 
$
3.0

 
$
—

 
A
Other long-term receivables (insurance settlement agreement note receivable)
$
34.0

 
$
—

 
$
34.0

 
$
—

 
C
Net investment hedge contracts
$
11.9

 
$
—

 
$
11.9

 
$
—

 
A
Liabilities:


 
 

 


 
 

 
 
Foreign currency contracts
$
1.7

 
$
—

 
$
1.7

 
$
—

 
A
Commodity contracts
$
0.2

 
$
—

 
$
0.2

 
$
—

 
A
 
 
 
Basis of fair value measurements
 
 
(millions of dollars)
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:
 

 
 

 
 

 
 

 
 
Foreign currency contracts
$
1.7

 
$
—

 
$
1.7

 
$
—

 
A
Other long-term receivables (insurance settlement agreement note receivable)
$
42.9

 
$
—

 
$
42.9

 
$
—

 
C
Liabilities:


 
 

 
 

 
 

 
 
Foreign currency contracts
$
5.0

 
$
—

 
$
5.0

 
$
—

 
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)
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)
U.S. Plans:


 


 


 


 
 
 
 
Fixed income securities
$
122.1

 
$
1.2

 
$
—

 
$
—

 
A
 
120.9

Equity securities
71.0

 
11.1

 
—

 
—

 
A
 
59.9

Real estate and other
22.7

 
17.8

 
0.2

 
—

 
A
 
4.7

 
$
215.8

 
$
30.1

 
$
0.2

 
$
—

 
 
 
$
185.5

Non-U.S. Plans:


 


 


 


 
 
 
 
Fixed income securities
$
239.4

 
$
—

 
$
—

 
$
—

 
A
 
239.4

Equity securities
162.7

 
92.9

 
—

 
—

 
A
 
69.8

Real estate and other
36.4

 
—

 
—

 
—

 
A
 
36.4

 
$
438.5

 
$
92.9

 
$
—

 
$
—

 
 
 
$
345.6



87
  


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
 
 
Basis of fair value measurements
(millions of dollars)
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)
U.S. Plans:
 

 
 

 
 

 
 

 
 
 
 
Fixed income securities
$
127.1

 
$
1.3

 
$
—

 
$
—

 
A
 
125.8

Equity securities
86.7

 
13.5

 
—

 
—

 
A
 
73.2

Real estate and other
26.3

 
19.9

 
0.4

 
—

 
A
 
6.0

 
$
240.1

 
$
34.7

 
$
0.4

 
$
—

 
 
 
$
205.0

Non-U.S. Plans:


 


 


 


 
 
 
 
Fixed income securities
$
212.4

 
$
—

 
$
—

 
$
—

 
A
 
212.4

Equity securities
233.9

 
105.4

 
—

 
—

 
A
 
128.5

Real estate and other
37.1

 
—

 
—

 
—

 
A
 
37.1

 
$
483.4

 
$
105.4

 
$
—

 
$
—

 
 
 
$
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 derivative contracts
 
 
Volume hedged
 
 
 
 
Commodity
 
December 31, 2018
 
Units of measure
 
Duration
Copper
 
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)
Functional currency
 
Traded currency
 
Notional in traded currency
December 31, 2018
 
Notional in traded currency
December 31, 2017
 
Ending Duration
Brazilian real
 
Euro
 
3.6

 
1.1

 
Jun - 19
Brazilian real
 
US dollar
 
5.3

 
—

 
Jun - 19
Chinese renminbi
 
Euro
 
—

 
18.6

 
Jun - 18
Chinese renminbi
 
US dollar
 
—

 
36.0

 
Sep - 18
Euro
 
British pound
 
7.0

 
3.9

 
Oct - 19
Euro
 
Chinese renminbi
 
—

 
85.0

 
Dec - 18
Euro
 
Japanese yen
 
—

 
1,311.3

 
Dec - 18
Euro
 
Swedish krona
 
539.6

 
267.4

 
Jun - 19
Euro
 
US dollar
 
18.9

 
56.5

 
Dec - 19
Japanese yen
 
Chinese renminbi
 
88.8

 
—

 
Dec - 19
Japanese yen
 
Korean won
 
5,785.2

 
—

 
Dec - 19
Japanese yen
 
US dollar
 
2.8

 
—

 
Dec - 19
Korean won
 
Euro
 
6.4

 
3.1

 
Dec - 19
Korean won
 
Japanese yen
 
266.4

 
619.0

 
Dec - 19
Korean won
 
US dollar
 
7.1

 
11.2

 
Dec - 19
Swedish krona
 
Euro
 
56.0

 
109.7

 
Jan - 20
US dollar
 
Euro
 
—

 
42.0

 
Dec - 18
US dollar
 
Mexican peso
 
574.5

 
—

 
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.

 
Cross-Currency Swaps
(in millions)
Notional
in USD
 
Notional
in Local Currency
 
Duration
Fixed $ to fixed €
$
250.0

 
€
206.2

 
Sep - 20
Fixed $ to fixed ¥
$
100.0

 
¥
10,977.5

 
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)
 
Assets
 
Liabilities
Derivatives designated as hedging instruments Under Topic 815:
 
Location
 
December 31, 2018
 
December 31, 2017
 
Location
 
December 31, 2018
 
December 31, 2017
Foreign currency
 
Prepayments and other current assets
 
$
1.9

 
$
0.9

 
Accounts payable and accrued expenses
 
$
1.6

 
$
3.9

 
 
Other non-current assets
 
$
—

 
$
0.8

 
Other non-current liabilities
 
$
0.1

 
$
—

Commodity
 
Prepayments and other current assets
 
$
—

 
$
—

 
Accounts payable and accrued expenses
 
$
0.2

 
$
—

Net investment hedges
 
Prepayments and other current assets
 
$
—

 
$
—

 
Accounts payable and accrued expenses
 
$
—

 
$
—

 
 
Other non-current assets
 
$
11.9

 
$
—

 
Other non-current liabilities
 
$
—

 
$
—

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
 
Prepayments and other current assets
 
$
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)
 
Deferred gain (loss) in AOCI at
 
Gain (loss) expected to be reclassified to income in one year or less
Contract Type
 
December 31, 2018
 
December 31, 2017
 
Foreign currency
 
$
0.1

 
$
(2.3
)
 
$
—

Commodity
 
(0.2
)
 
—

 
(0.2
)
Net investment hedges:
 
—

 
 
 
 
    Foreign currency
 
4.5

 
2.9

 
—

    Cross-currency swaps
 
11.9

 
—

 
—

    Foreign currency denominated debt
 
(30.4
)
 
(57.1
)
 
—

Total
 
$
(14.1
)
 
$
(56.5
)
 
$
(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:
 
 
Year Ended December 31, 2018
(in millions)
 
Net sales
 
Cost of sales
 
Selling, general and administrative expenses
 
Other comprehensive income
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded
 
$
10,529.6

 
$
8,300.2

 
$
945.7

 
$
(170.1
)
 
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
 
$
—

 
$
—

 
$
—

 
$
(1.3
)
    Gain (loss) reclassified from AOCI to income
 
$
(2.3
)
 
$
(1.1
)
 
$
(0.3
)
 
$
—

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
 
$
—

 
$
—

 
$
—

 
$
(0.4
)
    Gain (loss) reclassified from AOCI to income
 
$
—

 
$
(0.2
)
 
$
—

 
$
—

Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
 
$
—

 
$
—

 
$
—

 
$
—


91
  


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
 
Year Ended December 31, 2017
(in millions)
 
Net sales
 
Cost of sales
 
Selling, general and administrative expenses
 
Other comprehensive income
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded
 
$
9,799.3

 
$
7,683.7

 
$
899.1

 
$
232.1

 
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
 
$
—

 
$
—

 
$
—

 
$
(4.7
)
    Gain (loss) reclassified from AOCI to income
 
$
3.4

 
$
(0.1
)
 
$
—

 
$
—

Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
 
$
—

 
$
—

 
$
(0.1
)
 
$
—

 
 
 
 
 
 
 
 
 
Commodity
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
 
$
—

 
$
—

 
$
—

 
$
0.6

    Gain (loss) reclassified from AOCI to income
 
$
—

 
$
0.5

 
$
—

 
$
—

Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
 
$
—

 
$
—

 
$
—

 
$
—


 
 
Year Ended December 31, 2016
(in millions)
 
Net sales
 
Cost of sales
 
Selling, general and administrative expenses
 
Other comprehensive income
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded
 
$
9,071.0

 
$
7,142.3

 
$
818.0

 
$
(111.9
)
 
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
 
$
—

 
$
—

 
$
—

 
$
7.0

    Gain (loss) reclassified from AOCI to income
 
$
(0.1
)
 
$
1.4

 
$
—

 
$
—

Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
 
$
—

 
$
—

 
$
0.3

 
$
—

 
 
 
 
 
 
 
 
 
Commodity
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
 
$
—

 
$
—

 
$
—

 
$
0.6

    Gain (loss) reclassified from AOCI to income
 
$
—

 
$
(1.4
)
 
$
—

 
$
—

Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
 
$
—

 
$
(0.3
)
 
$
—

 
$
—


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)
 
Year Ended December 31,
Net investment hedges
 
2018
 
2017
 
2016
Foreign currency
 
$
1.6

 
$
(7.9
)
 
$
0.4

Cross-currency swaps
 
$
11.9

 
$
—

 
$
—

Foreign currency denominated debt
 
$
26.7

 
$
(83.7
)
 
$
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)
 
Year Ended December 31,
Net investment hedges
 
2018
 
2017
 
2016
Foreign currency
 
$
0.6

 
$
1.3

 
$
—

Cross-currency swaps
 
$
8.7

 
$
—

 
$
—


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.
 
 
 
 
Year Ended December 31,
(in millions)
 
2018
 
2017
 
2016
Contract Type
 
Location
 
Gain (loss) on swaps
 
Gain (loss) on borrowings
 
Gain (loss) on swaps
 
Gain (loss) on borrowings
 
Gain (loss) on swaps
 
Gain (loss) on borrowings
Interest rate swap
 
Interest expense and finance charges
 
$
—

 
$
—

 
$
—

 
$
—

 
$
8.5

 
$
(8.5
)

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.
 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Defined contribution expense
$
34.9

 
$
33.5

 
$
28.3

Defined benefit pension expense
8.5

 
12.5

 
10.1

Other postretirement employee benefit expense
0.1

 
0.5

 
1.4

Total
$
43.5

 
$
46.5

 
$
39.8


93
  


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.
 
Pension benefits
 
Other postretirement
 
Year Ended December 31,
 
employee benefits
 
2018
 
2017
 
Year Ended December 31,
(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

Service cost
—

 
17.9

 
—

 
18.0

 
0.1

 
0.1

Interest cost
8.5

 
12.0

 
8.9

 
11.0

 
2.9

 
3.2

Plan participants’ contributions
—

 
0.3

 
—

 
0.3

 
—

 
—

Plan amendments
—

 
1.7

 
—

 
—

 
—

 
(0.7
)
Settlement and curtailment
—

 
(4.3
)
 
—

 
(3.7
)
 
—

 
—

Actuarial (gain) loss
(18.2
)
 
4.9

 
8.7

 
(7.8
)
 
(6.7
)
 
2.2

Currency translation
—

 
(29.4
)
 
—

 
63.4

 
—

 
—

Acquisition
—

 
—

 
4.0

 
37.0

 
—

 
—

Benefits paid
(20.7
)
 
(19.6
)
 
(20.8
)
 
(17.6
)
 
(16.8
)
 
(17.7
)
Projected benefit obligation, December 31
$
252.9

 
$
612.3

 
$
283.3

 
$
628.8

 
$
86.5

 
$
107.0

Change in plan assets:
 

 
 

 
 

 
 

 
 

 
 

Fair value of plan assets, January 1
$
240.1

 
$
483.4

 
$
229.5

 
$
393.8

 
 

 
 

Actual return on plan assets
(10.7
)
 
(18.1
)
 
23.5

 
30.7

 
 

 
 

Employer contribution
7.0

 
18.8

 
4.0

 
14.3

 
 

 
 

Plan participants’ contribution
—

 
0.3

 
—

 
0.3

 
 

 
 

Settlements
—

 
(4.3
)
 
—

 
(3.6
)
 


 


Currency translation
—

 
(22.0
)
 
—

 
46.8

 
 

 
 

Acquisition
—

 
—

 
3.8

 
18.1

 


 


Other
—

 
—

 
—

 
0.6

 
 
 
 
Benefits paid
(20.6
)
 
(19.6
)
 
(20.7
)
 
(17.6
)
 
 

 
 

Fair value of plan assets, December 31
$
215.8

 
$
438.5

 
$
240.1

 
$
483.4

 
 
 
 
Funded status
$
(37.1
)
 
$
(173.8
)
 
$
(43.2
)
 
$
(145.4
)
 
$
(86.5
)
 
$
(107.0
)
Amounts in the Consolidated Balance Sheets consist of:
 

 
 

 
 

 
 

 
 

 
 

Non-current assets
$
—

 
$
16.7

 
$
—

 
$
23.2

 
$
—

 
$
—

Current liabilities
(0.5
)
 
(4.4
)
 
(0.1
)
 
(3.9
)
 
(11.0
)
 
(13.2
)
Non-current liabilities
(36.6
)
 
(186.1
)
 
(43.1
)
 
(164.7
)
 
(75.5
)
 
(93.8
)
Net amount
$
(37.1
)
 
$
(173.8
)
 
$
(43.2
)
 
$
(145.4
)
 
$
(86.5
)
 
$
(107.0
)
Amounts in accumulated other comprehensive loss consist of:
 

 
 

 
 

 
 

 
 

 
 

Net actuarial loss
$
113.1

 
$
193.0

 
$
111.0

 
$
159.0

 
$
13.2

 
$
20.8

Net prior service (credit) cost
(5.8
)
 
2.2

 
(6.6
)
 
0.8

 
(11.8
)
 
(15.8
)
Net amount*
$
107.3

 
$
195.2

 
$
104.4

 
$
159.8

 
$
1.4

 
$
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:
 
December 31,
(millions of dollars)
2018
 
2017
Accumulated benefit obligation
$
(649.9
)
 
$
(681.2
)
Plan assets
449.9

 
494.8

Deficiency
$
(200.0
)
 
$
(186.4
)
Pension deficiency by country:
 

 
 

United States
$
(37.1
)
 
$
(43.2
)
Germany
(95.4
)
 
(75.7
)
Other
(67.5
)
 
(67.5
)
Total pension deficiency
$
(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:
 
December 31,
 
Target Allocation
 
2018
 
2017
 
U.S. Plans:
 

 
 

 
 
Real estate and other
11
%
 
11
%
 
0% - 15%
Fixed income securities
56
%
 
53
%
 
45% - 65%
Equity securities
33
%
 
36
%
 
25% - 45%
 
100
%
 
100
%
 
 
Non-U.S. Plans:
 

 
 

 
 
Real estate and other
8
%
 
8
%
 
0% - 10%
Fixed income securities
55
%
 
44
%
 
43% - 65%
Equity securities
37
%
 
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:
 
Pension benefits
 
Other postretirement employee benefits
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
 
Year Ended December 31,
(millions of dollars)
US
 
Non-US
 
US
 
Non-US
 
US
 
Non-US
 
2018
 
2017
 
2016
Service cost
$
—

 
$
17.9

 
$
—

 
$
18.0

 
$
—

 
$
16.2

 
$
0.1

 
$
0.1

 
$
0.2

Interest cost
8.5

 
12.0

 
8.9

 
11.0

 
9.6

 
12.5

 
2.9

 
3.2

 
4.0

Expected return on plan assets
(13.6
)
 
(27.0
)
 
(13.2
)
 
(23.8
)
 
(15.0
)
 
(24.3
)
 
—

 
—

 
—

Settlements, curtailments and other
—

 
0.3

 
—

 
0.3

 
—

 
—

 
—

 
—

 
—

Amortization of unrecognized prior service (credit) cost
(0.8
)
 
0.1

 
(0.8
)
 
—

 
(0.8
)
 
0.6

 
(4.1
)
 
(4.1
)
 
(4.9
)
Amortization of unrecognized loss
4.2

 
6.9

 
4.2

 
7.9

 
5.1

 
6.2

 
1.2

 
1.3

 
2.1

Net periodic (income) cost
$
(1.7
)
 
$
10.2

 
$
(0.9
)
 
$
13.4

 
$
(1.1
)
 
$
11.2

 
$
0.1

 
$
0.5

 
$
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:
 
December 31,
(percent)
2018
 
2017
U.S. pension plans:
 
 
 
Discount rate
4.24
 
3.55
Rate of compensation increase
N/A
 
N/A
U.S. other postretirement employee benefit plans:
 
 
 
Discount rate
4.05
 
3.32
Rate of compensation increase
N/A
 
N/A
Non-U.S. pension plans:
 
 
 
Discount rate
2.28
 
2.25
Rate of compensation increase
2.99
 
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:
 
Year Ended December 31,
(percent)
2018
 
2017
U.S. pension plans:
 
 
 
Discount rate - service cost
3.55
 
3.94
Effective interest rate on benefit obligation
3.13
 
3.26
Expected long-term rate of return on assets
6.00
 
6.01
Average rate of increase in compensation
N/A
 
N/A
U.S. other postretirement plans:
 
 
 
Discount rate - service cost
2.65
 
2.68
Effective interest rate on benefit obligation
2.86
 
2.85
Expected long-term rate of return on assets
N/A
 
N/A
Average rate of increase in compensation
N/A
 
N/A
Non-U.S. pension plans:
 
 
 
Discount rate - service cost
2.71
 
2.55
Effective interest rate on benefit obligation
1.98
 
1.96
Expected long-term rate of return on assets
5.73
 
5.68
Average rate of increase in compensation
2.98
 
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:
 
 
Pension benefits
 
Other postretirement employee benefits
(millions of dollars)
 
 
 
 
 
Year
 
U.S.
 
Non-U.S.
 
2019
 
$
22.5

 
$
19.6

 
$
11.0

2020
 
19.8

 
21.7

 
10.3

2021
 
18.9

 
21.9

 
9.5

2022
 
18.3

 
22.6

 
9.1

2023
 
17.8

 
23.8

 
8.0

2024-2028
 
84.2

 
134.0

 
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)

 
One Percentage Point
(millions of dollars)
Increase
 
Decrease
Effect on other postretirement employee benefit obligation
$
5.5

 
$
(4.9
)
Effect on total service and interest cost components
$
0.2

 
$
(0.2
)

NOTE 13
STOCK-BASED COMPENSATION

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:
 
Shares (thousands)
 
Weighted average exercise price
 
Weighted average remaining contractual life
(in years)
 
Aggregate intrinsic value
(in millions)
Outstanding at January 1, 2016
1,267

 
$
16.59

 
0.9
 
$
33.7

Exercised
(794
)
 
$
16.07

 
 
 
$
14.4

Outstanding at December 31, 2016
473

 
$
17.47

 
0.1
 
$
10.4

Exercised
(473
)
 
$
17.47

 
 
 
$
10.4

Outstanding at December 31, 2017
—

 
$
—

 
0.0
 
$
—

Exercised
—

 
$
—

 

 
$
—

Outstanding at December 31, 2018
—

 
$
—

 
0.0
 
$
—

 
 
 
 
 
 
 
 
Options exercisable at December 31, 2018
—

 
$
—

 
0.0
 
$
—


Proceeds from stock option exercises for the years ended December 31, 2018, 2017 and 2016 were as follows:
 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Proceeds from stock options exercised — gross
$
—

 
$
8.3

 
$
12.7

Tax benefit
—

 
8.2

 
0.3

Proceeds from stock options exercised, net of tax
$
—

 
$
16.5

 
$
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:
 
Year Ended December 31,
(millions of dollars, except per share data)
2018
 
2017
 
2016
Restricted stock compensation expense
$
25.9

 
$
27.0

 
$
26.7

Restricted stock compensation expense, net of tax
$
19.7

 
$
19.7

 
$
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:
 
Shares subject to restriction
(thousands)
 
Weighted average grant date fair value
Nonvested at January 1, 2016
1,326

 
$
53.18

Granted
724

 
$
30.07

Vested
(551
)
 
$
47.55

    Forfeited
(70
)
 
$
43.05

Nonvested at December 31, 2016
1,429

 
$
44.12

Granted
804

 
$
40.10

Vested
(521
)
 
$
56.53

Forfeited
(119
)
 
$
38.97

Nonvested at December 31, 2017
1,593

 
$
38.86

Granted
737

 
$
51.70

Vested
(556
)
 
$
42.25

Forfeited
(258
)
 
$
44.51

Nonvested at December 31, 2018
1,516

 
$
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:

 
Year Ended December 31,
 (millions of dollars, except share data)
2018
 
2017
 
2016
Expense
$
9.0

 
$
9.9

 
$
9.6

Number of shares
—

 
—

 
—


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:
 
Number of shares
(thousands)
 
Weighted average grant date fair value
Nonvested at January 1, 2016
475

 
$
56.55

Granted
171

 
$
16.61

Forfeited
(236
)
 
$
49.37

Nonvested at December 31, 2016
410

 
$
43.99

Granted
201

 
$
45.57

Forfeited
(256
)
 
$
61.40

Nonvested at December 31, 2017
355

 
$
32.35

Granted
287

 
$
68.38

Forfeited
(345
)
 
$
38.26

Nonvested at December 31, 2018
297

 
$
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:
 
Year Ended December 31,
 (millions of dollars, except share data)
2018
 
2017
 
2016
Expense
$
18.0

 
$
15.9

 
$
7.1

Number of shares
249,000

 
126,000

 
—


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:
 
Number of shares
(thousands)
 
Weighted average grant date fair value
Nonvested at January 1, 2016
—

 
$
—

Granted
485

 
$
38.62

Vested
(126
)
 
$
38.62

Forfeited
(39
)
 
$
38.62

Nonvested at December 31, 2016
320

 
$
38.62

Granted
198

 
$
40.08

Vested
(156
)
 
$
38.62

Forfeited
(7
)
 
$
39.20

Nonvested at December 31, 2017
355

 
$
39.42

Granted
287

 
$
50.82

Vested
(166
)
 
$
38.62

Forfeited
(179
)
 
$
45.82

Nonvested at December 31, 2018
297

 
$
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
 
(109.1
)
 
8.0

 
(11.4
)
 
(1.6
)
 
(114.1
)
Income taxes associated with comprehensive (loss) income before reclassifications
 
—

 
(0.7
)
 
(2.6
)
 
—

 
(3.3
)
Reclassification from accumulated other comprehensive (loss) income
 
—

 
0.1

 
8.3

 
—

 
8.4

Income taxes reclassified into net earnings
 
—

 
(0.4
)
 
(2.5
)
 
—

 
(2.9
)
Ending Balance December 31, 2016
 
$
(530.3
)
 
$
5.0

 
$
(198.1
)
 
$
1.3

 
$
(722.1
)
Comprehensive (loss) income before reclassifications
 
236.5

 
(4.5
)
 
(5.0
)
 
1.4

 
228.4

Income taxes associated with comprehensive (loss) income before reclassifications
 
—

 
1.0

 
(0.5
)
 
—

 
0.5

Reclassification from accumulated other comprehensive (loss) income
 
—

 
(3.8
)
 
8.5

 
—

 
4.7

Income taxes reclassified into net earnings
 
—

 
1.0

 
(2.5
)
 
—

 
(1.5
)
Ending Balance December 31, 2017
 
$
(293.8
)
 
$
(1.3
)
 
$
(197.6
)
 
$
2.7

 
$
(490.0
)
Adoption of Accounting Standard
 
—

 
—

 
(14.0
)
 
—

 
(14.0
)
Comprehensive (loss) income before reclassifications
 
(152.8
)
 
(1.7
)
 
(41.9
)
 
(1.1
)
 
(197.5
)
Income taxes associated with comprehensive (loss) income before reclassifications
 
5.2

 
0.2

 
13.5

 
—

 
18.9

Reclassification from accumulated other comprehensive (loss) income
 
—

 
3.9

 
7.5

 
—

 
11.4

Income taxes reclassified into net earnings
 
—

 
(0.8
)
 
(2.1
)
 
—

 
(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:
 
2018
 
2017
Beginning claims January 1
9,225

 
9,385

New claims received
1,932

 
2,116

Dismissed claims
(2,189
)
 
(1,866
)
Settled claims
(370
)
 
(410
)
Ending claims December 31
8,598

 
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)
2018
 
2017
Beginning asbestos liability as of January 1
$
828.2

 
$
879.3

Actuarial revaluation
22.8

 
—

Claim resolution costs and defense related costs
(45.7
)
 
(51.1
)
Ending asbestos liability as of December 31
$
805.3

 
$
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:
 
December 31,
(millions of dollars)
2018
 
2017
Assets:
 

 
 

Other long-term asbestos-related insurance receivables
$
303.3

 
$
258.7

Deferred asbestos-related insurance asset
83.1

 
127.7

Total insurance assets
$
386.4

 
$
386.4

Liabilities:


 
 

Accounts payable and accrued expenses
$
50.0

 
$
52.5

Other non-current liabilities
755.3

 
775.7

Total accrued liabilities
$
805.3

 
$
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:
 
 
Severance Accruals
(millions of dollars)
 
Drivetrain
 
Engine
 
Total
Balance at January 1, 2017
 
$
3.7

 
$
2.7

 
$
6.4

Provision
 
4.7

 
1.4

 
6.1

Cash payments
 
(4.6
)
 
(2.9
)
 
(7.5
)
Translation adjustment
 
0.3

 
0.1

 
0.4

Balance at December 31, 2017
 
4.1

 
1.3

 
5.4

Provision
 
7.1

 
34.4

 
41.5

Cash payments
 
(7.3
)
 
(14.5
)
 
(21.8
)
Translation adjustment
 
—

 
(0.4
)
 
(0.4
)
Balance at December 31, 2018
 
$
3.9

 
$
20.8

 
$
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
$
24.3

2020
20.6

2021
15.5

2022
12.6

2023
10.4

After 2023
37.9

Total minimum lease payments
$
121.3


NOTE 18
EARNINGS PER SHARE

The Company presents both basic and diluted earnings per share of common stock (“EPS”) amounts. Basic EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock outstanding during the reporting period. Diluted EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock and common equivalent stock outstanding during the reporting period.

The dilutive impact of stock-based compensation is calculated using the treasury stock method. The treasury stock method assumes that the Company uses the assumed proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future, 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:
 
Year Ended December 31,
(in millions except share and per share amounts)
2018
 
2017
 
2016
Basic earnings per share:
 

 
 

 
 

Net earnings attributable to BorgWarner Inc.
$
930.7

 
$
439.9

 
$
595.0

Weighted average shares of common stock outstanding
208.197

 
210.429

 
214.374

Basic earnings per share of common stock
$
4.47

 
$
2.09

 
$
2.78

 
 
 
 
 
 
Diluted earnings per share:
 
 
 

 
 

Net earnings attributable to BorgWarner Inc.
$
930.7

 
$
439.9

 
$
595.0

 
 
 
 
 
 
Weighted average shares of common stock outstanding
208.197

 
210.429

 
214.374

Effect of stock-based compensation
1.299

 
1.119

 
0.954

Weighted average shares of common stock outstanding including dilutive shares
209.496

 
211.548

 
215.328

Diluted earnings per share of common stock
$
4.44

 
$
2.08

 
$
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
 
$
15.9

Inventories, net
 
16.7

Other current assets
 
2.8

Property, plant and equipment, net
 
7.3

Goodwill
 
127.6

Other intangible assets
 
70.7

Deferred tax liabilities
 
(9.2
)
Income taxes payable
 
(0.7
)
Other assets and liabilities
 
(2.9
)
Accounts payable and accrued expenses
 
(24.5
)
Total consideration, net of cash acquired
 
203.7

 
 
 
Less: Assumed retirement-related liabilities
 
18.0

Cash paid, net of cash acquired
 
$
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:
 
December 31,
 
December 31,
(millions of dollars)
2018
 
2017
Receivables, net
$
14.8

 
$
21.0

Inventories, net
41.6

 
30.4

Prepayments and other current assets
11.9

 
10.3

Property, plant and equipment, net
44.9

 
47.7

Goodwill
7.0

 
7.3

Other intangible assets, net
20.2

 
21.1

Other assets
0.1

 
0.5

Impairment of carrying value
(93.5
)
 
(71.0
)
    Total assets held for sale
$
47.0

 
$
67.3

 
 
 
 
Accounts payable and accrued expenses
$
18.3

 
$
24.6

Other liabilities
4.8

 
4.9

    Total liabilities held for sale
$
23.1

 
$
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
 
Year-end assets
 
Depreciation/ amortization
 
Long-lived asset expenditures (a)
(millions of dollars)
Customers
 
Inter-segment
 
Net
 
 
 
Engine
$
6,389.9

 
$
57.5

 
$
6,447.4

 
$
4,730.7

 
$
225.7

 
$
278.1

Drivetrain
4,139.7

 
(0.3
)
 
4,139.4

 
3,919.9

 
175.6

 
254.4

Inter-segment eliminations
—

 
(57.2
)
 
(57.2
)
 
—

 
—

 
—

Total
10,529.6

 
—

 
10,529.6

 
8,650.6

 
401.3

 
532.5

Corporate (b)
—

 
—

 
—

 
1,444.7

 
30.0

 
14.1

Consolidated
$
10,529.6

 
$
—

 
$
10,529.6

 
$
10,095.3

 
$
431.3

 
$
546.6



111
  


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2017 Segment information
 
 
 
 
 
 
 
 
Net sales
 
Year-end assets
 
Depreciation/ amortization
 
Long-lived asset expenditures (a)
(millions of dollars)
Customers
 
Inter-segment
 
Net
 
 
 
Engine
$
6,009.0

 
$
52.5

 
$
6,061.5

 
$
4,732.9

 
$
218.8

 
$
305.5

Drivetrain
3,790.3

 
—

 
3,790.3

 
3,903.8

 
160.9

 
241.6

Inter-segment eliminations
—

 
(52.5
)
 
(52.5
)
 
—

 
—

 
—

Total
9,799.3

 
—

 
9,799.3

 
8,636.7

 
379.7

 
547.1

Corporate (b)
—

 
—

 
—

 
1,150.9

 
28.1

 
12.9

Consolidated
$
9,799.3

 
$
—

 
$
9,799.3

 
$
9,787.6

 
$
407.8

 
$
560.0


2016 Segment information
 
 
 
 
 
 
 
 
Net sales
 
Year-end assets
 
Depreciation/ amortization
 
Long-lived asset
expenditures (a)
(millions of dollars)
Customers
 
Inter-segment
 
Net
 
 
 
Engine
$
5,547.3

 
$
42.8

 
$
5,590.1

 
$
4,134.6

 
$
211.9

 
$
298.7

Drivetrain
3,523.7

 
—

 
3,523.7

 
3,212.4

 
154.5

 
182.8

Inter-segment eliminations
—

 
(42.8
)
 
(42.8
)
 
—

 
—

 
—

Total
9,071.0

 
—

 
9,071.0

 
7,347.0

 
366.4

 
481.5

Corporate (b)
—

 
—

 
—

 
1,487.7

 
25.0

 
19.1

Consolidated
$
9,071.0

 
$
—

 
$
9,071.0

 
$
8,834.7

 
$
391.4

 
$
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
  


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Adjusted earnings before interest, income taxes and noncontrolling interest ("Adjusted EBIT")

 
Year Ended December 31,
(millions of dollars)
2018
 
2017
 
2016
Engine
$
1,039.9


$
992.1

 
$
943.9

Drivetrain
475.4


448.3

 
363.0

Adjusted EBIT
1,515.3


1,440.4

 
1,306.9

Restructuring expense
67.1

 
58.5

 
26.9

Asset impairment and loss on divestiture
25.6

 
71.0

 
127.1

Asbestos-related adjustments
22.8

 
—

 
(48.6
)
Gain on sale of building
(19.4
)
 
—

 
—

Other postretirement income
(9.4
)
 
(5.1
)
 
(4.9
)
Officer stock awards modification
8.3

 
—

 
—

Merger, acquisition and divestiture expense
5.8

 
10.0

 
23.7

Lease termination settlement
—

 
5.3

 
—

Intangible asset impairment
—

 
—

 
12.6

Contract expiration gain
—

 
—

 
(6.2
)
Other (income) expense, net
(3.3
)
 
2.1

 
—

Corporate, including equity in affiliates' earnings and stock-based compensation
169.6


170.3

 
155.3

Interest income
(6.4
)

(5.8
)
 
(6.3
)
Interest expense and finance charges
58.7


70.5

 
84.6

Earnings before income taxes and noncontrolling interest
1,195.9


1,063.6

 
942.7

Provision for income taxes
211.3


580.3

 
306.0

Net earnings
984.6


483.3

 
636.7

Net earnings attributable to the noncontrolling interest, net of tax
53.9


43.4

 
41.7

Net earnings attributable to BorgWarner Inc. 
$
930.7


$
439.9

 
$
595.0



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.
 
Net sales
 
Long-lived assets
(millions of dollars)
2018
 
2017
 
2016
 
2018
 
2017
 
2016
United States
$
2,393.5

 
$
2,280.0

 
$
2,236.0

 
$
728.9

 
$
719.3

 
$
799.3

Europe:


 


 


 
 

 
 

 
 

Germany
1,665.1

 
1,652.6

 
1,735.1

 
371.1

 
413.4

 
370.3

Hungary
687.3

 
655.7

 
541.1

 
153.0

 
147.5

 
122.2

Other Europe
1,669.5

 
1,427.2

 
1,193.9

 
452.5

 
426.1

 
337.7

Total Europe
4,021.9

 
3,735.5

 
3,470.1

 
976.6

 
987.0

 
830.2

China
1,801.1

 
1,560.1

 
1,218.0

 
589.3

 
554.8

 
384.6

South Korea
858.8

 
877.6

 
948.2

 
235.1

 
244.2

 
208.0

Mexico
978.4

 
920.2

 
805.6

 
223.1

 
201.2

 
136.2

Other foreign
475.9

 
425.9

 
393.1

 
150.8

 
157.3

 
143.5

Total
$
10,529.6

 
$
9,799.3

 
$
9,071.0

 
$
2,903.8

 
$
2,863.8

 
$
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)
2018
 
2017
Quarter ended
Mar-31
 
Jun-30
 
Sep-30
 
Dec-31
 
Year
 
Mar-31
 
Jun-30
 
Sep-30
 
Dec-31
 
Year
Net sales
$
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

Cost of sales
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

 
7,683.7

Gross profit
591.8

 
579.2

 
515.6

 
542.8

 
2,229.4

 
516.3

 
512.9

 
521.6

 
564.8

 
2,115.6

Selling, general and administrative expenses
253.4

 
236.0

 
230.5

 
225.8

 
945.7

 
219.0

 
215.1

 
225.0

 
240.0

 
899.1

Other expense (income), net
4.9

 
30.4

 
7.1

 
51.4

 
93.8

 
5.8

 
(0.3
)
 
22.0

 
117.0

 
144.5

Operating income
333.5

 
312.8

 
278.0

 
265.6

 
1,189.9

 
291.5

 
298.1

 
274.6

 
207.8

 
1,072.0

Equity in affiliates’ earnings, net of tax
(10.2
)
 
(13.0
)
 
(15.2
)
 
(10.5
)
 
(48.9
)
 
(9.7
)
 
(14.4
)
 
(14.4
)
 
(12.7
)
 
(51.2
)
Interest income
(1.5
)
 
(1.4
)
 
(1.5
)
 
(2.0
)
 
(6.4
)
 
(1.5
)
 
(1.4
)
 
(1.3
)
 
(1.6
)
 
(5.8
)
Interest expense and finance charges
16.1

 
14.9

 
14.4

 
13.3

 
58.7

 
18.0

 
18.0

 
17.6

 
16.9

 
70.5

Other postretirement income
(2.6
)
 
(2.4
)
 
(2.4
)
 
(2.0
)
 
(9.4
)
 
(1.2
)
 
(1.4
)
 
(1.3
)
 
(1.2
)
 
(5.1
)
Earnings before income taxes and noncontrolling interest
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
94.9

 
30.4

 
66.8

 
19.2

 
211.3

 
86.3

 
76.2

 
79.4

 
338.4

 
580.3

Net earnings (loss)
236.8

 
284.3

 
215.9

 
247.6

 
984.6

 
199.6

 
221.1

 
194.6

 
(132.0
)
 
483.3

Net earnings attributable to the noncontrolling interest, net of tax
11.7

 
12.5

 
12.1

 
17.6

 
53.9

 
10.4

 
9.1

 
9.7

 
14.2

 
43.4

Net earnings (loss) attributable to BorgWarner Inc. (a)
$
225.1

 
$
271.8

 
$
203.8

 
$
230.0

 
$
930.7

 
$
189.2

 
$
212.0

 
$
184.9

 
$
(146.2
)
 
$
439.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share — basic
$
1.07

 
$
1.30

 
$
0.98

 
$
1.11

 
$
4.47

 
$
0.89

 
$
1.01

 
$
0.88

 
$
(0.70
)
 
$
2.09

Earnings per share — diluted
$
1.07

 
$
1.30

 
$
0.98

 
$
1.10

 
$
4.44

 
$
0.89

 
$
1.00

 
$
0.88

 
$
(0.70
)
 
$
2.08

_______________
(a) The Company's results were impacted by the following:
•
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
  


PART III

Item 10.
Directors, Executive Officers and Corporate Governance

Information with respect to directors, executive officers and corporate governance that appears in the Company's proxy statement for its 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.

PART IV
 
Item 15.
Exhibits and Financial Statement Schedules

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
  


SIGNATURES 
 
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.
 
 
 
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
 
Title
 
/s/ Frederic B. Lissalde
 
President and Chief Executive Officer
Frederic B. Lissalde
 
(Principal Executive Officer) and Director
 
/s/ Thomas J. McGill
 
Vice President and Interim Chief Financial Officer
Thomas J. McGill
 
(Principal Financial Officer)
 
/s/ Anthony D. Hensel
 
Vice President and Controller
Anthony D. Hensel
 
(Principal Accounting Officer)
 
/s/ Jan Carlson
 
 
Jan Carlson
 
Director
 
 
 
/s/ Dennis C. Cuneo
 
 
Dennis C. Cuneo
 
Director
 
/s/ Roger A. Krone
 
 
Roger A. Krone
 
Director
 
 
 
/s/ Michael S. Hanley
 
 
Michael S. Hanley
 
Director
 
 
 
/s/ John R. McKernan, Jr.
 
 
John R. McKernan, Jr.
 
Director
 
 
 
/s/ Deborah D. McWhinney
 
 
Deborah D. McWhinney
 
Director
 
 
 
/s/ Paul A. Mascarenas
 
 
Paul A. Mascarenas
 
Director
 
 
 
/s/ Alexis P. Michas
 
 
Alexis P. Michas
 
Director and Non-Executive Chairman
 
 
 
/s/ Vicki L. Sato
 
 
Vicki L. Sato
 
Director
 
 
 
/s/ Thomas T. Stallkamp
 
 
Thomas T. Stallkamp
 
Director


EXHIBIT INDEX
Exhibit Number
Description
 
 
 
 
 
 
 
 
3.1

 
 
 
 
 
 
3.2

 
 
 
 
 
 
4.1

 
 
 
 
 
 
4.2

 
 
 
 
 
 
4.3

 
 
 
 
 
 
4.4

 
 
 
 
 
 
4.5

 
 
 
 
 
 
10.1

 
 
 
 
 
 
†10.2

 
 
 
 
 
 
†10.3

 
 
 
 
 
 
†10.4

 
 
 
 
 
 
†10.5

 
 
 
 
 
 
†10.6

 
 
 
 
 

A - 1

Exhibit Number
Description
 
 
 
 
†10.7

 
 
 
 
 
 
†10.8

 
 
 
 
 
 
†10.9

 
 
 
 
 
 
†10.10

 
 
 
 
 
 
†10.11

 
 
 
 
 
 
†10.12

 
 
 
 
 
 
†10.13

 
 
 
 
 
 
†10.14

 
 
 
 
 
 
†10.15

 
 
 
 
 
 
†10.16

 
 
 
 
 
 
†10.17

 
 
 
 
 
 
†10.18

 
 
 
 
 
 
†10.19

 
 
 
 
 

A - 2

Exhibit Number
Description
 
 
 
 
†10.20

 
 
 
 
 
 
†10.21

 
 
 
 
 
 
†10.22

 
 
 
 
 
 
†10.23

 
 
 
 
 
 
†10.24

 
 
 
 
 
 
†10.25

 
 
 
 
 
 
†10.26

 
 
 
 
 
 
†10.27

 
 
 
 
 
 
†10.28

 
 
 
 
 
 
†10.29

 
 
 
 
 
 
†10.30

 
 
 
 
 
 
†10.31

 
 
 
 
 
 
†10.32

 
 
 
 
 
 
10.33

 
 
 
 
 
 
10.34

 

A - 3

Exhibit Number
Description
 
 
 
 
 
 
 
 
10.35

 
 
 
 
 
 
21.1

 
 
 
 
 
 
23.1

 
 
 
 
 
 
31.1

 
 
 
 
 
 
31.2

 
 
 
 
 
 
32.1

 
 
 
 
 
 
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
Exhibit 10.3 BORGWARNER INC. 2018 STOCK INCENTIVE PLAN Restricted Stock Agreement For Non-Employee Directors THIS Restricted Stock Agreement (the “Agreement”) dated as of April 25, 2018, by and between BORGWARNER INC., a Delaware corporation (the “Company”), and (the “Director”) is entered into as follows: WITNESSETH: WHEREAS, the Company has established the BorgWarner Inc. 2018 Stock Incentive Plan (the “Plan”), a copy of which is attached hereto or which has been previously provided to the Director; WHEREAS, the Corporate Governance Committee of the Board of Directors of the Company has recommended that the Director be granted shares of Restricted Stock pursuant to the terms of the Plan and the terms of this Agreement, and the Board of Directors of the Company has approved such recommendation. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth: 1. Award of Restricted Stock. The Company hereby awards to the Director on this date, 2,457 shares of its common stock, par value $.01 (“Stock”), subject to the terms and conditions set forth in the Plan and this Agreement (the “Award”). 2. Issuance of Share Certificates or Book Entry Record. The Company shall, as soon as administratively feasible after execution of this Agreement by the Director, either (1) issue one or more certificates in the name of the Director representing the shares of Restricted Stock covered by this Award, or (2) direct the Company’s transfer agent for the Stock to make a book entry record showing ownership for the Restricted Stock in the name of the Director, subject to the terms and conditions of the Plan and this Agreement. 3. Custody of Share Certificates During the Restriction Period. In the event that the Company issues one or more certificates for the Restricted Stock covered by this Award in lieu of book entry, during the Restriction Period described below: a. The certificate or certificates shall bear the following legend: “The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including Page 1 of 5

 
Exhibit 10.3 forfeiture) of the BorgWarner Inc. 2018 Stock Incentive Plan and a Restricted Stock Agreement. Copies of such Plan and Restricted Stock Agreement are on file at the headquarters offices of BorgWarner Inc.” b. The certificates shall be held in custody by the Company until the restrictions set forth herein shall have lapsed; and c. As a condition to receipt of this Award, the Director hereby authorizes the Company to issue such instructions to the transfer agent as the Company may deem necessary or proper to comply with the intent and purposes of this Agreement and the Plan, including provisions regarding forfeiture, and that this paragraph shall be deemed to constitute the stock power, endorsed in blank, contemplated by Section 8.2 of the Plan. 4. Terms of the Plan Shall Govern. The Award is made pursuant to, and is subject to, the Plan, including, without limitation, its provisions governing a Change in Control and Cancellation and Rescission of Awards. In the case of any conflict between the Plan and this Agreement, the terms of the Plan shall control. Unless otherwise indicated, all capitalized terms contained in this Agreement shall have the meaning assigned to them in the Plan. 5. Restriction Period. The Restriction Period for the Restricted Stock awarded to the Director under this Agreement shall commence with the date of this Agreement set forth above and shall end, for the percentage of the shares indicated below, on the date when the Restricted Stock shall have vested in accordance with the following schedule: Date Vested Percentage April 25, 2019 100% of the Awarded Shares During the Restriction Period, the Director shall not be permitted to sell, assign, transfer, pledge or otherwise encumber the Restricted Stock awarded herein. 6. Shareholder Rights. Subject to the restrictions imposed by this Agreement and the Plan, the Director shall have, with respect to the Restricted Stock covered by this Award, all of the rights of a stockholder of the Company holding Stock, including the right to vote the shares and the right to receive any cash dividends; provided, however, that cash dividends will be automatically reinvested in additional shares of Restricted Stock, the number of which shall be determined by multiplying (i) the number of Page 2 of 5

 
Exhibit 10.3 shares of Restricted Stock that the Director has been issued under this Agreement as of the dividend record date by (ii) the dividend paid on each share of Stock, and dividing the result by (iii) the Fair Market Value of a share of Stock on the dividend payment date. Such additional shares of Restricted Stock resulting from the reinvestment of dividends shall be subject to the same restrictions, terms and conditions, including the Restriction Period, contained herein. For the avoidance of doubt, if the Restricted Stock is forfeited, then any dividends paid thereon and treated in accordance with this paragraph shall also be forfeited. 7. Forfeiture of Shares. Upon the Director’s Termination of Employment during the Restriction Period, all shares of Stock covered by this Award that remain subject to restriction shall be forfeited by the Director; provided, however, that in the event of the Director’s Retirement during the Restriction Period, the Compensation Committee shall have the discretion to waive, in whole or in part, any or all remaining restrictions with respect to any or all of the Restricted Stock covered by this Award. 8. Change in Control. In the event of a Change in Control, this Award shall be treated in accordance with Section 15 of the Plan. 9. Delivery of Shares. At the Director’s request, if and when the Restriction Period expires for a share or shares of Restricted Stock without a prior forfeiture, the Company will deliver certificate(s) for such share(s) to the Director. 10. Acquisition of Shares For Investment Purposes Only. By his or her signature hereto, the Director hereby agrees with the Company as follows: a. The Director is acquiring the shares of Stock covered by this Award for investment purposes only and not with a view to resale or other distribution thereof to the public in violation of the Securities Act of 1933, as amended (the “1933 Act”), and shall not dispose of any of the shares of the Stock in transactions which, in the opinion of counsel to the Company, violate the 1933 Act, or the rules and regulations thereunder, or any applicable state securities or “blue sky” laws; b. If any of the shares of Stock covered by this Award shall be registered under the 1933 Act, no public offering (otherwise than on a national securities exchange, as defined in the Exchange Act) of any such shares shall be made by the Director (or any other person) under such circumstances that he or she (or any other such person) may be deemed an underwriter, as defined in the 1933 Act; and Page 3 of 5

 
Exhibit 10.3 c. The Company shall have the authority to endorse upon the certificate or certificates representing the Stock covered by this Agreement such legends referring to the foregoing restrictions. 11. No Right to Continued Service. Nothing contained in the Plan or this Agreement shall confer upon the Director any right to continue as a director of the Company. 12. Withholding of Taxes. If applicable, no later than the date as of which an amount first becomes includible in the Director’s gross income for Federal income tax purposes, the Director shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any Federal, state, local, or foreign taxes of any kind required by law to be withheld. 13. Governing Law. The Award made and actions taken under the Plan and this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without taking into account its conflict of laws provisions. 14. Acceptance of Award. By the Director’s signature below, the Director accepts the terms of the Award, as set forth in this Agreement and in the Plan. Unless the Company otherwise agrees in writing, this Agreement shall not be effective as a Restricted Stock Award if a copy of this Agreement is not signed and returned to the Company. 15. Binding Effect. Subject to the limitations stated above, this Agreement shall be binding upon and inure to the benefit of the parties’ respective heirs, legal representatives, successors, and assigns. * * * * * IN WITNESS WHEREOF, BORGWARNER INC. and the Director have executed this Agreement to be effective as of the date first written above. BORGWARNER INC. By: Title: Executive Vice President, Chief Human Resources Officer Page 4 of 5

 
Exhibit 10.3 I acknowledge receipt of a copy of the Plan (either as an attachment hereto or that has been previously received by me) and that I have carefully read this Agreement and the Plan. I agree to be bound by all of the provisions set forth in this Agreement and the Plan. Date Director Page 5 of 5

 
Exhibit 10.4 BORGWARNER INC. 2018 STOCK INCENTIVE PLAN Stock Units Award Agreement – Non-U.S. Directors THIS Award Agreement (the “Agreement”) dated as of April 25, 2018, by and between BORGWARNER INC., a Delaware corporation (the “Company”), and , a non-employee member of the Company’s Board of Directors (the “Board”) resident in Sweden (the “Director”), is entered into as follows: WITNESSETH: WHEREAS, the Company has established the BorgWarner Inc. 2018 Stock Incentive Plan (the “Plan”), a copy of which is attached hereto or which has been previously provided to the Director; WHEREAS, the Corporate Governance Committee of the Board has determined that the Director be granted Stock Units pursuant to the terms of the Plan and the terms of this Agreement, and the Board has approved such recommendation. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth: 1. Award of Stock Units. The Company hereby awards to the Director on this date, 2,457 Stock Units. Each Stock Unit awarded hereunder represents a contingent right to receive one share of the Company’s common stock, par value $.01 (“Stock”), upon satisfaction of the conditions for vesting as provided in paragraph 4 of this Agreement and subject further to the terms of the Plan and the additional terms and conditions of this Agreement (the “Award”). 2. Stock Units. The Company shall credit the Director’s Stock Units to a Stock Units account established and maintained for the Director on the books of the Company payable in shares or cash. The account shall constitute the record of the Stock Units awarded to the Director under this Agreement, is solely for accounting purposes, and shall not require a segregation of any Company assets. 3. Dividend Equivalents. If the Company pays any cash or other dividend or makes any other distribution in respect of the Stock before the Stock Units are settled in accordance with paragraph 7 of this Agreement, then the Director’s account shall be credited with an additional number of Stock Units (including fractions thereof) determined by multiplying (i) the number of Stock Units credited to the Director on the dividend record date by (ii) the dividend paid on each share of Stock, and dividing the result of such multiplication by (iii) the Fair Market Value of a share of Stock on the dividend payment date. Credits shall be made effective as of the date of the dividend or other distribution in respect of the Stock. Dividend equivalents credited to the Director’s account shall be subject to the same Page 1 of 8 4811-4098-0578.3

 
Exhibit 10.4 restrictions as the Stock Units in respect of which the dividends or other distribution were credited, including, without limitation, the Award’s vesting conditions and distribution provisions. 4. Vesting of Stock Units. Subject to the terms and conditions of this Agreement and to the provisions of the Plan, the Stock Units shall vest in accordance with the following schedule: Date Vested Percentage April 25, 2019 100% of the Awarded Units 5. Forfeiture of Stock Units. Upon the Director’s Termination of Employment as a member of the Board, any unvested Stock Units shall be forfeited by the Director as of the termination date; provided, however, that in the event that Director terminates service as a member of the Board by reason of Retirement, the Compensation Committee shall have the discretion to accelerate the vesting of the Stock Units, in whole or in part. For purposes of the foregoing, if the Director is a local national of a country that is a member of the European Union, the grant of the Stock Units and the terms and conditions governing the Award are intended to comply with the age discrimination provisions of the EU Equal Treatment Framework Directive, as implemented into local law (the “Age Discrimination Rules”). To the extent a court or tribunal of competent jurisdiction determines that any provision of the Award is invalid or unenforceable, in whole or in part, under the Age Discrimination Rules, the Company, in its sole discretion, shall have the power and authority to revise or strike such provision to the minimum extent necessary to make it valid and enforceable to the full extent permitted under local law. 6. Change in Control. In the event of a Change in Control, this Award shall be treated in accordance with Section 15 of the Plan. 7. Delivery of Stock. The Company shall deliver Stock to the Director in settlement of the Stock Units awarded by this Agreement equal to the number of the Director's vested Stock Units (including any additional Stock Units acquired as a result of dividend equivalents that have vested). Payment shall be made to the Director as soon as practicable on or after the specified vesting date, but in no event no later than December 31 of the year following the year in which the Stock Units vest. Notwithstanding the foregoing, the Company may, in its sole discretion, settle the Stock Units (a) in the form of a cash payment, or (b) in the form of Stock but require the Director to immediately sell such Stock (in which case this Agreement shall serve as the Director’s authorization for such sale of Stock). Page 2 of 8 4811-4098-0578.3

 
Exhibit 10.4 8. Acquisition of Stock Units For Investment Purposes Only. By his or her signature hereto, the Director hereby agrees with the Company as follows: a. The Director is acquiring the Stock Units covered by this Award and the Shares issued under this Award for investment purposes only and not with a view to resale or other distribution thereof to the public in violation of the Securities Act of 1933, as amended (the “1933 Act”), and shall not dispose of any of the Shares issued under this Award in transactions which, in the opinion of counsel to the Company, violate the 1933 Act, or the rules and regulations thereunder, or any applicable state securities or “blue sky” laws; b. If any of the Shares issued under this Award shall be registered under the 1933 Act, no public offering (otherwise than on a national securities exchange, as defined in the Exchange Act) of any such Shares shall be made by the Director (or any person) under such circumstances that he or she (or any other such person) may be deemed an underwriter, as defined in the 1933 Act; and c. The Company shall have the authority to endorse upon the certification or certificates representing the Shares covered by this Award such legends referring to the foregoing restrictions. 9. Repatriation; Compliance with Laws. The Director agrees, as a condition of the grant of the Stock Units, to repatriate all payments attributable to the Stock Units and/or cash acquired under the Plan (including, but not limited to, dividends, dividend equivalents, and any proceeds derived from the sale of the Stock acquired pursuant to the Stock Units) in accordance with all foreign exchange rules and regulations applicable to the Director. In addition, the Director also agrees to take any and all actions, and consent to any and all actions taken by the Company and its subsidiaries and Affiliates, as may be required to allow the Company and its subsidiaries and Affiliates to comply with all laws, rules and regulations applicable to the Director. Finally, the Director agrees to take any and all actions as may be required to comply with the Director’s personal legal and tax obligations under all laws, rules and regulations applicable to the Director. 10. Nontransferability. The Stock Units awarded under this Agreement, and any rights and privileges pertaining thereto, are not subject to anticipation, alienation, sale, transfer, assignment, pledge, or encumbrance by the Director or by the Director's beneficiary, in any manner, by operation of law or otherwise, and shall not be subject to execution, attachment or similar process. 11. No Rights as a Stockholder. Prior to the actual delivery of Stock to the Director in settlement of the Stock Units awarded and vested hereunder (if any), the Page 3 of 8 4811-4098-0578.3

 
Exhibit 10.4 Director shall have no rights as a stockholder with respect to the Stock Units or any underlying Stock. 12. No Right to Continued Service. Nothing contained in the Plan or this Agreement shall confer upon the Director any right to continue as a member of the Board. 13. Discretionary Nature of Plan; No Vested Rights. The Director acknowledges and agrees that the Plan is discretionary in nature and limited in duration and may be amended, cancelled, or terminated by the Company, in its sole discretion, at any time. The grant of the Stock Units under the Plan is a one-time benefit and does not create any contractual or other right to receive an award or benefits in lieu of Stock Units in the future. Future awards, if any, will be at the sole discretion of the Company, including, but not limited to, the form and timing of an award, the number of shares of Stock subject to the award, and the vesting provisions. 14. Private Placement. The grant of the Stock Units is not intended to be a public offering of securities in the Director’s country of residence but instead is intended to be a private placement. As a private placement, the Company has not submitted any registration statement, prospectus or other filings with the local securities authorities (unless otherwise required under local law), and the grant of the Stock Units is not subject to the supervision of the local securities authorities. 15. Consent to Collection, Processing and Transfer of Personal Data. Pursuant to applicable personal data protection laws, the Company hereby notifies the Director of the following in relation to the Director’s personal data and the collection, processing and transfer of such data in relation to the Company’s grant of this Award and the Director’s participation in the Plan. The collection, processing and transfer of the Director’s personal data is necessary for the Company’s administration of the Plan and the Director’s participation in the Plan. The Director’s denial and/or objection to the collection, processing and transfer of personal data may affect the Director’s participation in the Plan. As such, the Director voluntarily acknowledges and consents (where required under applicable law) to the collection, use, processing and transfer of personal data as described herein. The Company holds certain personal information about the Director, including name, home address and telephone number, date of birth, social security number or other tax identification number, nationality, job title, any shares of Stock or directorships held in the Company, details of all Stock Units, or any other entitlement to shares of Stock awarded, canceled, purchased, vested, unvested or outstanding in the Director’s favor, for the purpose of managing and administering the Plan (“Data”). The Data may be provided by the Director or collected, where lawful, from third parties, and the Company will process the Data for the exclusive purpose of implementing, administering and managing the Director’s participation in the Plan. The Data processing will take place through electronic and non-electronic means according to logic and procedures strictly Page 4 of 8 4811-4098-0578.3

 
Exhibit 10.4 correlated to the purposes for which Data are collected and with confidentiality and security provisions as set forth by applicable laws and regulations in the Director’s country of residence. Data processing operations will be performed minimizing the use of personal and identification data when such operations are unnecessary for the processing purposes sought. Data will be accessible within the Company’s organization only by those persons requiring access for purposes of the implementation, administration and operation of the Plan and for the Director’s participation in the Plan. The Company will transfer Data as necessary for the purpose of implementation, administration and management of the Director’s participation in the Plan, and the Company may further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plan. These recipients may be located in the European Economic Area, or elsewhere throughout the world, such as the United States. The Director hereby authorizes (where required under applicable law) them to receive, possess, use, retain and transfer the Data, in electronic or other form, for purposes of implementing, administering and managing the Director’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of shares of Stock on the Director’s behalf to a broker or other third party with whom the Director may elect to deposit any shares of Stock acquired pursuant to the Plan. The Director may, at any time, exercise his or her rights provided under applicable personal data protection laws, which may include the right to (a) obtain confirmation as to the existence of the Data, (b) verify the content, origin and accuracy of the Data, (c) request the integration, update, amendment, deletion, or blockage (for breach of applicable laws) of the Data, and (d) to oppose, for legal reasons, the collection, processing or transfer of the Data which is not necessary or required for the implementation, administration and/or operation of the Plan and the Director’s participation in the Plan. The Director may seek to exercise these rights by contacting the Company’s Legal Department. 16. Terms of the Plan Shall Govern. The Award is made pursuant to, and is subject to, the Plan, including, without limitation, its provisions governing a Change in Control and Cancellation and Rescission of Awards. In the case of any conflict between the Plan and this Agreement, the terms of the Plan shall control. Unless otherwise indicated, all capitalized terms contained in this Agreement shall have the meaning assigned to them in the Plan. 17. Tax and Social Insurance Contributions Withholding. Regardless of any action the Company may take with respect to any or all income tax or other tax-related items pertaining to the Stock Units (“Tax-Related Items”), the Director acknowledges that the ultimate liability for all Tax-Related Items legally due by the Director is and remains the Director’s responsibility and that the Company (i) Page 5 of 8 4811-4098-0578.3

 
Exhibit 10.4 makes no representations or undertakings regarding the treatment of any Tax- Related Items in connection with any aspect of the Stock Units, including the grant of the Stock Units, the vesting of the Stock Units, the subsequent sale of any Stock acquired pursuant to the Stock Units and the receipt of any dividends or dividend equivalents; and (ii) does not commit to structure the terms of the grant or any aspect of the Stock Units to reduce or eliminate the Director’s liability for Tax-Related Items. Prior to the delivery of the Stock upon the vesting of the Stock Units, if any taxing jurisdiction requires withholding of Tax-Related Items, the Company may withhold a sufficient number of whole shares of Stock otherwise issuable upon the vesting of the Stock Units that have an aggregate Fair Market Value not to exceed the maximum statutory Tax-Related Items required to be withheld with respect to the Shares. The cash equivalent of the Shares withheld will be used to settle the obligation to withhold the Tax-Related Items (determined by reference to the Fair Market Value of the Stock on the applicable vesting date. No fractional shares of Stock will be withheld or issued pursuant to the grant of the Stock Units and the issuance of Stock hereunder. 18. Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to the Stock Units granted to the Director under the Plan by electronic means. The Director hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company. 19. English Language. The Director acknowledges and agrees that it is the Director’s express intent that this Agreement, the Plan and all other documents, notices and legal proceedings entered into, given or instituted pursuant to the Stock Units be drawn up in English. If the Director has received this Agreement, the Plan or any other documents related to the Stock Units translated into a language other than English, and if the meaning of the translated version is different than the English version, the English version shall control. 20. Additional Requirements. The Company reserves the right to impose other requirements on the Stock Units, any shares of Stock acquired pursuant to the Stock Units, and the Director’s participation in the Plan, to the extent the Company determines, in its sole discretion, that such other requirements are necessary or advisable in order to comply with local law or to facilitate the administration of the Plan. Such requirements may include (but are not limited to) requiring the Director to sign any agreements or undertakings that may be necessary to accomplish the foregoing. 21. Governing Law. The Award made and actions taken under the Plan and this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without taking into account its conflict of laws provisions. Page 6 of 8 4811-4098-0578.3

 
Exhibit 10.4 22. Binding Effect. Subject to the limitations stated above, this Agreement shall be binding upon and inure to the benefit of the parties’ respective heirs, legal representatives successors and assigns. 23. Change in Capital or Corporate Structure. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, extraordinary distribution with respect to the Stock, other change in corporate structure affecting the Stock or any other event, which other event the Compensation Committee determines necessitates an adjustment to prevent dilution or enlargement of the benefits or potential benefits intended to be made available hereunder, this Agreement shall be adjusted pursuant to Section 4.4 of the Plan. 24. Entire Agreement. This Agreement is the entire agreement between the parties hereto, and all prior oral and written representations are merged into this Agreement. The headings in this Agreement are inserted for convenience and identification only and are not intended to describe, interpret, define or limit the scope, extent, or intent of this Agreement or any provision hereof. 25. Notices. Any notice or other communication required or permitted under this Agreement must be in writing and must be delivered personally, sent by certified, registered or express mail, or sent by overnight courier, at the sender's expense. Notice shall be deemed given when delivered personally or, if mailed, three days after the date of deposit in the United States mail or, if sent by overnight courier, on the regular business day following the date sent. Notice to the Company should be sent to Attention: Vice President, Human Resources, BorgWarner World Headquarters, 3850 Hamlin Road, Auburn Hills, MI, USA 48326. The Company may change the person and/or address to whom the Director must give notice under this paragraph by giving the Director written notice of such change, in accordance with the procedures described above. Notices to or with respect to the Director shall be directed to the Director, or to the Director's executors, personal representatives or distributees, if the Director is deceased, or the assignees of the Director, at the Director's last home address on the records of the Company. 26. Amendment of the Agreement. Except as otherwise provided in the Plan, the Company and the Director may amend this Agreement only by a written instrument signed by both parties. 27. Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall constitute but one agreement. Page 7 of 8 4811-4098-0578.3

 
Exhibit 10.4 IN WITNESS WHEREOF, BORGWARNER INC. and the Director have executed this Agreement to be effective as of the date first written above. BORGWARNER INC. By: Title: Executive Vice President, Chief Human Resources Officer I acknowledge receipt of a copy of the Plan (either as an attachment hereto or that has been previously received by me) and that I have carefully read this Agreement and the Plan. I agree to be bound by all of the provisions set forth in this Agreement and the Plan. Date DIRECTOR Page 8 of 8 4811-4098-0578.3

 
Exhibit 10.5 BORGWARNER INC. 2018 STOCK INCENTIVE PLAN Restricted Stock Agreement—Employees BorgWarner, Inc., a Delaware corporation (the “Company), hereby awards to the Employee indicated below a Restricted Stock Award (the “Award”) under the BorgWarner Inc. 2018 Stock Incentive Plan (the “Plan”), as specified below, effective as of the Grant Date, according to the terms and conditions of this Restricted Stock Agreement (this “Agreement”) and the Plan. All capitalized terms shall have the meanings ascribed to them in the Plan, unless specifically set forth otherwise herein. The parties hereto agree as follows: Grant Information: Employee Name: Employee Address: Grant Date: October 2018 Number of Restricted Shares Awarded: x,xxx Shares Terms and Conditions: 1. Restriction Period. Except as otherwise provided in this Agreement, the Restriction Period for the Restricted Stock awarded to the Employee under this Agreement shall commence with the Grant Date set forth above and shall end, for the percentage of the Shares indicated below (each percentage of Shares and the associated vesting date is referred to as a “Tranche”), on the date when the Restricted Stock shall have vested in accordance with the following schedule provided that the Employee remains continuously employed by or in the service of the Company or an Affiliate through the applicable vesting date: Vesting Date Vested Percentage October 8, 2019 1/3 of the Awarded Shares October 8, 2020 1/3 of the Awarded Shares October 8, 2021 1/3 of the Awarded Shares Notwithstanding the foregoing, if the application of the above vesting schedule would cause a fractional Share to vest, then the number of Shares that vest on such date shall be rounded down to the nearest whole number. Prior to the date that the Restriction Period applicable to Shares of Restricted Stock lapses, the Employee shall not be permitted to sell, assign, transfer, pledge or otherwise encumber such Shares of Restricted Stock. 4846-1583-6518.5

 
Exhibit 10.5 2. Issuance of Share Certificates or Book Entry Record. (a) The Company shall, as soon as administratively feasible after execution of this Agreement by the Employee, either (1) issue one or more certificates in the name of the Employee representing the Shares covered by this Award, or (2) direct the Company’s transfer agent for the Stock to make a book entry record showing ownership for the Restricted Stock in the name of the Employee, subject to the terms and conditions of the Plan and this Agreement. (b) In the event that the Company issues one or more certificates for the Restricted Stock covered by this Award in lieu of book entry, during the applicable Restriction Period: (i) The certificate or certificates shall bear the following legend: “The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the 2018 Stock Incentive Plan and a Restricted Stock Agreement. Copies of such Plan and Restricted Stock Agreement are on file at the headquarters offices of BorgWarner Inc.” (ii) The certificates shall be held in custody by the Company until the restrictions set forth herein shall have lapsed; and (iii) As a condition to receipt of this Award, the Employee hereby authorizes the Company to issue such instructions to the transfer agent as the Company may deem necessary or proper to comply with the intent and purposes of this Agreement and the Plan, including provisions regarding forfeiture. This paragraph shall be deemed to constitute the stock power, endorsed in blank, contemplated by Section 8.2 of the Plan. (c) At the Employee’s request, if and when the applicable Restriction Period expires for a Share or Shares granted hereunder without a prior forfeiture, the Company will deliver certificate(s) for such Share(s) to the Employee. 3. Termination of Employment. Except as otherwise provided in this Section 3 or Section 4, the Employee shall forfeit the Shares that are unvested as of the effective date of the Employee’s Termination of Employment. Notwithstanding the foregoing, except as otherwise determined by the Committee, in its sole discretion, at the time of the Employee’s Termination of Employment, the following provisions shall apply. (a) Death or Disability. If the Employee’s Termination of Employment is due to the Employee’s death or Disability, then all the unvested Shares shall immediately vest. (b) Retirement. If the Employee’s Termination of Employment is due to Retirement, then the Committee may, in its sole discretion, cause all or a portion of the unvested Shares to vest. (c) Effective Date of Termination of Employment. For purposes of this Agreement, any Termination of Employment shall be effective as of the earlier of (1) the date that the Company receives the Employee’s notice of resignation of employment, 4846-1583-6518.5

 
Exhibit 10.5 or (2) the date that the Employee ceases to actively provide services. In connection with the foregoing, the applicable termination date shall not be extended by any notice period mandated under local law (e.g., “garden leave” or similar period pursuant to local law), and the Company shall have the exclusive discretion to determine when the Employee is no longer actively providing service for purposes of this Award. Notwithstanding the foregoing, the Employee will be deemed to have experienced a Termination of Employment upon the Employee’s “separation from service” within the meaning of Section 409A of the Code to the extent this Award is subject to Section 409A of the Code. 4. Change in Control. In the event of a Change in Control, this Award shall be treated in accordance with Section 15 of the Plan, provided, however, that for purposes of Section 15.1(a)(5), the Employee will be considered to have terminated the Employee’s employment or service for “good reason” if the Employee’s termination either (a) meets the requirements set forth in Exhibit A attached to this Agreement or (b) constitutes a “good reason” termination under the Employee’s employment, retention, change in control, severance or similar agreement with the successor, purchaser, the Company, or any affiliate thereof, if any. 5. Stockholder Rights. Subject to the restrictions imposed by this Agreement and the Plan, the Employee shall have, with respect to the Restricted Stock covered by this Award, all of the rights of a stockholder of the Company holding Stock, including the right to vote the Shares and the right to receive dividends; provided , however, that any cash dividends payable with respect to the Restricted Stock covered by this Award shall be automatically reinvested in additional Shares of Restricted Stock, the number of which shall be determined by multiplying (a) the number of Shares that the Employee has been issued under this Agreement as of the dividend record date that have not vested as of such record date by (b) the dividend paid on each Share, and dividing the result by (c) the Fair Market Value of a Share on the dividend payment date. Such additional Shares so awarded shall vest at the same time, and to the same extent, as the Restricted Stock to which it relates and shall be subject to the same restrictions, terms and conditions contained herein. Dividends payable with respect to the Restricted Stock covered by this Award that are payable in Stock shall also be paid in the form of additional Shares of Restricted Stock and shall vest at the same time, and to the same extent, as the Restricted Stock to which it relates and shall be subject to the same restrictions, terms, and conditions contained herein. 6. Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require the Employee or beneficiary to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Agreement. The Employee acknowledges that the ultimate liability for all taxes legally due by the Employee is and remains the Employee’s responsibility, and the Company: (a) makes no representations or undertakings regarding the tax treatment of this Award; and (b) does not commit to structure the terms of this Award to reduce or eliminate the Employee’s tax liability. 7. Acquisition of Shares For Investment Purposes Only. By accepting this Award, the Employee hereby agrees with the Company as follows: (a) The Employee is acquiring the Shares covered by this Award for investment purposes only and not with a view to resale or other distribution thereof to the 4846-1583-6518.5

 
Exhibit 10.5 public in violation of the Securities Act of 1933, as amended (the “1933 Act”), and shall not dispose of any of the Shares in transactions which, in the opinion of counsel to the Company, violate the 1933 Act, or the rules and regulations thereunder, or any applicable state securities or “blue sky” laws; (b) If any of the Shares covered by this Award shall be registered under the 1933 Act, no public offering (otherwise than on a national securities exchange, as defined in the Exchange Act) of any such Shares shall be made by the Employee (or any other person) under such circumstances that he or she (or any other such person) may be deemed an underwriter, as defined in the 1933 Act; and (c) The Company shall have the authority to endorse upon the certificate or certificates representing the Shares covered by this Agreement such legends referring to the foregoing. 8. Miscellaneous. (a) Nontransferability. This Award may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution or as otherwise permitted by the Company, and shall not be subject to execution, attachment or similar process. (b) Notices. Any written notice required or permitted under this Agreement shall be deemed given when delivered personally, as appropriate, either to the Employee or to the Executive Compensation Department of the Company, or when deposited in a United States Post Office as registered mail, postage prepaid, addressed, as appropriate, either to the Employee at his or her address set forth above under the heading “Grant Information,” or to Attention: Executive Compensation, BorgWarner Inc., at its headquarters office or such other address as the Company may designate in writing to the Employee. (c) Failure To Enforce Not a Waiver. The failure of the Company to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof. (d) Governing Law. The Award made and actions taken under the Plan and this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without taking into account its conflict of laws provisions. (e) Provisions of Plan. This Award is granted pursuant to the Plan, and this Award and this Agreement are in all respects governed by the Plan and subject to all of the terms and provisions thereof, whether such terms and provisions are incorporated in this Agreement solely by reference or expressly cited herein. It is expressly understood that the Committee is authorized to administer, construe, and make all determinations necessary or appropriate to the administration of the Plan and this Agreement, all of which shall be binding upon the Employee. If there is any conflict between the terms of this Agreement and the terms of the Plan, other than with respect to any provisions relating to Termination of Employment or Change in Control, the Plan’s terms shall supersede and replace the conflicting terms of this Agreement to the minimum extent necessary to resolve the conflict. Notwithstanding any terms of the Plan to the contrary, the 4846-1583-6518.5

 
Exhibit 10.5 termination provisions of Section 3 or the change in control provision of Section 4 of this Agreement control. (f) Section 16 Compliance. To the extent necessary to comply with, or to avoid disgorgement of profits under the short-swing matching rules of, Section 16 of the Exchange Act, the Employee shall not sell or otherwise dispose of the Shares. (g) No Right to Continued Employment. Nothing contained in the Plan or this Agreement shall confer upon the Employee any right to continued employment nor shall it interfere in any way with the right of the Company or any subsidiary or Affiliate to terminate the employment of the Employee at any time. (h) Discretionary Nature of Plan; No Right to Additional Awards. The Employee acknowledges and agrees that the Plan is discretionary in nature and limited in duration and may be amended, cancelled, or terminated by the Company, in its sole discretion, at any time. The grant of an Award under the Plan is a one-time benefit and does not create any contractual or other right to receive an Award or benefits in lieu of an Award. Future awards, if any, will be at the sole discretion of the Company, including, but not limited to, the form and timing of an award, the number of Shares subject to the award, and the vesting provisions. (i) Termination Indemnities. The value of this Award is an extraordinary item of compensation outside the scope of the Employee’s employment contract, if any. As such, Awards are not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension, or retirement benefits or similar payments. (j) Acceptance of Award. By accepting this Award, the Employee agrees to accept all the terms and conditions of the Award, as set forth in this Agreement and in the Plan. This Agreement shall not be effective as a Restricted Stock Award if a copy of this Agreement is not signed by the Employee and returned to the Company (unless the Employee accepts this award in an alternative means approved by the Company, which may include electronic acceptance). (k) Binding Effect. Subject to the limitations stated above, this Agreement shall be binding upon and inure to the benefit of the parties’ respective heirs, legal representatives successors and assigns. (l) Amendment of the Agreement. Except as otherwise provided in the Plan, the Company and the Employee may amend this Agreement only by a written instrument signed by both parties. (m) Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall constitute but one Agreement. (n) Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to this Award by electronic means. The Employee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company. 4846-1583-6518.5

 
Exhibit 10.5 (o) Entire Agreement; Headings. This Agreement is the entire agreement between the parties hereto, and all prior oral and written representations are merged into this Agreement. The headings in this Agreement are inserted for convenience and identification only and are not intended to describe, interpret, define or limit the scope, extent, or intent of this Agreement or any provision hereof. * * * * * IN WITNESS WHEREOF, BORGWARNER INC. and the Employee have executed this Agreement to be effective as of the date first written above. BORGWARNER INC. By: Title: Chief Executive Officer I acknowledge receipt of a copy of the Plan (either as an attachment hereto or that has been previously received by me) and that I have carefully read this Agreement and the Plan. I agree to be bound by all of the provisions set forth in this Agreement and the Plan. Date Employee 4846-1583-6518.5

 
Exhibit 10.5 Exhibit A To Restricted Stock Agreement for Employees Definition of “Good Reason” For purposes of Section 4 of the Agreement, the Employee will be treated as having terminated the Employee’s employment for “good reason” if, after a Change in Control, the Employee terminates employment after any of the following events occurs: a) the assignment to the Employee of any duties inconsistent in any respect with the Employee’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as of the date of the Change in Control or any higher position, authority, duties or responsibilities assigned to the Employee after the date of the Change in Control, or any other diminution in the Employee’s position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company’s ceasing to be a publicly traded entity), excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; or b) any failure by the Company to: 1. pay the Employee an annual base salary at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Employee by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Change in Control occurs; or 2. provide the Employee, for each fiscal year ending during the applicable Restriction Period (or, if earlier, before the second anniversary of the effective date of the Change in Control), an annual bonus (the “Annual Bonus”) opportunity at least equal to the Employee’s average of the bonuses paid or payable under the Company’s Management Incentive Bonus Plan, or any comparable annual bonus under any predecessor or successor plan, in respect of the last three full fiscal years prior to the date of the Change in Control (or, if the Employee was first employed by the Company after the beginning of the earliest of such three fiscal years, the average of the bonuses paid or payable under such plan(s) in respect of the fiscal years ending before the date of the Change in Control during which the Employee was employed by the Company, with such bonus being annualized with respect to any such fiscal year if the Employee was not employed by the Company for the whole of such fiscal year), in either case, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; or c) the Company’s requiring the Employee, without the Employee’s consent, to: 1. be based at any office or location that is more than 35 miles from the location where the Employee was employed immediately preceding the date of the Change in Control; or 2. travel on Company business to a substantially greater extent than required immediately prior to the date of the Change in Control. For purposes of this Exhibit, any good faith determination of “good reason” made by the Employee shall be conclusive. 4846-1583-6518.5

 
Exhibit 10.22

 

 

 

 

 

 
Exhibit 10.23

 

 

 

 

 

 

 

 

 

 

 

 

 
Exhibit 10.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Exhibit 10.25 (;FH[YZKWP(; ([KLELW )LUVW$PHQGPHQW 7R %RUJ:DUQHU,QF%RDUGRI'LUHFWRUV'HIHUUHG&RPSHQVDWLRQ3ODQ $V$PHQGHGDQG5HVWDWHG(IIHFWLYH-DQXDU\  (IIHFWLYH-DQXDU\6HFWLRQRIWKHWKH%RUJ:DUQHU,QF%RDUGRI'LUHFWRUV'HIHUUHG&RPSHQVDWLRQ3ODQ $V$PHQGHGDQG5HVWDWHG(IIHFWLYH-DQXDU\ LVKHUHE\DPHQGHGDVIROORZV 6HFWLRQ7LPLQJRI'HIHUUDO&UHGLWV 7KHSHUFHQWDJHDPRXQWRID5HWDLQHU)HHWKDWD3DUWLFLSDQWHOHFWVWRGHIHULQ WKH'HIHUUDO(OHFWLRQVKDOOFDXVHDQHTXLYDOHQWUHGXFWLRQLQWKHDPRXQWRIWKH5HWDLQHU)HHDFWXDOO\SDLGLQFDVKWR the Participant for that year. Retainer Fee deferrals shall be credited to each Participant’s appropriate De IHUUHG %HQHILW$FFRXQWDVRIWKHILUVW%XVLQHVV'D\RIWKHFDOHQGDUTXDUWHULPPHGLDWHO\IROORZLQJWKHFDOHQGDUTXDUWHULQ ZKLFKWKH5HWDLQHU)HHZDVSD\DEOHWRWKH3DUWLFLSDQW)RUH[DPSOHD5HWDLQHU)HHSD\DEOHWRWKH3DUWLFLSDQWGXULQJ 1RYHPEHUZLOOEH credited to the Participant’s Deferred Benefit Account as of the first Business Day of January. The amounts credited to the Participant’s deferred Benefit Account will be allocated among the Investment Options HOHFWHGE\WKH3DUWLFLSDQWXQGHU6HFWLRQ

 
Exhibit 10.27 (;FH[YZKWP(; ([KLELW  $0(1'('$1'5(67$7('  &+$1*(2)&21752/(03/2<0(17$*5((0(17   AGREEMENT by and between BorgWarner Inc., a Delaware corporation (the “Company”) and  WKH “Executive”) dated as of the  GD\RI    The Board of Directors of the Company (the “Board”), has determined that it is in the best interests of the &RPSDQ\DQGLWVVWRFNKROGHUVWRDVVXUHWKDWWKH&RPSDQ\ZLOOKDYHWKHFRQWLQXHGGHGLFDWLRQRIWKH([HFXWLYH QRWZLWKVWDQGLQJWKHSRVVLELOLW\WKUHDWRURFFXUUHQFHRID&KDQJHRI&RQWURO DVGHILQHGEHORZ RIWKH&RPSDQ\7KH %RDUGEHOLHYHVLWLVLPSHUDWLYHWRGLPLQLVKWKHLQHYLWDEOHGLVWUDFWLRQRIWKH([HFXWLYHE\YLUWXHRIWKHSHUVRQDO uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full DWWHQWLRQDQGGHGLFDWLRQWRWKH&RPSDQ\FXUUHQWO\DQGLQWKHHYHQWRIDQ\WKUHDWHQHGRUSHQGLQJ&KDQJHRI&RQWURO DQGWRSURYLGHWKH([HFXWLYHZLWKFRPSHQVDWLRQDQGEHQHILWVDUUDQJHPHQWVXSRQD&KDQJHRI&RQWUROZKLFKHQVXUH WKDWWKHFRPSHQVDWLRQDQGEHQHILWVH[SHFWDWLRQVRIWKH([HFXWLYHZLOOEHVDWLVILHGDQGZKLFKDUHFRPSHWLWLYHZLWK WKRVHRIRWKHUFRUSRUDWLRQV7KHUHIRUHLQRUGHUWRDFFRPSOLVKWKHVHREMHFWLYHVDQGLQFRQVLGHUDWLRQRIWKH Executive’s covenants in Section WKH%RDUGKDVFDXVHGWKH&RPSDQ\WRHQWHULQWRWKLV$JUHHPHQW 12:7+(5()25(,7,6+(5(%<$*5(('$6)2//2:6 &HUWDLQ'HILQLWLRQV  D  The “Effective Date” shall mean the first date during the Change of Control Period DVGHILQHGLQ6HFWLRQ E RQZKLFKD&KDQJHRI&RQWURO DVGHILQHGLQ6HFWLRQ RFFXUV$Q\WKLQJLQWKLV $JUHHPHQWWRWKHFRQWUDU\QRWZLWKVWDQGLQJLI L  the Executive’s employment with the Company is terminated by WKH&RPSDQ\ LL WKH'DWHRI7HUPLQDWLRQLVSULRUWRWKHGDWHRQZKLFKD&KDQJHRI&RQWURORFFXUVDQG LLL LWLV UHDVRQDEO\GHPRQVWUDWHGE\WKH([HFXWLYHWKDWVXFKWHUPLQDWLRQRIHPSOR\PHQW $ ZDVDWWKHUHTXHVWRIDWKLUG SDUW\WKDWKDVWDNHQVWHSVUHDVRQDEO\FDOFXODWHGWRHIIHFWD&KDQJHRI&RQWURORU % RWKHUZLVHDURVHLQFRQQHFWLRQ ZLWKRUDQWLFLSDWLRQRID&KDQJHRI&RQWUROWKHQIRUDOOSXUSRVHVRIWKLV$JUHH ment the “Effective Date” shall mean WKHGDWHLPPHGLDWHO\SULRUWRVXFK'DWHRI7HUPLQDWLRQ  E  The “Change of Control Period” shall mean the period commencing on the date hereof and ending on the WKLUGDQQLYHUVDU\RIWKHGDWHKHUHRISURYLGHG KRZHYHU WKDWFRPPHQFLQJRQWKHGDWHRQH\HDUDIWHUWKHGDWHKHUHRI DQGRQHDFKDQQXDODQQLYHUVDU\RIVXFKGDWH VXFKGDWHDQGHDFKDQQXDODQQLYHUVDU\WKHUHRIVKDOOEHKHUHLQDIWHU referred to as the “Renewal Date”), unless previously terminated, the Chan JHRI&RQWURO3HULRGVKDOOEH DXWRPDWLFDOO\H[WHQGHGVRDVWRWHUPLQDWHWKUHH\HDUVIURPVXFK5HQHZDO'DWHXQOHVVDWOHDVWGD\VSULRUWRWKH 5HQHZDO'DWHWKH&RPSDQ\VKDOOJLYHQRWLFHWRWKH([HFXWLYHWKDWWKH&KDQJHRI&RQWURO3HULRGVKDOOQRWEHVR H[WHQGHG &KDQJHRI&RQWURO . For the purpose of this Agreement, a “Change of Control” shall mean:   D 7KHDFTXLVLWLRQE\DQ\LQGLYLGXDOHQWLW\RUJURXS ZLWKLQWKHPHDQLQJRI6HFWLRQ G  RU G  RI WKH6HFXULWLHV([FKDQJH$FWRIDV  

 
 amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of 5XOHG SURPXOJDWHGXQGHUWKH([FKDQJH$FW RIRUPRUHRIHLWKHU L WKHWKHQRXWVWDQGLQJVKDUHVRIFRPPRQVWRFNRI the Company (the “Outstanding Company Common Stock”) or (ii) WKHFRPELQHGYRWLQJSRZHURIWKHWKHQ RXWVWDQGLQJYRWLQJVHFXULWLHVRIW he Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); SURYLGHG KRZHYHU WKDWIRUSXUSRVHVRIWKLVVXEVHFWLRQ D WKHIROORZLQJDFTXLVLWLRQV VKDOOQRWFRQVWLWXWHD&KDQJHRI&RQWURO : DQ\DFTXLVLWLRQGLUHFWO\IURPWKH&RPSDQ\ ; DQ\DFTXLVLWLRQE\WKH &RPSDQ\ < DQ\DFTXLVLWLRQE\DQ\HPSOR\HHEHQHILWSODQ RUUHODWHGWUXVW VSRQVRUHGRUPDLQWDLQHGE\WKH &RPSDQ\RUDQ\HQWLW\FRQWUROOHGE\WKH&RPSDQ\ = DQ\DFTXLVLWLRQSXUVXDQWWRDWUDQVDFWLRQZKLFKFRPSOLHV ZLWKFODXVHV L  LL DQG LLL RIVXEVHFWLRQ F RIWKLV6HFWLRQ  E  Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason WRFRQVWLWXWHDWOHDVWDPDMRULW\RIWKH%RDUGSURYLGHG KRZHYHU WKDWDQ\LQGLYLGXDOEHFRPLQJDGLUHFWRUVXEVHTXHQW to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a YRWHRIDWOHDVWDPDMRULW\RIWKHGLUHFWRUVWKHQFRPSULVLQJWKH,QFXPEHQW%RDUGVKDOOEHFRQVLGHUHGDVWKRXJKVXFK LQGLYLGXDOZHUHDPHPEHURIWKH,QFXPEHQW%RDUGEXWH[FOXGLQJIRUWKLVSXUSRVHDQ\VXFKLQGLYLGXDOZKRVHLQLWLDO DVVXPSWLRQRIRIILFHRFFXUVDVDUHVXOWRIDQDFWXDORUWKUHDWHQHGHOHFWLRQFRQWHVWZLWKUHVSHFWWRWKHHOHFWLRQRU UHPRYDORIGLUHFWRUVRURWKHUDFWXDORUWKUHDWHQHGVROLFLWDWLRQRISUR[LHVRUFRQVHQWVE\RURQEHKDOIRID3HUVRQRWKHU WKDQWKH%RDUG  F &RQVXPPDWLRQE\WKH&RPSDQ\RIDUHRUJDQL]DWLRQVWDWXWRU\VKDUHH[FKDQJHPHUJHURUFRQVROLGDWLRQRU VLPLODUWUDQVDFWLRQLQYROYLQJWKH&RPSDQ\RUDQ\RILWVVXEVLGLDULHVRUVDOHRURWKHUGLVSRVLWLRQRIDOORUVXEVWDQWLDOO\ DOORIWKHDVVHWVRIWKH&RPSDQ\RUWKHDFTXLVLWLRQRIDVVHWVRUVWRFNRIDQRWKHUHQWLW\E\WKH&RPSDQ\RUDQ\RILWV subsidiaries (each of the foregoing, a “Business Combination”), in each case, unless, following such Business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or substantially all of the Company’s assets eith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 $JUHHPHQW$QQXDO%DVH6DODU\VKDOOQRWEHUHGXFHGDIWHUDQ\VXFKLQFUHDVHDQGWKHWHUP$QQXDO%DVH6DODU\DV XWLOL]HGLQWKLV$JUHHPHQWVKDOOUHIHUWR$QQXDO%DVH6DODU\DVVRLQFUHDVHG$VXVHGLQWKLV$JUHHPHQWWKHWHUP “affiliated companies” shall include any company controlled by, controlling or under common control with the &RPSDQ\  LL $QQXDO%RQXV ,QDGGLWLRQWR$QQXDO%DVH6DODU\WKH([HFXWLYHVKDOOEHDZDUGHGIRUHDFKILVFDO\HDU ending during the Employment Period, an annual bonus (the “Annual Bonus”) in cash at least equal to the Executive’s average of the bonuses paid or payable under the Company’s Management Incentive Bonus Plan, or any FRPSDUDEOHDQQXDOERQXVXQGHUDQ\SUHGHFHVVRURUVXFFHVVRUSODQLQUHVSHFWRIWKHODVWWKUHHIXOOILVFDO\HDUVSULRU WRWKH(IIHFWLYH'DWH RULIWKH([HFXWLYHZDVILUVWHPSOR\HGE\WKH&RPSDQ\DIWHUWKHEHJLQQLQJRIWKHHDUOLHVWRI VXFKWKUHHILVFDO\HDUVWKHDYHUDJHRIWKHERQXVHVSDLGRUSD\DEOHXQGHUVXFKSODQ V LQUHVSHFWRIWKHILVFDO\HDUV HQGLQJEHIRUHWKH(IIHFWLYH'DWHGXULQJZKLFKWKH([HFXWLYHZDVHPSOR\HGE\WKH&RPSDQ\ZLWKVXFKERQXVEHLQJ DQQXDOL]HGZLWKUHVSHFWWRDQ\VXFKILVFDO\HDULIWKH([HFXWLYHZDVQRWHPSOR\HGE\WKH&RPSDQ\IRUWKHZKROHRI such fiscal year) (the “Recent Average Bonus”). If the Executive has not been eligible to earn such a bonus for any SHULRGSULRUWR the Effective Date, the “Recent Annual Bonus” shall mean the Executive’s target annual bonus for WKH\HDULQZKLFKWKH(IIHFWLYH'DWHRFFXUV(DFKVXFK$QQXDO%RQXVVKDOOEHSDLGQRODWHUWKDQWZRDQGDKDOI PRQWKVDIWHUWKHHQGRIWKHILVFDO\HDUIRUZKLFKWKH$QQXDO%RQXVLVDZDUGHGXQOHVVWKH([HFXWLYHVKDOOHOHFWWR GHIHUWKHUHFHLSWRIVXFK$QQXDO%RQXVSXUVXDQWWRDQDUUDQJHPHQWWKDWPHHWVWKHUHTXLUHPHQWVRI6HFWLRQ$RI the Internal Revenue Code of 1986, as amended (the “Code”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uring the Employment Period, the Executive and/or the Executive’s family, as WKHFDVHPD\EHVKDOOEHHOLJLEOHIRUSDUWLFLSDWLRQLQDQGVKDOOUHFHLYHDOOEHQHILWVXQGHUZHOIDUHEHQHILWSODQV SUDFWLFHVSROLFLHVDQGSURJUDPVSURYLGHGE\WKH&RPSDQ\DQGLWVDIILOLDWHGFRPSDQLHV LQFOXGLQJZLWKRXW OLPLWDWLRQPHGLFDOSUHVFULSWLRQGHQWDOGLVDELOLW\VDODU\FRQWLQXDQFHHPSOR\HHOLIHJURXSOLIHDFFLGHQWDOGHDWK and travel accident insurance plans and programs) (“Company Welfare Benefit Plans”) to the extent applicable JHQHUDOO\WRRWKHUSHHUH[HFXWLYHVRIWKH&RPSDQ\DQGLWVDIILOLDWHGFRPSDQLHVEXWLIWKH&RPSDQ\:HOIDUH%HQHILW 3ODQVSURYLGHWKH([HFXWLYHZLWKEHQHILWVZKLFKDUHOHVVIDYRUDEOHLQWKHDJJUHJDWHWKDQWKHPRVWIDYRUDEOHRIVXFK SODQVSUDFWLFHVSROLFLHVDQGSURJUDPVLQHIIHFWIRUWKH([HFXWLYHDWDQ\WLPHGXULQJWKHGD\SHULRGLPPHGLDWHO\ SUHFHGLQJWKH  

 
 Effective Date (the “Former Company Welfare Benefit Plans”), the Company shall provide the Executive with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he Executive’s employment shall terminate DXW omatically upon the Executive’s death during the Employment Period. If the Company determines in good faith WKDWWKH'LVDELOLW\RIWKH([HFXWLYHKDVRFFXUUHGGXULQJWKH(PSOR\PHQW3HULRG SXUVXDQWWRWKHGHILQLWLRQRI 'LVDELOLW\VHWIRUWKEHORZ LWPD\JLYHWRWKH([HFXWLYHZULWWHQQRWLFHLQDFFRUGDQFHZLWK6HFWLRQ E RIWKLV Agreement of its intention to terminate the Executive’s employment.   

 
 In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), SURYLGHG WKDWZLWKLQWKHGD\VDIWHUVXFK UHFHLSWWKH([HFXWLYHVKDOOQRWKDYHUHWXUQHGWRIXOO time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties ZLWKWKH&RPSDQ\RQ DIXOOWLPHEDVLVIRUFRQVHFXWLYHEXVLQHVVGD\V RUIRUEXVLQHVVGD\VLQDQ\FRQVHFXWLYHGD\V DVDUHVXOW RILQFDSDFLW\GXHWRPHQWDORUSK\VLFDOLOOQHVVZKLFKLVGHWHUPLQHGWREHWRWDODQGSHUPDQHQWE\DSK\VLFLDQVHOHFWHG by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.   E &DXVH . The Company may terminate the Executive’s employment during the Employment Period with or ZLWKRXW&DXVH)RUSXUSRVHVRIWKLV$J reement, “Cause” shall mean:   (i) the willful and continued failure of the Executive to perform substantially the Executive’s duties with the &RPSDQ\RURQHRILWVDIILOLDWHV RWKHUWKDQDQ\VXFKIDLOXUHUHVXOWLQJIURPLQFDSDFLW\GXHWRSK\VLFDORUPHQWDO illness or following the Executive’s delivery of a Notice of Termination for Good Reason), after a written demand IRUVXEVWDQWLDOSHUIRUPDQFHLVGHOLYHUHGWRWKH([HFXWLYHE\WKH%RDUGRUWKH&KLHI([HFXWLYH2IILFHURIWKH &RPSDQ\ZKLFKVSHFLILFDOO\LGHQWLILHVWKHPDQQHULQZKLFKWKH%RDUGRU&KLHI([HFXWLYH2IILFHURIWKH&RPSDQ\ believes that the Executive has not substantially performed the Executive’s duties, or   LL WKHZLOOIXOHQJDJLQJE\WKH([HFXWLYHLQLOOHJDOFRQGXFWRUJURVVPLVFRQGXFWZKLFKLVPDWHULDOO\DQG GHPRQVWUDEO\LQMXULRXVWRWKH&RPSDQ\ For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” XQOHVVLWLVGRQHRURPLWWHGWREHGRQHE\WKH([HFXWLYHLQEDGIDLWKRUZLWKRXWUHDVRQDEOHEHOLHIWKDWWKH Executive’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon DXWKRULW\JLYHQSXUVXDQWWRDUHVROXWLRQGXO\DGRSWHGE\WKH%RDUGRULIWKH&RPSDQ\LVQRWWKHXOWLPDWHSDUHQW HQWLW\DQGLVQRWSXEOLFO\WUDGHGWKHERDUGRIGLUHFWRUV RUIRUDQRQFRUSRUDWHHQWLW\HTXLYDOHQWJRYHUQLQJERG\ RI the ultimate parent of the Company (the “Applicable Board”)or upon the instructions of the Chief Executive Officer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

 
 RSLQLRQRIWKH$SSOLFDEOH%RDUGWKH([HFXWLYHLVJXLOW\RIWKHFRQGXFWGHVFULEHGLQVXESDUDJUDSK L RU LL DERYH DQGVSHFLI\LQJWKHSDUWLFXODUVWKHUHRILQGHWDLO  F *RRG5HDVRQ . The Executive’s employment may be terminated by tKH([HFXWLYHIRU*RRG5HDVRQRUE\ the Executive voluntarily without Good Reason. For purposes of this Agreement, “Good Reason” shall mean:   L WKHDVVLJQPHQWWRWKH([HFXWLYHRIDQ\GXWLHV inconsistent in any respect with the Executive’s position LQFOXGLQJVWDWXVRIILFHVWLWOHVDQGUHSRUWLQJUHTXLUHPHQWV DXWKRULW\GXWLHVRUUHVSRQVLELOLWLHVDVFRQWHPSODWHGE\ 6HFWLRQ D RIWKLV$JUHHPHQWRUDQ\RWKHUGLPLQXWLRQLQVXFKSRVLWLRQDXWKRULW\GXWLHVRUUHVSRQVLELOLWLHV (whether or not occurring solely as a result of the Company’s ceasing to be a publicly traded entity), excluding for WKLVSXUSRVHDQLVRODWHGLQVXEVWDQWLDODQGLQDGYHUWHQWDFWLRQQRWWDNHQLQEDGIDLWKDQGZKLFKLVUHPHGLHGE\WKH &RPSDQ\SURPSWO\DIWHUUHFHLSWRIQRWLFHWKHUHRIJLYHQE\WKH([HFXWLYH  LL DQ\IDLOXUHE\WKH&RPSDQ\WRFRPSO\ZLWKDQ\RIWKHSURYLVLRQVRI6HFWLRQ E RIWKLV$JUHHPHQWRWKHU WKDQDQLVRODWHGLQVXEVWDQWLDODQGLQDGYHUWHQWIDLOXUHQRWRFFXUULQJLQEDGIDLWKDQGZKLFKLVUHPHGLHGE\WKH &RPSDQ\SURPSWO\DIWHUUHFHLSWRIQRWLFHWKHUHRIJLYHQE\WKH([HFXWLYH  (iii) the Company’s requiring the Executive to be based at any office or location other than as provided in 6HFWLRQ 4(a)(i)(B) hereof or the Company’s requiring the Executive to travel on Company business to a substantially JUHDWHUH[WHQWWKDQUHTXLUHGLPPHGLDWHO\SULRUWRWKH(IIHFWLYH'DWH  LY DQ\SXUSRUWHGWHUPLQDWLRQE\WKH&RPSDQ\RIWKH([HFXWLYH ’s employment otherwise than as expressly SHUPLWWHGE\WKLV$JUHHPHQWRU  Y DQ\IDLOXUHE\WKH&RPSDQ\WRFRPSO\ZLWKDQGVDWLVI\6HFWLRQ F RIWKLV$JUHHPHQW )RUSXUSRVHVRIWKLV6HFWLRQ 5(c), any good faith determination of “Good Reason” made by the Executive shall be FRQFOXVLYH  G ,QFDSDFLW\ . The Executive’s mental or physical incapacity following the occurrence of an event described DERYHLQFODXVHV L WKURXJK Y  of Section 5(c) shall not affect the Executive’s ability t RWHUPLQDWHHPSOR\PHQWIRU Good Reason and the Executive’s death following delivery of a Notice of Termination for Good Reason shall not DIIHFWWKHHQWLWOHPHQWRIWKHHVWDWHRIWKH([HFXWLYHWRVHYHUDQFHSD\PHQWVRUEHQHILWVSURYLGHGKHUHXQGHUXSRQD WHUPLQDWLRQRIHPSOR\PHQWIRU*RRG5HDVRQ  H 1RWLFHRI7HUPLQDWLRQ $Q\WHUPLQDWLRQRIHPSOR\PHQWE\WKH&RPSDQ\IRU&DXVHRUE\WKH([HFXWLYH IRU*RRG5HDVRQVKDOOEHFRPPXQLFDWHGE\1RWLFHRI7HUPLQDWLRQWRWKHRWKHUSDUW\KHUHWRJLYHQLQDFFRUGDQFH with Section 12(b) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written QRWLFHZKLFK L LQGLFDWHVWKHVSHFLILFWHUPLQDWLRQSURYLVLRQLQWKLV$JUHHPHQW  

 
 UHOLHGXSRQ LL WRWKHH[WHQWDSSOLFDEOHVHWVIRUWKLQUHDVRQDEOHGHWDLOWKHIDFWVDQGFLUFXPVWDQFHVFODLPHGWR provide a basis for termination of the Executive’ VHPSOR\PHQWXQGHUWKHSURYLVLRQVRLQGLFDWHGDQG LLL LIWKH'DWH RI7HUPLQDWLRQ DVGHILQHGEHORZ LVRWKHUWKDQWKHGDWHRIUHFHLSWRIVXFKQRWLFHVSHFLILHVWKH'DWHRI7HUPLQDWLRQ ZKLFKGDWHVKDOOEHQRWPRUHWKDQWKLUW\GD\VDIWHUWKHJLYLQJRIVXFKQRWLFH 7KHIDLOXUHE\WKH([HFXWLYHRUWKH &RPSDQ\WRVHWIRUWKLQWKH1RWLFHRI7HUPLQDWLRQDQ\IDFWRUFLUFXPVWDQFHZKLFKFRQWULEXWHVWRDVKRZLQJRI*RRG 5HDVRQRU&DXVHVKDOOQRWZDLYHDQ\ULJKWRIWKH([HFXWLYHRUWKH&RPSDQ\UHVSHFWLYHO\KHUHXQGHURUSUHFOXGHWKH Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.   I 'DWHRI7HUPLQDWLRQ . “Date of Termination” means (i) if the Executive’s empl R\PHQWLVWHUPLQDWHGE\WKH &RPSDQ\IRU&DXVHRUE\WKH([HFXWLYHIRU*RRG5HDVRQWKHGDWHRIUHFHLSWRIWKH1RWLFHRI7HUPLQDWLRQRUDQ\ later date specified therein, as the case may be, (ii) if the Executive’s employment is terminated by the Company RWKHUWKDQIRU&DXVHRU'LVDELOLW\WKHGDWHRQZKLFKWKH&RPSDQ\QRWLILHVWKH([HFXWLYHRIVXFKWHUPLQDWLRQ LLL LI WKH([HFXWLYHUHVLJQVZLWKRXW*RRG5HDVRQWKHGDWHRQZKLFKWKH([HFXWLYHQRWLILHVWKH&RPSDQ\RIVXFK WHUPLQDWLRQDQG LY LIWKH([HFXWL ve’s employment is terminated by reason of death or Disability, the date of death RIWKH([HFXWLYHRUWKH'LVDELOLW\(IIHFWLYH'DWHDVWKHFDVHPD\EH1RWZLWKVWDQGLQJWKHIRUHJRLQJLQQRHYHQW VKDOOWKH'DWHRI7HUPLQDWLRQRFFXUXQWLOWKH([HFXWLYHH[SH riences a “separation from service” within the meaning RI6HFWLRQ$RIWKH&RGHDQGQRWZLWKVWDQGLQJDQ\WKLQJFRQWDLQHGKHUHLQWRWKHFRQWUDU\WKHGDWHRQZKLFKVXFK separation from service takes place shall be the “Date of Termination.”  2EOLJDWLRQVRIWKH&RPSDQ\XSRQ7HUPLQDWLRQ  D *RRG5HDVRQ2WKHU7KDQIRU&DXVH'HDWKRU 'LVDELOLW\ . If, during the Employment Period, the Company shall terminate the Executive’s employment other than IRU&DXVH'HDWKRU'LVDELOLW\RUWKH([HFXWLYHVKDOOWHUPLQDWHHPSOR\PHQWIRU*RRG5HDVRQ  L WKH&RPSDQ\VKDOOSD\WRWKH([HFXWLYHLQDOXPSVXPLQFDVKZLWKLQGD\VDIWHUWKH'DWHRI7HUPLQDWLRQ WKHDJJUHJDWHRIWKHIROORZLQJDPRXQWV  $ WKHVXPRI   the Executive’s Annual B DVH6DODU\WKURXJKWKH'DWHRI7HUPLQDWLRQWRWKHH[WHQWQRW WKHUHWRIRUHSDLG   the Executive’s business expenses that are reimbursable pursuant to Section  E Y EXWKDYH QRWEHHQUHLPEXUVHGE\WKH&RPSDQ\DVRIWKH'DWHRI7HUPLQDWLRQ  WKH([HFXW ive’s Annual Bonus for the fiscal \HDULPPHGLDWHO\SUHFHGLQJWKHILVFDO\HDULQZKLFKWKH'DWHRI7HUPLQDWLRQRFFXUVLIVXFKERQXVKDVEHHQ GHWHUPLQHGEXWQRWSDLGDVRIWKH'DWHRI7HUPLQDWLRQ  DQ\DFFUXHGYDFDWLRQSD\WRWKHH[WHQWQRWWKHUHWRIRUH SDLG WKHVXPRIWKHDPRXQWVGHVFULEHGLQVXEFODXVHV       and (4), the “Accrued Obligations”) and (5) DQ DPRXQWHTXDOWRWKHSURGXFWRI [ WKH5HFHQW$YHUDJH%RQXVDQG \ DIUDFWLRQWKHQXPHUDWRURIZKLFKLVWKH QXPEHURIGD\VLQWKHFXUUHQWILVFDO\HDUWKURXJKWKH'DWHRI7HUPLQDWLRQDQGWKHGHQRPLQDWRURIZKLFKLV WKH “Pro Rata Bonus”); SURYLGHG WKDWQRWZLWKVWDQGLQJWKHIRUHJRLQJLIWKH([HFXWLYHKDVPDGHDQLUUHYRFDEOHHOHFWLRQ XQGHUDQ\GHIHUUHGFRPSHQVDWLRQDUUDQJHPHQWVXEMHFWWR6HFWLRQ$RIWKH&RGHWRGHIHUDQ\SRUWLRQRIWKH $QQXDO%DVH6DODU\RUWKH$QQXDO%RQXVGHVFULEHGLQFODXVHV  RU  DERYH  

 
 WKHQIRUDOOSXUSRVHVRIWKLV6HFWLRQ LQFOXGLQJZLWKRXWOLPLWDWLRQ6HFWLRQV E WKURXJK G VXFKGHIHUUDO HOHFWLRQDQGWKHWHUPVRIWKHDSSOLFDEOHDUUDQJHPHQWVKDOODSSO\WRWKHVDPHSRUWLRQRIWKHDPRXQWGHVFULEHGLQVXFK FODXVH   or clause (3), and such portion shall not be considered as part of the “Accrued Obligations” but shall instead be an “Other Benefit” (as defined below); and   % WKHDPRXQWHTXDOWRWKHSURGXFWRI  >WZRWKUHH@DQG  WKHVXPRI (x) the Executive’s Annual Base 6DODU\DQG \ WKH5HFHQW$YHUDJH%RQXVDQG  & DQDPRXQWHTXDOWRWKHSURGXFWRI  >WZRWKUHH@DQG  WKHVXPRI D WKH&RPSDQ\5HWLUHPHQW &RQWULEXWLRQV DVGHILQHGLQWKH%RUJ:DUQHU,QF5HWLUHPHQW6D vings Plan (“RSP”)) that would have been made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b)(ii) of this Agreement (“Limitations” meaning limitations contained in the RSP, the Em SOR\HH Retirement Income Security Act (“ERISA”) or the Code (including without limitation the $150,000 cap on &RPSHQVDWLRQ   (ii) for two years following the Date of Termination (the “Benefits Period”), the Company shall provide the ([HFXWLYH and his eligible dependents with medical and dental insurance coverage (the “Health Care Benefits”) and OLIHLQVXUDQFHEHQHILWVQROHVVIDYRUDEOHWRWKRVHZKLFKWKH([HFXWLYHDQGKLVVSRXVHDQGHOLJLEOHGHSHQGHQWVZHUH UHFHLYLQJLPPHGLDWHO\SULRUWRWKH'DWHRI7HUPLQDWLRQRULIPRUHIDYRUDEOHWRVXFKSHUVRQVDVLQHIIHFWJHQHUDOO\ DWDQ\WLPHWKHUHDIWHUZLWKUHVSHFWWRRWKHUSHHUH[HFXWLYHVRIWKH&RPSDQ\DQGWKH$IILOLDWHG&RPSDQLHVSURYLGHG  KRZHYHU WKDWWKH+HDOWK&DUH%HQHILWVVKDOOEHSURYLGHGGXULQJWKH%HQHILWV3HULRGLQVXFKDPDQQHUWKDWVXFK benefits are excluded from the Executive’s income for federal income tax purposes; SURYLGHG IXUWKHU KRZHYHU WKDW LIWKH([HFXWLYHEHFRPHVUHHPSOR\HGZLWKDQRWKHUHPSOR\HUDQGLVHOLJLEOHWRUHFHLYHKHDOWKFDUHEHQHILWVXQGHU DQRWKHUHPSOR\HUSURYLGHGSODQWKHKHDOWKFDUHEHQHILWVSURYLGHGKHUHXQGHUVKDOOEHVHFRQGDU\WRWKRVHSURYLGHG XQGHUVXFKRWKHUSODQGXULQJVXFKDSSOLFDEOHSHULRGRIHOLJLELOLW\7KHUHFHLSWRIWKH+HDOWK&DUH%HQHILWVVKDOOEH FRQGLWLRQHGXSRQWKH([HFXWLYHFRQWLQXLQJWRSD\WKH$SSOLFDEOH&REUD3UHPLXPZLWKUHVSHFWWRWKHOHYHORI coverage that the Executive has elected for the Executive and the Executive’s spouse and eligible dependents ( e.g.  VLQJOHVLQJOHSOXVRQHRUIDPLO\ 'XULQJWKHSRUWLRQRIWKH%HQHILWV3HULRGLQZKLFKWKH([HFXWLYHDQGKLVHOLJLEOH GHSHQGHQWVFRQWLQXHWRUHFHLYHFRYHUDJHXQGHUWKH  

 
 Company’s Health Care Benefits plans, the Company shall pay to the Executive a monthly amount equal to the $SSOLFDEOH&2%5$3UHPLXPLQUHVSHFWRIWKHPD[LPXPOHYHORIFRYHUDJHWKDWWKH([HFXWLYHFRXOGKDYHHOHFWHGWR receive for the Executive and the Executive’s spouse and eligible dependents if the Executive were still an employee RIWKH&RPSDQ\GXULQJWKH%HQHILWV3HULRG e.g. VLQJOHVLQJOHSOXVRQHRUIDPLO\ UHJDUGOHVVRIZKDWOHYHORI FRYHUDJHLVDFWXDOO\HOHFWHGZKLFKSD\PHQWVKDOOEHSDLGLQDGYDQFHRQWKHILUVWSD\UROOGD\RIHDFKPRQWK commencing with the month immediately following the Executive’s Date of Termination. The Company shall use LWVUHDVRQDEOHEHVWHIIRUWVWRHQVXUHWKDWIROORZLQJWKHHQGRI the Benefit Period, the Executive and the Executive’s VSRXVHDQGHOLJLEOHGHSHQGHQWVVKDOOEHHOLJLEOHWRHOHFWFRQWLQXHGKHDOWKFRYHUDJHSXUVXDQWWR6HFWLRQ%RIWKH Code or other applicable law (“COBRA Coverage”), as if the Executive’s employment wi WKWKH&RPSDQ\KDG WHUPLQDWHGDVRIWKHHQGRIVXFKSHULRG)RUSXUSRVHVRIGHWHUPLQLQJHOLJLELOLW\ EXWQRWWKHWLPHRIFRPPHQFHPHQW of benefits) of the Executive for retiree welfare benefits pursuant to the Company’s retiree welfare benefit plans, if DQ\WKH([HFXWLYHVKDOOEHFRQVLGHUHGWRKDYHUHPDLQHGHPSOR\HGXQWLOWKHHQGRIWKH%HQHILW3HULRGDQGWRKDYH retired on the last day of such period. For purposes of this Provision, “Applicable COBRA Premium” means the PRQWKO\SUHPLXPLQHIIHFWIURPWLPHWRWLPHIRUFRYHUDJHSURYLGHGWRIRUPHUHPSOR\HHVXQGHU6HFWLRQ%RI WKH&RGHDQGWKHUHJXODWLRQVWKHUHXQGHUZLWKUHVSHFWWRDSDUWLFXODUOHYHORIFRYHUDJH e.g. VLQJOHVLQJOHSOXVRQHRU IDPLO\   LLL WKH&RPSDQ\VKDOODWLWVVROHH[SHQVHDVLQFXUUHGSURYLGHWKH([HFXWLYHZLWKRXWSODFHPHQWVHUYLFHVWKH scope and provider of which shall be selected by the Executive in the Executive’s sole discretion, but the cost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referred to as the “Other Benefits”) in accordance with the terms of the underlying plans or agreements.  1RWZLWKVWDQGLQJWKHIRUHJRLQJSURYLVLRQVRI6HFWLRQ D L DQG6HFWLRQ D LL LQWKHHYHQWWKDWWKH([HFXWLYHLVD “specified employee” within the meaning of Section $RIWKH&RGH DVGHWHUPLQHGLQDFFRUGDQFHZLWKWKH PHWKRGRORJ\HVWDEOLVKHGE\WKH&RPSDQ\DVLQH ffect on the Date of Termination) (a “Specified Employee”), amounts that constitute “nonqualified deferred compensation” within the meaning of Section $RIWKH&RGHWKDW ZRXOGRWKHUZLVHEHSD\DEOHDQGEHQHILWVWKDWZRXOGRWKHUZLVHEHSURYLGHGXQGHU6HFWLRQ D L RU6HFWLRQ D LL  GXULQJWKHVL[PRQWKSHULRGLPPHGLDWHO\IROORZLQJWKH'DWHRI7HUPLQDWLRQ RWKHUWKDQWKH$FFUXHG2EOLJDWLRQV  VKDOOLQVWHDGEHSDLGZLWKLQWHUHVWRQDQ\GHOD\HGSD\PHQWDWWKHDSSOLFDEOHIHGHUDOUDWHSURYLGHGIRULQ 6HFWLRQ 7872(f)(2)(A) of the Code (“Interest”) determined as of the Date of Termination,   

 
 RUSURYLGHGRQWKHILU st business day after the date that is six months following the Executive’s Date of Termination (the “Delayed Payment Date”);   E 'HDWK . If the Executive’s employment is terminated by reason of the Executive’s death during the (PSOR\PHQW3HULRG the Company shall provide the Executive’s estate or beneficiaries with the Accrued Obligations DQGWKH3UR5DWD%RQXVDQGWKHWLPHO\SD\PHQWRUGHOLYHU\RIWKH2WKHU%HQHILWVDQGVKDOOKDYHQRRWKHUVHYHUDQFH REOLJDWLRQVXQGHUWKLV$JUHHPHQW7KH$FFUXHG2EOLJDWLRQV VXEMHFWWRWKHSURYLVRVHWIRUWKLQ6HFWLRQ D  $ WR the extent applicable) and the Pro Rata Bonus shall be paid to the Executive’s estate or beneficiary, as applicable, in DOXPSVXPLQFDVKZLWKLQGD\VRIWKH'DWHRI7HUPLQDWLRQ:LWKUHVSHFWWRWKHSURYLVLRQRIWKH2WKHU%HQHILWV the term “Other Benefits” as utilized in this Section 6(b) shall include, without limitation, and the Executive’s estate DQGRUEHQHILFLDULHVVKDOOEHHQWLWOHGWRUHFHLYHEHQHILWV HLWKHUSXUVXDQWWRDSODQSURJUDPSUDFWLFHRUSROLF\RUDQ LQGLYLGXDODUUDQJHPHQW DWOHDVWHTXDOWRWKHPRVWIDYRUDEOHEHQHILWVSURYLGHGE\WKH&RPSDQ\DQGWKHDIILOLDWHG FRPSDQLHVWRWKHHVWDWHVDQGEHQHILFLDULHVRISHHUH[HFXWLYHVRIWKH&RPSDQ\DQGVXFKDIILOLDWHGFRPSDQLHVXQGHU VXFKSODQVSURJUDPVSUDFWLFHVDQGSROLFLHVUHODWLQJWRGHDWKEHQHILWVLIDQ\DVLQHIIHFWZLWKUHVSHFWWRRWKHUSHHU H[HFXWLYHVDQGWKHLUEHQHILFLDULHVDWDQ\WLPHGXULQJWKHGD\SHULRGLPPHGLDWHO\SUHFHGLQJWKH(IIHFWLYH'DWH RULIPRUHI avorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and its affiliated companies and their EHQHILFLDULHV  F 'LVDELOLW\  If the Executive’s employment is terminated by reason of the Executive’s Disability during the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ayment Date. With respect to the provision of the Other Benefits, the term “Other Benefits” as utilized in this 6HFWLRQ F VKDOOLQFOXGHDQGWKH([HFXWLYHVKDOOEHHQWLWOHGDIWHUWKH'LVDELOLW\(IIHFWLYH'DWHWRUHFHLYHGLVDELOLW\ DQGRWKHUEHQHILWV HLWKHUSXUVXDQWWRDSODQSURJUDPSUDFWLFHRUSROLF\RUDQLQGLYLGXDODUUDQJHPHQW DWOHDVWHTXDO WRWKHPRVWIDYRUDEOHRIWKRVHJHQHUDOO\SURYLGHGE\WKH&RPSDQ\DQGWKHDIILOLDWHGFRPSDQLHVWRGLVDEOHG H[HFXWLYHVDQGRUWKHLUIDPLOLHVLQDFFRUGDQFHZLWKVXFKSODQVSURJUDPVSUDFWLFHVDQGSROLFLHVUHODWLQJWRGLVDELOLW\ LIDQ\DVLQHIIHFWJHQHUDOO\ZLWKUHVSHFWWRRWKHUSHHUH[HFXWLYHVDQGWKHLUIDPLOLHVDWDQ\WLPHGXULQJWKHGD\ SHULRGLPPHGLDWHO\SUHFHGLQJWKH(IIHFWLYH'DWHRULIPRUH favorable to the Executive and/or the Executive’s IDPLO\DVLQHIIHFWDWDQ\WLPHWKHUHDIWHUJHQHUDOO\ZLWKUHVSHFWWRRWKHUSHHUH[HFXWLYHVRIWKH&RPSDQ\DQGWKH DIILOLDWHGFRPSDQLHVDQGWKHLUIDPLOLHV  G &DXVH2WKHUWKDQIRU*RRG5HDVRQ  If the Executive’s employment is terminated for Cause during the Employment Period, the Company shall provide the Executive with the Executive’s Annual Base Salary (subject to WKHSURYLVRVHWIRUWKLQ6HFWLRQ D  $ WRWKHH[WHQWDSSOLFDEOH WKURXJKWKH'DWHRI7HUPLQDWLRQDQGWKHWLPHO\ SD\PHQWRUGHOLYHU\RIWKH2WKHU%HQHILWVDQGVKDOOKDYHQRRWKHU  

 
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othing in this Agreement shall prevent or limit the Executive’s continuing or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limiting the generality of the foregoing, the Executive’s resignation under this Agreement w LWKRUZLWKRXW*RRG Reason, shall in no way affect the Executive’s ability to terminate employment by reason of the Executive’s “retirement” under any compensation and benefits plans, programs or arrangements of the affiliated companies, LQFOXGLQJZLWKRXWOLPLWDWLRQDQ\UHWLUHPHQWRUSHQVLRQSODQVRUDUUDQJHPHQWVRUWREHHOLJLEOHWRUHFHLYHEHQHILWV XQGHUDQ\FRPSHQVDWLRQRUEHQHILWSODQVSURJUDPVRUDUUDQJHPHQWVRIWKH&RPSDQ\RUDQ\RILWVDIILOLDWHG FRPSDQLHVLQFOXGLQJZLWKRXWOLPLWDWLRQDQ\UHWLUHPHQWRUSHQVLRQSODQRUDUUDQJHPHQWRIWKH&RPSDQ\RUDQ\RILWV DIILOLDWHGFRPSDQLHVRUVXEVWLWXWHSODQVDGRSWHGE\WKH&RPSDQ\RULWVVXFFHVVRUVDQGDQ\WHUPLQDWLRQZKLFK otherwise qualifies as Good Reason shall be treated as such even if it is also a “retirement” for purposes of any such SODQ1RWZLWKVWDQGLQJWKHIRUHJRLQJLIWKH([HFXWLYHUHFHLYHVSD\PHQWVDQGEHQHILWVSXUVXDQWWR6HFWLRQ D RIWKLV $JUHHPHQWWKH([HFXWLYHVKDOOQRWEHHQWLWOHGWRDQ\VHYHUDQFHSD\RUEHQHILWVXQGHUDQ\VHYHUDQFHSODQSURJUDP RUSROLF\RIWKH&RPSDQ\DQGWKHDIILOLDWHGFRPSDQLHVXQOHVVRWKHUZLVHVSHFLILFDOO\SURYLGHGWKHUHLQLQDVSHFLILF UHIHUHQFHWRWKLV$JUHHPHQW )XOO6HWWOHPHQW/HJDO)HHV . The Company’s obligation to make the payments provided for LQWKLV $JUHHPHQWDQGRWKHUZLVHWRSHUIRUPLWVREOLJDWLRQVKHUHXQGHUVKDOOQRWEHDIIHFWHGE\DQ\VHWRIIFRXQWHUFODLP UHFRXSPHQWGHIHQVHRURWKHUFODLPULJKWRUDFWLRQZKLFKWKH&RPSDQ\PD\KDYHDJDLQVWWKH([HFXWLYHRURWKHUV,Q QRHYHQWVKDOOWKH([HFXWLYHEHREOLJDWHGWRVHHNRWKHUHPSOR\PHQWRUWDNHDQ\RWKHUDFWLRQE\ZD\RIPLWLJDWLRQRI WKHDPRXQWVSD\DEOHWRWKH([HFXWLYHXQGHUDQ\RIWKHSURYLVLRQVRIWKLV$JUHHPHQWDQGH[FHSWDVVSHFLILFDOO\ SURYLGHGLQ6HFWLRQ D LL VXFKDPRXQWVVKDOOQRWEHUHGXFHGZKHWKHURUQRWWKH([HFXWLYHREWDLQVRWKHU HPSOR\PHQW7KH&RPSDQ\DJUHHVWRSD\DVLQFXUUHG ZLWKLQ days following the Company’s receipt of an invoice from the Executive), at any time from the Effective Date through the Executive’s remai QLQJOLIHWLPH RULIORQJHU WKURXJKWKHWKDQQLYHUVDU\RIWKH(IIHFWLYH'DWH WRWKHIXOOH[WHQWSHUPLWWHGE\ODZDOOOHJDOIHHVDQGH[SHQVHV ZKLFKWKH([HFXWLYHPD\UHDVRQDEO\LQFXUDVDUHVXOWRIDQ\FRQWHVW UHJDUGOHVVRIWKH  

 
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he Executive’s or the Company’s failure to insist upon strict compliance with any provision hereof or any RWKHUSURYLVLRQRIWKLV$JUHHPHQWRUWKHIDLOXUHWRDVVHUWDQ\ULJKWWKH([HFXWLYHRUWKH&RPSDQ\PD\KDYH KHUHXQGHULQFOXGLQJZLWKRXWOLPLWDWLRQWKHULJKWRIWKH([HFXWLYHWRWHUPLQDWHHPSOR\PHQWIRU*RRG5HDVRQ SXUVXDQWWR6HFWLRQ F L  Y RIWKLV$JUHHPHQWVKDOOQRWEHGHHPHGWREHDZDLYHURIVXFKSURYLVLRQRUULJKWRU DQ\RWKHUSURYLVLRQRUULJKWRIWKLV$JUHHPHQW  I 7KH([HFXWLYHDQGWKH&RPSDQ\DFNQRZOHGJHWKDWH[FHSWDVPD\RWKHUZLVHEHSURYLGHGXQGHUDQ\RWKHU ZULWWHQDJUHHPHQWEHWZHHQWKH([HFXWLYHDQGWKH&RPSDQ\WKHHPSOR\PHQWRIWKH([HFXWLYHE\WKH&RPSDQ\LV “at will” and, subject to Section 1(a) of this Agreement, prior to the Effective Date, the Executive’s employment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of the Code, such amounts shall be paid to the personal representative of the Executive’s estate within 30 days after the date of the Executive’s death. All reimbursements and in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

 
 DQGH[SHQVHVZHUHLQFXUUHG LL WKHDPRXQWRILQNLQGEHQHILWVWKDWWKH&RPSDQ\LVREOLJDWHGWRSD\RUSURYLGHLQ DQ\JLYHQFDOHQGDU\HDUVKDOOQRWDIIHFWWKHLQNLQGEHQHILWVWKDWWKH&RPSDQ\LVREOLJDWHGWRSD\RUSURYLGHLQDQ\ RWKHUFDOHQGDU\HDU LLL  the Executive’s right to have the Company pay or provide such reimbursements and in NLQG EHQHILWVPD\QRWEHOLTXLGDWHGRUH[FKDQJHGIRUDQ\RWKHUEHQHILWDQG LY  in no event shall the Company’s REOLJDWLRQVWRPDNHVXFKUHLPEXUVHPHQWVRUWRSURYLGHVXFKLQ kind benefits apply later than the Executive’s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greement or the Executive’s employment, WKHUHVSHFWLYHULJKWVDQGREOLJDWLRQVRIWKHSDUWLHVKHUHWRVKDOOVXUYLYHWRWKHH[WHQWQHFHVVDU\WRFDUU\RXWWKH LQWHQWLRQVRIWKHSDUWLHVXQGHUWKLV$JUHHPHQW ,1:,71(66:+(5(2)WKH([HFXWLYHKDVKH reunto set the Executive’s hand and, pursuant to the DXWKRUL]DWLRQIURPLWV%RDUGRI'LUHFWRUVWKH&RPSDQ\KDVFDXVHGWKLV$JUHHPHQWWREHH[HFXWHGLQLWVQDPHRQLWV EHKDOIDOODVRIWKHGD\DQG\HDUILUVWDERYHZULWWHQ           %25*:$51(5,1&     %\      

 
Exhibit 10.28 (;FLFDPHQGPHQWKWP&+$1*(,1&21752/  (;+,%,7   $0(1'('$1'5(67$7('   &+$1*(2)&21752/(03/2<0(17$*5((0(17   AGREEMENT by and between BorgWarner Inc., a Delaware corporation (the “Company”) and ____________ (the “Executive”) dated as of the ___ day of _____________, 2009.   WHEREAS, the Board of Directors of the Company (the “Board”), has determined t KDWLWLVLQWKH EHVWLQWHUHVWVRIWKH&RPSDQ\DQGLWVVWRFNKROGHUVWRDVVXUHWKDWWKH&RPSDQ\ZLOOKDYHWKHFRQWLQXHGGHGLFDWLRQRI WKH([HFXWLYHQRWZLWKVWDQGLQJWKHSRVVLELOLW\WKUHDWRURFFXUUHQFHRID&KDQJHRI&RQWURO DVGHILQHGEHORZ RIWKH &RPSDQ\7KH%RDUGEHOLHYHVLWLVLPSHUDWLYHWRGLPLQLVKWKHLQHYLWDEOHGLVWUDFWLRQRIWKH([HFXWLYHE\YLUWXHRIWKH SHUVRQDOXQFHUWDLQWLHVDQGULVNVFUHDWHGE\DSHQGLQJRUWKUHDWHQHG&KDQJHRI&RQWURODQGWRHQFRXUDJHWKH Executive’s full attention and dedi FDWLRQWRWKH&RPSDQ\FXUUHQWO\DQGLQWKHHYHQWRIDQ\WKUHDWHQHGRUSHQGLQJ &KDQJHRI&RQWURODQGWRSURYLGHWKH([HFXWLYHZLWKFRPSHQVDWLRQDQGEHQHILWVDUUDQJHPHQWVXSRQD&KDQJHRI &RQWUROZKLFKHQVXUHWKDWWKHFRPSHQVDWLRQDQGEHQHILWVH[SHFWDWLRQVRIWKH([HFXWLYHZLOOEHVDWLVILHGDQGZKLFK DUHFRPSHWLWLYHZLWKWKRVHRIRWKHUFRUSRUDWLRQV  >:+(5($6EHFDXVHWKH([HFXWLYH>KDV@>ZLOOREWDLQ@LQWLPDWHDQGYDOXDEOHNQRZOHGJHDQG experience in the operation of the Company’s business, as well as techn LFDOILQDQFLDOFXVWRPHUDQGRWKHU confidential information related to the Company’s business, as a condition to the Company’s willingness to enter LQWRWKLV$JUHHPHQWWKH&RPSDQ\KDVUHTXLUHGWKDWWKH([HFXWLYHH[HFXWHDQGGHOLYHUWKH>1RQ&RPSHWH $JUHH ment] attached to this Agreement as Exhibit A (the “Non Compete”), pursuant to which Executive has agreed not to compete with the Company or solicit the Company’s employees and customers during [the term of this Agreement] [Executive’s employment with the &RPSDQ\@DQGGXULQJWKH>RQH\HDU@>PRQWK@SHULRGIROORZLQJ Executive’s termination of employment with the Company.]   WHEREAS, the Company would not have entered into this Agreement but for Executive’s H[HFXWLRQRIWKH1RQ&RPSHWHDQGDFFRUGLQJO\FRQWHPSRUDQHRXVZLWKWKHH[HFXWLRQRIWKLV$JUHHPHQWWKH ([HFXWLYHDQGWKH&RPSDQ\KDYHHQWHUHGLQWRWKH1RQ&RPSHWH  12:7+(5()25(,7,6+(5(%<$*5(('$6)2//2:6   &HUWDLQ'HILQLWLRQV  D  The “Effective Date” shall mean the first date during WKH&KDQJHRI &RQWURO3HULRG DVGHILQHGLQ6HFWLRQ E RQZKLFKD&KDQJHRI&RQWURO DVGHILQHGLQ6HFWLRQ  RFFXUV Anything in this Agreement to the contrary notwithstanding, if (i) the Executive’s employment with the &RPSDQ\LVWHUPLQDWHGE\WKH&RPSDQ\ LL WKH'DWHRI7HUPLQDWLRQLVSULRUWRWKHGDWHRQZKLFKD&KDQJHRI &RQWURORFFXUVDQG LLL LWLVUHDVRQDEO\GHPRQVWUDWHGE\WKH([HFXWLYHWKDWVXFKWHUPLQDWLRQRIHPSOR\PHQW $  ZDVDWWKHUHTXHVWRIDWKLUGSDUW\WKDWKDVWDNHQVWHSVUHDVRQDEO\FDOFXODWHGWRHIIHFWD&KDQJHRI&RQWURORU %  RWKHUZLVHDURVHLQFRQQHFWLRQZLWKRUDQWLFLSDWLRQRID&KDQJHRI&RQWUROWKHQIRUDOOSXUSRVHVRIWKLV   Agreement the “Effective Date” shall mean the date immediately prior to such Date of 7HUPLQDWLRQ  E  The “Change of Control Period” shall mean the period commencing on the date hereof and HQGLQJRQWKHWKLUGDQQLYHUVDU\RIWKHGDWHKHUHRISURYLGHG KRZHYHU WKDWFRPPHQFLQJRQWKHGDWHRQH\HDUDIWHU WKHGDWHKHUHRIDQGRQHDFKDQQXDODQQLYHUVDU\RIVXFKGDWH VXFKGDWHDQGHDFKDQQXDODQQLYHUVDU\WKHUHRIVKDOOEH hereinafter referred to as the “Renewal Date”), unless previously terminated, the Change of Control Period shall be DXWRPDWLFDOO\H[WHQGHGVRDVWRWHUPLQDWHWKUHH\HDUVIURPVXFK5HQHZDO'DWHXQOHVVDWOHDVWGD\VSULRUWRWKH 5HQHZDO'DWHWKH&RPSDQ\VKDOOJLYHQRWLFHWRWKH([HFXWLYHWKDWWKH&KDQJHRI&RQWURO3HULRGVKDOOQRWEHVR H[WHQGHG   &KDQJHRI&RQWURO  For the purpose of this Agreement, a “Change of Control” shall me DQ

 
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 7HUPLQDWLRQRI(PSOR\PHQW  D 'HDWKRU'LVDELOLW\  The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. ,IWKH&RPSDQ\GHWHUPLQHVLQ JRRGIDLWKWKDWWKH'LVDELOLW\RIWKH([HFXWLYHKDVRFFXUUHGGXULQJWKH(PSOR\PHQW3HULRG SXUVXDQWWRWKH GHILQLWLRQRI'LVDELOLW\VHWIRUWKEHORZ LWPD\JLYHWRWKH([HFXWLYHZULWWHQQRWLFHLQDFFRUGDQFHZLWK6HFWLRQ E  RIWKLV Agreement of its intention to terminate the Executive’s employment.  In such event, the Executive’s HPSOR\PHQWZLWKWKH&RPSDQ\VKDOOWHUPLQDWHHIIHFWLYHRQWKHWKGD\DIWHUUHFHLSWRIVXFKQRWLFHE\WKH Executive (the “Disability Effective Date”), SURYLGHG WKDWZLWKLQWKHGD\VDIWHUVXFKUHFHLSWWKH([HFXWLYHVKDOO QRWKDYHUHWXUQHGWRIXOO time performance of the Executive’s duties.  For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties wi WKWKH&RPSDQ\RQDIXOOWLPHEDVLVIRU FRQVHFXWLYHEXVLQHVVGD\V RUIRUEXVLQHVVGD\VLQDQ\FRQVHFXWLYHGD\V DVDUHVXOWRILQFDSDFLW\GXHWR PHQWDORUSK\VLFDOLOOQHVVZKLFKLVGHWHUPLQHGWREHWRWDODQGSHUPDQHQWE\DSK\VLFLDQVHOHFWHGE\WKH&RPSDQ\RU its insurers and acceptable to the Executive or the Executive’s legal representative.   E  &DXVH  The Company may terminate the Executive’s employment during the Employment 3HULRGZLWKRUZLWKRXW&DXVH For purposes of this Agreement, “Cause” shall mean:  L  WKHZLOOIXODQGFRQWLQXHGIDLOXUHRIWKH([HFXWLYHWRSHUIRUPVXEVWDQWLDOO\WKH Executive’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity GXHWRSK\VLFDORUPHQWDOLOOQHVVR r following the Executive’s delivery of a Notice of Termination for Good Reason), DIWHUDZULWWHQGHPDQGIRUVXEVWDQWLDOSHUIRUPDQFHLVGHOLYHUHGWRWKH([HFXWLYHE\WKH%RDUGRUWKH&KLHI([HFXWLYH 2IILFHURIWKH&RPSDQ\ZKLFKVSHFLILFDOO\LGHQWLILHVWKHPDQQHULQZKLFKWKH%RDUGRU&KLHI([HFXWLYH2IILFHURI the Company believes that the Executive has not substantially performed the Executive’s duties, or   LL  WKHZLOOIXOHQJDJLQJE\WKH([HFXWLYHLQLOOHJDOFRQGXFWRUJURVVPLVFRQGXFWZKLFK LVPDWHULDOO\DQGGHPRQVWUDEO\LQMXULRXVWRWKH&RPSDQ\  For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” XQOHVVLWLVGRQHRURPLWWHGWREHGRQHE\WKH([HFXWLYHLQEDGIDLWKRUZLWKRXWUHDVRQDEOHEHOLHIWKDWWKH  Executive’s action or omission was in the best interests of the Company. $Q\DFWRUIDLOXUHWRDFWEDVHGXSRQ DXWKRULW\JLYHQSXUVXDQWWRDUHVROXWLRQGXO\DGRSWHGE\WKH%RDUGRULIWKH&RPSDQ\LVQRWWKHXOWLPDWHSDUHQW HQWLW\DQGLVQRWSXEOLFO\WUDGHGWKHERDUGRIGLUHFWRUV RUIRUDQRQFRUSRUDWHHQWLW\HTXLYDOHQWJRYHUQLQJERG\ RI the ultimate parent of the Company (the “Applicable Board”)or upon the instructions of the Chief Executive Officer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he Executive’s employment may be terminated by the Executive for Good 5HDVRQRUE\WKH([HFXWLYHYROXQWDULO\ZLWKRXW*RRG5HDVRQ For purposes of this Agreement, “Good Reason” VKDOOPHDQ  L  WKHDVVLJQPHQWWRWKH([HFXWLYHRIDQ\GXWLHVLQFRQVLVWHQWLQDQ\UHVSHFWZLWKWKH Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities DVFRQWHPSODWHGE\6HFWLRQ D RIWKLV$JUHHPHQWRUDQ\RWKHUGLPLQXWLRQLQVXFKSRVLWLRQDXWKRULW\GXWLHVRU responsibilities (whether or not occurring solely as a result of the Company’s ceasing to be a publicly traded entity),

 
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 $  the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the Executive’s business expenses that are reimbursable pursuant WR6HFWLRQ E )(v) but have not been reimbursed by the Company as of the Date of Termination; (3) the Executive’s $QQXDO%RQXVIRUWKHILVFDO\HDULPPHGLDWHO\SUHFHGLQJWKHILVFDO\HDULQZKLFKWKH'DWHRI7HUPLQDWLRQRFFXUVLI VXFKERQXVKDVEHHQGHWHUPLQHGEXWQRWSDLGDVRIWKH'DWHRI7HUPLQDWLRQ  DQ\DFFUXHGYDFDWLRQSD\WRWKH extent not theretofore paid (the sum of the amounts described in subclauses (1), (2), (3) and (4), the “Accrued Obligations”) and (5) an amount equal to the product of (x) the Recent Ave UDJH%RQXVDQG \ DIUDFWLRQWKH QXPHUDWRURIZKLFKLVWKHQXPEHURIGD\VLQWKHFXUUHQWILVFDO\HDUWKURXJKWKH'DWHRI7HUPLQDWLRQDQGWKH denominator of which is 365 (the “Pro Rata Bonus”); SURYLGHG WKDWQRWZLWKVWDQGLQJWKHIRUHJRLQJLIWKH([HFXWLYH KDVPDGHDQLUUHYRFDEOHHOHFWLRQXQGHUDQ\GHIHUUHGFRPSHQVDWLRQDUUDQJHPHQWVXEMHFWWR6HFWLRQ$RIWKH&RGH WRGHIHUDQ\SRUWLRQRIWKH$QQXDO%DVH6DODU\RUWKH$QQXDO%RQXVGHVFULEHGLQFODXVHV  RU  DERYHWKHQIRU DOOSXUSRVHVRIWKLV6HFWLRQ LQFOXGLQJZLWKRXWOLPLWDWLRQ6HFWLRQV E WKURXJK G VXFKGHIHUUDOHOHFWLRQDQG WKHWHUPVRIWKHDSSOLFDEOHDUUDQJHPHQWVKDOODSSO\WRWKHVDPHSRUWLRQRIWKHDPRXQWGHVFULEHGLQVXFKFODXVH  RU FODXVH  DQGVXFKSRUWLRQVKDOOQRWEHF onsidered as part of the “Accrued Obligations” but shall instead be an “Other Benefit” (as defined below); and   %  WKHDPRXQWHTXDOWRWKHSURGXFWRI  >WZR@>WKUHH@DQG  WKHVXPRI [  the Executive’s Annual Base Salary and (y) the Recent Average B RQXVDQG  &  DQDPRXQWHTXDOWRWKHSURGXFWRI  >WZR@>WKUHH@DQG  WKHVXPRI D  the Company Retirement Contributions (as defined in the BorgWarner Inc. Retirement Savings Plan (“RSP”)) that ZRXOGKDYHEHHQPDGHXQGHUWKH563IRUWKHILUVW3ODQ<HDU DVGHILQHGLQWKH563 HQGLQJDIWHUWKH'DWHRI 7HUPLQDWLRQLIWKHUHKDGEHHQQR/LPLWDWLRQV DVGHILQHGEHORZ RQVXFK&RPSDQ\5HWLUHPHQW&RQWULEXWLRQVDQG E  DQDPRXQWHTXDOWRWKH&RPSDQ\0DWFKLQJ&RQWULEXWLRQV DVGHILQHGLQWKH563 WKDWZRXOGKDYHEHHQPDGHXQGHU WKH563LQWKHILUVW3ODQ<HDUDIWHUWKH'DWHRI7HUPLQDWLRQLIWKHUHKDGEHHQQR/LPLWDWLRQVRQVXFK&RPSDQ\ 0DWFKLQJ&RQWULEXWLRQVDQGDVVXPLQJIRUWKHVHSXUSRVHVWKDWWKH([HFXWLYHKDGHOHFWHGWRGHIHUWKHPD[LPXP DPRXQWRI&RPSHQVDWLRQ DVGHILQHGLQWKH563 SHUPLWWHGE\WKH563 ZLWKRXWUHJDUGWRDQ\/LPLWDWLRQVRQVXFK GHIHUUDO DQGDVVXPLQJIRUSXUSRVHVRIFDOFXODWLQJWKHDPRXQWVLQFODXVHV D DQG E WKDWWKH([HFXWLYHKDG UHPDLQHGHPSOR\HGE\WKH&RPSDQ\WKURXJKWKHHQGRIVXFK3ODQ<HDUZLWKFRPSHQVDWLRQHTXDOWRWKDWUHTXLUHGE\ Section 4(b)(i) and Section 4(b)(ii) of this Agreement (“Limitations” meaning limitations contained in the RSP, the Employee Retirement Income Security Act (“ERISA”) or the Code (including without l LPLWDWLRQWKHFDS RQ&RPSHQVDWLRQ   '  for [two] [three] years following the Date of Termination (the “Benefits Period”), the Company shall provide the Executive and his eligible dependents with medical and dental insurance coverage (the “Health Care Benefits”) and life insurance benefits no less favorable to those which the Executive and KLVVSRXVHDQGHOLJLEOHGHSHQGHQWVZHUHUHFHLYLQJLPPHGLDWHO\SULRUWRWKH'DWHRI7HUPLQDWLRQRULIPRUH IDYRUDEOHWRVXFKSHUVRQVDVLQHIIHFWJHQHUDOO\DWDQ\WLPHWKHUHDIWHUZLWKUHVSHFWWRRWKHUSHHUH[HFXWLYHVRIWKH &RPSDQ\DQGWKH$IILOLDWHG&RPSDQLHVSURYLGHG KRZHYHU WKDWWKH+HDOWK&DUH%HQHILWVVKDOOEHSURYLGHGGXULQJ WKH%HQHILWV3HULRGLQVXFKDPDQQHUWKDWVXFKEHQHILWVDUHH[FOXGHGIURPWKH( xecutive’s income for federal income WD[SXUSRVHVSURYLGHG IXUWKHU KRZHYHU WKDWLIWKH([HFXWLYHEHFRPHVUHHPSOR\HGZLWKDQRWKHUHPSOR\HUDQGLV HOLJLEOHWRUHFHLYHKHDOWKFDUHEHQHILWVXQGHUDQRWKHUHPSOR\HUSURYLGHGSODQWKHKHDOWKFDUHEHQHILWVSURYLGHG KHUHXQGHUVKDOOEHVHFRQGDU\WRWKRVHSURYLGHGXQGHUVXFKRWKHUSODQGXULQJVXFKDSSOLFDEOHSHULRGRI HOLJLELOLW\7KHUHFHLSWRIWKH+HDOWK&DUH%HQHILWVVKDOOEHFRQGLWLRQHGXSRQWKH([HFXWLYHFRQWLQXLQJWRSD\WKH $SSOLFDEOH&2%5$3UHPLXPZLWKUHVSHFWWRWKHOHYHORIFRYHUDJHWKDWWKH([HFXWLYHKDVHOHFWHGIRUWKH([HFXWLYH and the Executive’s spouse and eligible dependents ( e.g. VLQJOHVLQJOHSOXVRQHRUIDPLO\ 'XULQJWKHSRUWLRQRI WKH%HQHILWV3HULRGLQZKLFKWKH([HFXWLYHDQGKLVHOLJLEOHGHSHQGHQWVFRQWLQXHWRUHFHLYHFRYHUDJHXQGHUWKH Company’s Health Care Benefits plans, the Company shall pay to the Executive a monthly amount equal to the $SSOLFDEOH&2%5$3UHPLXPLQUHVSHFWRIWKHPD[LPXPOHYHORIFRYHUDJHWKDWWKH([HFXWLYHFRXOGKDYHHOHFWHGWR receive for the Executive and the Executive’s spouse and eligible dependents if the Executive were still an employee RIWKH&RPSDQ\GXULQJWKH%HQHILWV3HULRG e.g. VLQJOHVLQJOHSOXVRQHRUIDPLO\ UHJDUGOHVVRIZKDWOHYHORI FRYHUDJHLVDFWXDOO\HOHFWHGZKLFKSD\PHQWVKDOOEHSDLGLQDGYDQFHRQWKHILUVWSD\UROOGD\RIHDFKPRQWK commencing with the month immediately following the Executive’s Date of Termination. 7KH&RPSDQ\VKDOOXVH LWVUHDVRQDEOHEHVWHIIRUWVWRHQVXUHWKDWIROORZLng the end of the Benefit Period, the Executive and the Executive’s VSRXVHDQGHOLJLEOHGHSHQGHQWVVKDOOEHHOLJLEOHWRHOHFWFRQWLQXHGKHDOWKFRYHUDJHSXUVXDQWWR6HFWLRQ%RIWKH

 
Code or other applicable law (“COBRA Coverage”), as if the Executive’s HPSOR\PHQWZLWKWKH&RPSDQ\KDG WHUPLQDWHGDVRIWKHHQGRIVXFKSHULRG)RUSXUSRVHVRIGHWHUPLQLQJHOLJLELOLW\ EXWQRWWKHWLPHRIFRPPHQFHPHQW of benefits) of the Executive for retiree welfare benefits pursuant to the Company’s retiree welfare benefit SODQVLI DQ\WKH([HFXWLYHVKDOOEHFRQVLGHUHGWRKDYHUHPDLQHGHPSOR\HGXQWLOWKHHQGRIWKH%HQHILW3HULRGDQGWRKDYH retired on the last day of such period. For purposes of this Provision, “Applicable COBRA Premium” means the PRQWKO\SUHPLXPLQHIIHFWIURPWLPHWRWLPHIRUFRYHUDJHSURYLGHGWRIRUPHUHPSOR\HHVXQGHU6HFWLRQ%RI WKH&RGHDQGWKHUHJXODWLRQVWKHUHXQGHUZLWKUHVSHFWWRDSDUWLFXODUOHYHORIFRYHUDJH e.g. VLQJOHVLQJOHSOXVRQHRU IDPLO\    LL  WKH&RPSDQ\VKDOODWLWVVROHH[SHQVHDVLQFXUUHGSURYLGHWKH([HFXWLYHZLWK outplacement services the scope and provider of which shall be selected by the Executive in the Executive’s sole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shall be hereinafter referred to as the “Other Benefits”) in accordance with the terms of the underlying plans or DJUHHPHQWV  1RWZLWKVWDQGLQJWKHIRUHJRLQJSURYLVLRQVRI6HFWLRQ D L DQG6HFWLRQ D LL LQWKHHYHQWWKDWWKH([HFXWLYHLVD “specified employee” within the meaning of Section 409A of the Code (as determined in accordance with the methodology established by the Company as in effect on the Date of Termination) (a “Specified Employee”  amounts that constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code that ZRXOGRWKHUZLVHEHSD\DEOHDQGEHQHILWVWKDWZRXOGRWKHUZLVHEHSURYLGHGXQGHU6HFWLRQ D L RU6HFWLRQ D LL  GXULQJWKHVL[PRQWKSHULRGLPPHGLDWHO\IROORZLQJWKH'DWHRI7HUPLQDWLRQ RWKHUWKDQWKH$FFUXHG2EOLJDWLRQV  VKDOOLQVWHDGEHSDLGZLWKLQWHUHVWRQDQ\GHOD\HGSD\PHQWDWWKHDSSOLFDEOHIHGHUDOUDWHSURYLGHGIRULQ6HFWLRQ 7872(f)(2)(A) of the Code (“Interest”) determined as of WKH'DWHRI7HUPLQDWLRQRUSURYLGHGRQWKHILUVWEXVLQHVV day after the date that is six months following the Executive’s Date of Termination (the “Delayed Payment Date”);   E  'HDWK  If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, the Company shall provide the Executive’s estate or beneficiaries with the Accrued 2EOLJDWLRQVDQGWKH3UR5DWD%RQXVDQGWKHWLPHO\SD\PHQWRUGHOLYHU\RIWKH2WKHU%HQHILWVDQGVKDOOKDYHQR RWKHUVHYHUDQFHREOLJDWLRQVXQGHUWKLV$JUHHPHQW7KH$FFUXHG2EOLJDWLRQV VXEMHFWWRWKHSURYLVRVHWIRUWKLQ Section 6(a)(1)(A) to the extent applicable) and the Pro Rata Bonus shall be paid to the Executive’s estate or EHQHILFLDU\DVDSSOLFDEOHLQDOXPSVXPLQFDVKZLWKLQGD\VRIWKH'DWHRI7HUPLQDWLRQ:LWKUHVSHFWWRWKH provision of the Other Benefits, the term “Other Benefits” as utilized in this Section 6(b) shall include, without limitation, and the Executive’s estate and/or beneficiaries shall be entitled to UHFHLYHEHQHILWV HLWKHUSXUVXDQWWRD SODQSURJUDPSUDFWLFHRUSROLF\RUDQLQGLYLGXDODUUDQJHPHQW DWOHDVWHTXDOWRWKHPRVWIDYRUDEOHEHQHILWVSURYLGHG E\WKH&RPSDQ\DQGWKHDIILOLDWHGFRPSDQLHVWRWKHHVWDWHVDQGEHQHILFLDULHVRISHHUH[HFXWLYHVRIWKH&RPSDQ\DQG VXFKDIILOLDWHGFRPSDQLHVXQGHUVXFKSODQVSURJUDPVSUDFWLFHVDQGSROLFLHVUHODWLQJWRGHDWKEHQHILWVLIDQ\DVLQ HIIHFWZLWKUHVSHFWWRRWKHUSHHUH[HFXWLYHVDQGWKHLUEHQHILFLDULHVDWDQ\WLPHGXULQJWKHGD\SHULRG LPPHGLDWHO\ preceding the Effective Date or, if more favorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company DQGLWVDIILOLDWHGFRPSDQLHVDQGWKHLUEHQHILFLDULHV  F  'LVDELOLW\  If the Executive’s employment is terminated by reason of the Executive’s 'LVDELOLW\GXULQJWKH(PSOR\PHQW3HULRGWKH&RPSDQ\VKDOOSURYLGHWKH([HFXWLYHZLWKWKH$FFUXHG2EOLJDWLRQV DQG3UR5DWD%RQXVDQGWKHWLPHO\SD\PHQWRUGHOLYHU\RIWKH2WKHU%HQHILWVLQDFFRUGDQFHZLWKWKHWHUPVRIWKH XQGHUO\LQJSODQVRUDJUHHPHQWVDQGVKDOOKDYHQRRWKHUVHYHUDQFHREOLJDWLRQVXQGHUWKLV$JUHHPHQW7KH$FFUXHG 2EOLJDWLRQV VXEMHFWWRWKHSURYLVRVHWIRUWKLQ6HFWLRQ D  $ WRWKHH[WHQWDSSOLFDEOH DQGWKH3UR5DWD%RQXV

 
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L   “Reduced Amount” shall mean the greatest amount of Agreement Payments that FDQEHSDLGWKDWZRXOGQRWUHVXOWLQWKHLPSRVLWLRQRIWKHH[FLVHWD[XQGHU6HFWLRQRIWKH&RGHLIWKH $FFRXQWLQJ)LUPGHWHUPLQHVWRUHGXFH$JUHHPHQW3D\PHQWVSXUVXDQWWR6HFWLRQ D   LL  “Net After Tax Receipt” shall mean the present value (as determined in accordance ZLWK6HFWLRQV* E  $ LL DQG* G  RIWKH&RGH RID3D\PHQWQHWRIDOOWD[HVLPSRVHGRQWKH ([HFXWLYHZLWKUHVSHFWWKHUHWRXQGHU6HFWLRQVDQGRIWKH&RGHDQGXQGHUDSSOLFDEOHVWDWHDQGORFDOODZV GHWHUPLQHGE\DSSO\LQJWKHKLJKHVWPDUJLQDOUDWHXQGHU6HFWLRQRIWKH&RGHDQGXQGHUVWDWHDQGORFDOODZVZKLFK applied to the Executive’s taxable income for t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definition of the term “parachute payment” within the meaning of Q&A  D RI6HFWLRQ*RIWKH&RGHLQ DFFRUGDQFHZLWK4 $ D RI6HFWLRQ*RIWKH&RGH@   &RQILGHQWLDO,QIRUPDWLRQ 7KH([HFXWLYHVKDOOKROGLQDILGXFLDU\FDSDFLW\IRUWKHEHQHILWRI WKH&RPSDQ\DOOVHFUHWRUFRQILGHQWLDOLQIRUPDWLRQNQRZOHGJHRUGDWDUHODWLQJWRWKH&RPSDQ\RUDQ\RILWV DIILOLDWHGFRPSDQLHVDQGWKHLUUHVSHFWLYHEXVLQHVVHVZKLFKVKDOOKDYHEHHQREWDLQHGE\WKH([HFXWLYHGXULQJWKH Executive’s employment by the Company or any of its affiliated companies and which shall not be or become public NQRZOHGJH RWKHUWKDQE\DFWVE\WKH([HFXWLYHRUUHSUHVHQWDWLYHVRIWKH([HFXWLYHLQYLRODWLRQRIWKLV $JUHHPHQW  After termination of the Executive’s employment with the Company, the Executive shall not, without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e by the Executive’s legal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s used in this Agreement, “Company” shall mean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he Executive’s or the Company’s failure to insist upon strict compliance with any provision KHUHRIRUDQ\RWKHUSURYLVLRQRIWKLV$JUHHPHQWRUWKHIDLOXUHWRDVVHUWDQ\ULJKWWKH([HFXWLYHRUWKH&RPSDQ\PD\ KDYHKHUHXQGHULQFOXGLQJZLWKRXWOLPLWDWLRQWKHULJKWRIWKH([HFXWLYHWRWHUPLQDWHHPSOR\PHQWIRU*RRG5HDVRQ SXUVXDQWWR6HFWLRQ F L  Y RIWKLV$JUHHPHQWVKDOOQRWEHGHHPHGWREHDZDLYHURIVXFKSURYLVLRQRUULJKWRU DQ\RWKHUSURYLVLRQRUULJKWRIWKLV$JUHHPHQW  I  7KH([HFXWLYHDQGWKH&RPSDQ\DFNQRZOHGJHWKDWH[FHSWDVPD\RWKHUZLVHEHSURYLGHG XQGHUDQ\RWKHUZULWWHQDJUHHPHQWEHWZHHQWKH([HFXWLYHDQGWKH&RPSDQ\WKHHPSOR\PHQWRIWKH([HFXWLYHE\ the Company is “at will” and, subject to Section 1(a) of this Agreement, prior to the Effective Date, the Executive’s HPSOR\PHQWPD\EHWHUPLQDWHGE\HLWKHUWKH([HFXWLYHRUWKH&RPSDQ\DWDQ\WLPHSULRUWRWKH(IIHFWLYH'DWHLQ ZKLFKFDVHWKH([HFXWLYHVKDOOKDYHQRIXUWKHUULJKWVXQGHUWKLV$JUHHPHQW)URPDQGDIWHUWKH(IIHFWLYH'DWHWKLV $JUHHPHQWVKDOOVXSHUVHGHDQ\RWKHUDJUHHPHQWEHWZHHQWKHSDUWLHVZLWKUHVSHFWWRWKHVXEMHFWPDWWHUKHUHRI  J  7KH$JUHHPHQWLVLQWHQGHGWRFRPSO\ZLWKWKHUHTXLUHPHQWVRI6HFWLRQ$RIWKH&RGHRU DQH[HPSWLRQRUH[FOXVLRQWKHUHIURPDQGZLWKUHVSHFWWRDPRXQWVWKDWDUHVXEMHFWWR6HFWLRQ$RIWKH&RGH VKDOOLQDOOUHVSHFWVEHDGPLQLVWHUHGLQDFFRUGDQFHZLWK6HFWLRQ$RIWKH&RGH(DFKSD\PHQWXQGHUWKLV $JUHHPHQWVKDOOEHWUHDWHGDVDVHSDUDWHSD\PHQWIRUSXUSRVHVRI6HFWLRQ$RIWKH&RGH,QQRHYHQWPD\WKH ([HFXWLYHGLUHFWO\RULQGLUHFWO\GHVLJQDWHWKHFDOHQGDU\HDURIDQ\SD\PHQWWREHPDGHXQGHUWKLV$JUHHPHQW,I WKH([HFXWLYHGLHVIROORZLQJWKH'DWHRI7HUPLQDWLRQDQGSULRUWRWKHSD\PHQWRIWKHDQ\DPRXQWVGHOD\HGRQ DFFRXQWRI6HFWLRQ$RIWKH&RGHVXFKDPRXQWVVKDOOEHSDLGWR the personal representative of the Executive’s estate within 30 days after the date of the Executive’s death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

 
DIIHFWWKHLQNLQGEHQHILWVWKDWWKH&RPSDQ\LVREOLJDWHGWRSD\RUSURYLGHLQDQ\RWKHUFDOHQGDU\HDU LLL WKH Executive’s right to have the Company pay or provide such reimbursements and in NLQGEHQHILWVPD\QRWEH liquidated or exchanged for any other benefit; and (iv) in no event shall the Company’s obligations to make such UHLPEXUVHPHQWVRUWRSURYLGHVXFKLQ kind benefits apply later than the Executive’s remaining lifetime (or if longer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the Executive’s HPSOR\PHQWWKHUHVSHFWLYHULJKWVDQGREOLJDWLRQVRIWKHSDUWLHVKHUHWRVKDOOVXUYLYHWRWKHH[WHQWQHFHVVDU\WRFDUU\ RXWWKHLQWHQWLRQVRIWKHSDUWLHVXQGHUWKLV$JUHHPHQW  6,*1$785(3$*()2//2:6         ,1:,71(66:+(5(2)WKH([ ecutive has hereunto set the Executive’s hand and, pursuant to the authorization IURPLWV%RDUGRI'LUHFWRUVWKH&RPSDQ\KDVFDXVHGWKLV$JUHHPHQWWREHH[HFXWHGLQLWVQDPHRQLWVEHKDOIDOODV RIWKHGD\DQG\HDUILUVWDERYHZULWWHQ   (;(&87,9(        %\V    1DPH    7LWOH       %25*:$51(5,1&        %\V-RKQ-*DVSDURYLF    1DPH-RKQ-*DVSDURYLF    7LWOH9LFH3UHVLGHQW  *HQHUDO&RXQVHODQG 6HFUHWDU\                                

 
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 6HFWLRQ%HQHILFLDU\ VKDOOPHDQWKHSHUVRQRUSHUVRQVRUHQWLW\GHVLJQDWHGE\WKH3DUWLFLSDQWWRUHFHLYHWKH balance of the Participant’s Account in the event of the Participant’s death. The designation may be in favor of one RUPRUH%HQHILFLDULHVPD\LQFOXGHFRQWLQJHQWDVZHOODVSULPDU\GHVLJQDWLRQVDQGQDPHGRUXQQDPHGWUXVWHHVXQGHU DQ\ZLOORUWUXVWDJUHHPHQWPD\DSSRUWLRQWKHEHQHILWVSD\DEOHLQDQ\PDQQHUDPRQJWKH%HQHILFLDULHVSURYLGHG however, that a married Participant’s primary Beneficiary shall EHDWDOOWLPHVZKLOHWKH3DUWLFLSDQWLVPDUULHGWKH Participant’s current spouse unless the spouse consents in writing, properly notarized or witnessed by a member of WKH$GPLQLVWUDWLYH&RPPLWWHHRULWVGHOHJDWHHWRWKHQDPLQJE\WKH3DUWLFLSDQWRIVRPHRQHRWKHUWKDQWKHVSRXVHDV DSULPDU\%HQHILFLDU\DQGWKHFRQVHQWDFNQRZOHGJHVWKHILQDQFLDOHIIHFWRIWKHZDLYHUDQGIXUWKHUDFNQRZOHGJHVWKH QRQVSRXVHEHQHILFLDU\ LHV FODVVRIEHQHILFLDULHVRUFRQWLQJHQWEHQHILFLDU\ LHV DQGWKHVSHFLILFIRUPRISD\PHQWLI any, chosen by the Participant. A Participant’s designation of one or more Beneficiaries shall be made in writing in a PDQQHUGHVLJQDWHGE\WKH$GPLQLVWUDWLYH&RPPLWWHHDQGVKDOOQRWEHHIIHFWLYHXQWLOUHFHLYHGE\WKH$GPLQLVWUDWLYH &RPPLWWHH,ID3DUWLFLSDQWZKRLVXQPDUULHGDWWKHWLPHRIKLVRUKHUGHDWKIDLOVWRSURSHUO\GHVLJQDWHD%HQHILFLDU\ RULIWKHGHVLJQDWHGEHQHILFLDULHVRIVXFKXQPDUULHG3DUWLFLSDQWVKDOOKDYHSUHGHFHDVHGWKH3DUWLFLSDQWWKH Participant’s estate shall be the Beneficiary. If a married Participant’s spouse has validly consented to the GHVLJQDWLRQRID%HQHILFLDU\ LHV RWKHUWKDQVXFKVSRXVHDQGVXFKGHVLJQDWHGEHQHILFLDULHVVKDOOKDYHSUHGHFHDVHG the Participant, the Participant’s spouse shall be the Beneficiary.   Subject to the provisions of the preceding paragraph requiring spousal consent to a married Participant’s designation of a Beneficiary other than such Participant’s spouse, a Participant may change his or her Beneficiary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individual, the term “Board of Directors” shall also include such committee or individual.  6HFWLRQ%:6WRFN8QLW VKDOOPHDQDPHDVXUHRISDUWLFLSDWLRQXQGHUWKH3ODQZKLFKKDVDYDOXHEDVHGRQ Common Stock. Each BW Stock Unit credited to a Participant’s Account represents an obligation of the Company RUUHOHYDQW(PSOR\HUWRPDNHDSD\PHQWRIFDVKHTXDOWRWKHIDLUPDUNHWYDOXHRIDVKDUHRI&RPPRQ6WRFNWRVXFK Participant at such time as the Participant’s Account shall become distributable to him or her under the terms of the 3ODQ,QWKHHYHQWRIDQ\&RPSDQ\VWRFNVSOLWVWRFNGLYLGHQGUHFDSLWDOL]DWLRQUHRUJDQL]DWLRQPHUJHU FRQVROLGDWLRQFRPELQDWLRQH[FKDQJHRIVKDUHVOLTXLGDWLRQVSLQRIIRURWKHUVLPLODUFKDQJHLQFDSLWDOL]DWLRQRU HYHQWRUDQ\GLVWULEXWLRQWRKROGHUVRI&RPPRQ6WRFNRWKHUWKDQDUHJXODUFDVKGLYLGHQGWKHQXPEHURI%:6WRFN 8QLWVFUHGLWHGWR3DUWLFLSD nts’ Accounts under the Plan shall be appropriately adjusted by the Board of Directors. 7KHGHFLVLRQRIWKH%RDUGRI'LUHFWRUVUHJDUGLQJDQ\DGMXVWPHQWVKDOOEHILQDOELQGLQJDQGFRQFOXVLYH  

 
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Exhibit 10.32 RETENTION BONUS AGREEMENT This Retention Bonus Agreement (“Agreement”) is entered into between BorgWarner, Inc. (“BW”) and Anthony Hensel (“EMPLOYEE”) in order to set forth the parties’ mutual intentions and understandings regarding EMPLOYEE’s eligibility for a bonus during the retention period. 1. Retention Period and Retention Bonus. In consideration for EMPLOYEE remaining continuously employed on an active, full-time basis, from the date EMPLOYEE signs this Agreement through March 31, 2020 (“Retention Period”) and subject to the terms of this Agreement, BW agrees to pay EMPLOYEE a lump sum retention bonus in the total gross amount of Two Hundred Sixteen Thousand Dollars ($ 216,000.00 ), less any applicable taxes, social security charges, or other amounts required by law to be withheld (“Retention Bonus”). The Retention Bonus shall be in addition to EMPLOYEE’s standard benefits and compensation. 2. Responsibilities during Retention Period. EMPLOYEE agrees and acknowledges that he is subject to all policies, procedures and expectations of BW during the Retention Period and must perform his duties and responsibilities (as the same are currently being performed by EMPLOYEE) in good faith on a full- time basis to the satisfaction of BW EMPLOYEE acknowledges and agrees that nothing in this Agreement modifies or changes his at-will employment status and either EMPLOYEE or BW may terminate the employment relationship at any time, with or without cause or advance notice, at the will of either party. Notwithstanding anything to the contrary contained herein, EMPLOYEE shall be allowed to perform his duties and responsibilities remotely, provided that EMPLOYEE provides BW with prior notice that he will be working remotely, and further provided that EMPLOYEE may not work remotely during the months following a quarter end (i.e. January 2019, April 2019, July 2019, October 2019, and January 2020) until BW has satisfied its reporting obligations with the U.S. Securities and Exchange Commission. If requested by BW, EMPLOYEE will attend senior leadership meetings in person. 3. Management Incentive Plan. Nothing in this Agreement modifies or waives EMPLOYEE’S eligibility for a bonus or other payment under the BW Management Incentive Plan (MIP) for the years 2019 or 2020. Any eligibility for a bonus or other payment will be determined solely by the express terms of the MIP, as amended or modified by BW. 4. Payment of Retention Bonus. EMPLOYEE acknowledges that the Retention Bonus is only due and payable if EMPLOYEE remains continuously employed in good standing and performs his duties on an active, full-time basis, until March 31, 2020, or is terminated by BW without cause prior to March 31, 2020. Payment of the Retention Bonus shall be conditioned on EMPLOYEE’s execution of a general release of claims in a form acceptable to BW. EMPLOYEE acknowledges and agrees that BW will not be obligated to pay the Retention Bonus if: (i) EMPLOYEE is discharged “for cause” as that term is defined in the BorgWarner Inc. 2018 Stock Incentive Plan; (ii) EMPLOYEE resigns for any reason prior to March 31, 2020; (iii)

 
Exhibit 10.32 EMPLOYEE retires prior to March 31, 2020; or (iv) EMPLOYEE dies or is incapacitated from performing his full time duties (with or without accommodation) for four non-consecutive months during the Retention Period; provided, however, if such an event occurs, BW shall pay EMPLOYEE (or the spouse of EMPLOYEE, in the event of EMPLOYEE'S death) a prorated portion of the Retention Bonus based on the number of months prior to the occurrence of an event specified in clause (iv) over the total number of months in the Retention Period. The Retention Bonus (or any prorated portion thereof, if applicable) will be paid on March 31, 2020 or, in the event EMPLOYEE’s employment is terminated by BW without cause prior to March 31, 2020, or terminated due to an event described in clause (iv) above or in Paragraph 6 below, on the first regularly scheduled payroll date following such termination date or event. 5. Cooperation and Successor. To enable EMPLOYEE to voluntarily resign or retire effective on March 31, 2020, BW [will use its commercially reasonable best efforts to] [shall] identify a successor to EMPLOYEE (the "Successor") by September 15, 2019. EMPLOYEE agrees to cooperate in good faith in the training the Successor during the quarterly financial closing process following September 30, 2019, and will transition EMPLOYEE’S duties to the Successor during the year-end financial closing following December 31, 2019. 6. Full Transfer of Duties to Successor. Notwithstanding anything to the contrary contained herein, in the event that EMPLOYEE'S duties are fully transferred to his Successor prior to March 31, 2020 (as determined or approved by BW) EMPLOYEE shall be permitted to retire on said date and BW shall pay EMPLOYEE the entire Retention Bonus on the first regularly scheduled payroll date following the date EMPLOYEE'S duties are so transferred. 7. Section 409A. The Retention Bonus is intended to comply with the “short term deferral” exception from Section 409A of the Internal Revenue Code (“Section 409A”) and shall be interpreted in a manner consistent with the applicable exception(s). If the Retention Bonus is subject to Section 409A, this Agreement shall be interpreted and administered in such a way as to comply with Section 409A to the maximum extent possible. The terms “termination of employment,” “resignation,” or words of similar import in this Agreement shall mean the Employee’s “separation from service” as defined by Section 409A. If payment of any amount subject to Section 409A is triggered by a separation from service that occurs while EMPLOYEE is a “specified employee” under Section 409A and if such amount is scheduled to be paid within six (6) months after such separation from service, the amount shall accrue without interest and shall be paid the first business day after the end of such six-month period, or, if earlier, within thirty (30) days after EMPLOYEE’s death. Nothing in this Agreement shall be construed as a guarantee of any particular tax treatment to EMPLOYEE and EMPLOYEE shall be solely responsible for the tax consequences with respect to all amounts payable under this Agreement.

 
Exhibit 10.32 8. Applicable Law, Integration, Modification and Counterparts. This Agreement shall be construed in accordance with and governed by the laws of the State of Michigan without reference to choice of law or conflict of law principles. This Agreement supersedes all prior or contemporaneous agreements or understandings, oral or written, between the parties regarding any Retention Bonus; provided, however, that this Agreement expressly does not apply to the Change in Control Agreement dated July 1, 2002.. This Agreement may only be amended or modified in a writing so stating and signed by EMPLOYEE and the President of BW. EMPLOYEE may not assign, sell or transfer his rights under this Agreement to any third- party without the written consent of the President of BW. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one Agreement. 9. Voluntary Agreement. EMPLOYEE signs this Agreement voluntarily, of his own free will, without any duress or coercion by BW or its representatives. EMPLOYEE read this Agreement and understands its terms, and has been advised to seek legal advice prior to signing this Agreement. I understand and accept the above terms and voluntarily agree to this Agreement. /s/ Anthony D. Hensel_______________ /s/ Tonit M. Calaway__________________ EMPLOYEE BorgWarner, Inc . Anthony Hensel By: Tonit M. Calaway Dated: December 8, 2018 36503615.1

 
Subsidiaries of the Company Exhibit 21.1 BORGWARNER INC. (Parent)* JURISDICTION NAME OF SUBSIDIARY B80 Italia S.r.l. Italy BorgWarner Aftermarket Europe GmbH Germany BorgWarner Alternators Inc. Delaware BorgWarner Arden LLC Delaware BorgWarner Arnstadt RE GmbH & Co. KG Germany BorgWarner Asia Inc. Delaware BorgWarner Automotive Asia Limited Hong Kong BorgWarner Automotive Components (Beijing) Co., Ltd. China BorgWarner Automotive Components (Jiangsu) Co., Ltd. China BorgWarner Automotive Components (Ningbo) Co., Ltd. China BorgWarner Automotive Components (Tianjin) Co., Ltd. China BorgWarner Automotive Components (Wuhan) Co., Ltd. China BorgWarner Brasil Ltda. Brazil BorgWarner (China) Investment Co., Ltd. China BorgWarner Comercializadora PDS, S. de R.L. de C.V. Mexico BorgWarner Componentes PDS, S. de R.L. de C.V. Mexico BorgWarner Chungju Co., Ltd. South Korea BorgWarner Comercial e Distribuidora de Pecas Brazil para Veiculos Automotores Ltda. BorgWarner Cooling Systems (India) Private Limited India BorgWarner Cooling Systems GmbH Germany BorgWarner Diversified Transmission Products Inc. Delaware BorgWarner Diversified Transmission Products Services Inc. Delaware BorgWarner Drivetrain de Mexico S.A. de C.V. Mexico BorgWarner Drivetrain Engineering GmbH Germany BorgWarner Drivetrain Management Services Mexico de Mexico S.A. de C.V.

 
Subsidiaries of the Company Exhibit 21.1 BorgWarner Electric Motors, L.L.C. Virginia BorgWarner Emissions Systems Ltda. Brazil BorgWarner Emissions Systems Holding LLC Delaware BorgWarner Emissions Systems India Private Limited India BorgWarner Emissions Systems LLC Delaware BorgWarner Emissions Systems of Michigan Inc. Delaware BorgWarner Emissions Systems Portugal, Unipessoal LDA Portugal BorgWarner Emissions Systems (Ningbo) Co., Ltd. China BorgWarner Emissions Systems Spain, S.L.U. Spain BorgWarner Emissions Talegaon Private Limited India BorgWarner Engineering Ketsch RE GmbH & Co. KG Germany BorgWarner Engineering Kibo RE GmbH & Co. KG Germany BorgWarner Esslingen GmbH Germany BorgWarner Europe GmbH Germany Borg Warner Europe Holdings (PDS) B. V. Netherlands BorgWarner Europe Holding S.a. r. l. Luxembourg BorgWarner Europe LLC Delaware BorgWarner Gateshead Limited United Kingdom BorgWarner Germany REH GmbH Germany BorgWarner Germany REM GmbH Germany BorgWarner Germany Verwaltungs GmbH Germany BorgWarner Global Holding S.a. r. l. Luxembourg BorgWarner Heidelberg I RE GmbH & Co. KG Germany BorgWarner Heidelberg II RE GmbH & Co. KG Germany BorgWarner Heidelberg REH GmbH Germany BorgWarner Heidelberg REM GmbH Germany BorgWarner Holding Inc. Delaware BorgWarner Holdings Limited United Kingdom

 
Subsidiaries of the Company Exhibit 21.1 BorgWarner Hungary Kft. Hungary BorgWarner India Holdings Inc. Delaware BorgWarner Investment Holding Inc. Delaware BorgWarner IT Services Europe GmbH Germany BorgWarner Ithaca LLC Delaware BorgWarner Ketsch Plant RE GmbH & Co. KG Germany BorgWarner Ketsch REH GmbH Germany BorgWarner Ketsch REM GmbH Germany BorgWarner Kibo RE GmbH & Co. KG Germany BorgWarner Korea Holdings LLC Delaware BorgWarner Korea Holdings (PDS) B.V. Netherlands BorgWarner Limited United Kingdom BorgWarner Ludwigsburg GmbH Germany BorgWarner Ludwigsburg RE GmbH & Co. KG Germany BorgWarner Markdorf Plant RE GmbH & Co. KG Germany BorgWarner Markdorf REH GmbH Germany BorgWarner Markdorf REM GmbH Germany BorgWarner Massachusetts Inc. Delaware BorgWarner Mauritius Holdings Ltd. Mauritius BorgWarner Mexico Holdings LLC Delaware BorgWarner Morse Systems Italy S.r.l. Italy BorgWarner Morse Systems Japan K.K. Japan BorgWarner Morse Systems Korea Ltd. South Korea BorgWarner Morse TEC LLC Delaware BorgWarner Morse Systems Mexico, S.A. de C.V. Mexico BorgWarner Morse Systems India Private Limited India BorgWarner Muggendorf RE GmbH & Co. KG Germany BorgWarner Netherlands Holdings (PDS) B.V. Netherlands

 
Subsidiaries of the Company Exhibit 21.1 BorgWarner NW Inc. Delaware BorgWarner Oberboihingen RE GmbH & Co. KG Germany BorgWarner Oroszlany Kft. Hungary BorgWarner PDS (Anderson), L.L.C. Delaware BorgWarner PDS Brasil Produtos Automotivos Ltda. Brazil BorgWarner PDS (Changnyeong) Inc. South Korea BorgWarner PDS (Indiana) Inc. Delaware BorgWarner PDS Irapuato, S. de R.L. de C.V. Mexico BorgWarner PDS (Livonia) Inc. Delaware BorgWarner PDS Mexico Holdings, S. de R.L. de C.V. Mexico BorgWarner PDS (Ochang) Inc. South Korea BorgWarner PDS Technologies, L.L.C. Delaware BorgWarner PDS (Thailand) Limited Thailand BorgWarner PDS (USA) Inc. Delaware BorgWarner Poland Sp. z o.o. Poland BorgWarner (Reman) Holdings, L.L.C. Delaware BorgWarner Rzeszów Sp. z o.o. Poland BorgWarner Shenglong (Ningbo) Co., Ltd. China BorgWarner South Asia LLC Delaware BorgWarner Southborough Inc. Delaware BorgWarner Spain Holding, S.L.U Spain BorgWarner Sweden AB Sweden BorgWarner Systems Lugo S.r.l. Italy BorgWarner (Thailand) Limited Thailand BorgWarner Thermal Systems Inc. Delaware BorgWarner Thermal Systems of Michigan Inc. Delaware BorgWarner TorqTransfer Systems Beijing Co., Ltd. China BorgWarner Tralee Ltd. Ireland

 
Subsidiaries of the Company Exhibit 21.1 BorgWarner Transmission Systems Arnstadt GmbH Germany BorgWarner Transmission Systems GmbH Germany BorgWarner Transmission Systems Korea Ltd. South Korea BorgWarner Transmission Systems LLC Delaware BorgWarner Transmission Systems Tulle S.A.S. France BorgWarner Trustees Limited United Kingdom BorgWarner Turbo & Emissions Systems France S.A.S. France BorgWarner Turbo and Emissions Systems Mexico de Mexico S.A. de C.V. BorgWarner Turbo Systems Engineering GmbH Germany BorgWarner Turbo Systems GmbH Germany BorgWarner Turbo Systems LLC Delaware BorgWarner Turbo Systems of Michigan Inc. Delaware BorgWarner Turbo Systems Worldwide Headquarters GmbH Germany BorgWarner United Transmission Systems Co., Ltd. China BorgWarner USA Industries, L.L.C. Delaware BorgWarner Waterloo Inc. Canada BorgWarner Wrexham Limited United Kingdom BW El Salto, S.A. De C.V. Mexico BWA Receivables Corporation Delaware BWA Turbo Systems Holding LLC Delaware Cascadia Motion LLC Delaware Creon Insurance Agency Limited United Kingdom Kuhlman LLC Delaware Kysor Europe Limited United Kingdom M. & M. Knopf Auto Parts, L.L.C. Delaware New PDS Corp. Delaware NSK-Warner K.K. Japan NSK-Warner Mexico, S.A. de C.V . Mexico

 
Subsidiaries of the Company Exhibit 21.1 NSK-Warner (Shanghai) Co., Ltd. China NSK-Warner U.S.A., Inc. Michigan Old Remco Holdings, L.L.C. Delaware Old Remco International Holdings, L.L.C. Delaware Remy Electric (Wuhan) Limited China SeohanWarner Turbo Systems, Ltd. South Korea Sevcon GmbH Germany Sevcon New Energy Technology (Hubei) Company Limited China Sevcon SAS France Sevcon S.r.l. Italy Transmission Systems AutoForm Ltd. South Korea *This list includes significant equity investees

 


EXHIBIT 23.1


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-12939, 333-45423, 333-45507, 333-45491, 333-45493, 333-45495, 333-45499, 333-51647, 333-67131, 333-67133, 333-67135, 333-85289, 333-85291, 333-85293, 333-85295, 333-85301,333-95207, 333-35716; 333-35718, 333-35720, 333-35722, 333-35724, 333-117171, 333-118203, 333-118202, 333‑118201, 333-118200, 333-122204, 333-124086, 333-134167, 333-136604, 333-136605, 333-136606, 333-150568, 333-150569, 333-150570, 333-150571, 333-150572, 333-159694, 333-197761) and Registration Statements on Form S-3 (Nos. 333-06041, 333-14717, 333-20485, 333-31259, 333-66879, 333-84931, 333-99007, 333-106787, 333-149539, 333-163928, 333-216118) of BorgWarner Inc. of our report dated February 19, 2019 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.




/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 19, 2019



EXHIBIT 31.1
Certification of the Principal Executive Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Frederic B. Lissalde, certify that:

1.
I have reviewed this annual report on Form 10-K of BorgWarner Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 19, 2019
 
 
 
/s/    Frederic B. Lissalde
 
Frederic B. Lissalde
 
President and Chief Executive Officer
 


EXHIBIT 31.2
Certification of the Principal Financial Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Thomas J. McGill, certify that:

1.
I have reviewed this annual report on Form 10-K of BorgWarner Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 19, 2019
 
 
 
/s/ Thomas J. McGill
 
Thomas J. McGill
 
Vice President, Interim Chief Financial Officer and Treasurer
 
 
 


EXHIBIT 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Annual Report of BorgWarner Inc. (the “Company”) on Form 10-K for the period ended December 31, 2018 (the “Report”), each of the undersigned officers of the Company certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of such officer's knowledge:

(1)  the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 19, 2019
 
 
 
/s/   Frederic B. Lissalde
 
Frederic B. Lissalde
 
President and Chief Executive Officer
 
 
 
/s/   Thomas J. McGill
 
Thomas J. McGill
 
Vice President, Interim Chief Financial Officer and Treasurer
 

A signed original of this written statement required by Section 906 has been provided to BorgWarner Inc. and will be retained by BorgWarner Inc. and furnished to the Securities and Exchange Commission or its staff upon request.