NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair statement of results have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The balance sheet as of December 31, 2018 was derived from the audited financial statements as of that date. For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Certain prior period amounts have been reclassified to conform to current period presentation. Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and accompanying notes, as well as the amounts of revenues and expenses reported during the periods covered by those financial statements and accompanying notes. Actual results could differ from these estimates.
(2) New Accounting Pronouncements
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02,
"Leases (Topic 842)."
Under this guidance, a lease is a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. 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 adopted Accounting Standards Codification ("ASC") 842 as of January 1, 2019, using the optional transition method provided in ASU No. 2018-11, "
Leases (Topic 842): Targeted Improvements
." Under this method, the Company recorded an adjustment as of the effective date and did not include any retrospective adjustments to comparative periods to reflect the adoption of ASC 842. In addition, the Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, 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 also elected the practical expedients to combine the lease and non-lease components. The Company did not elect the practical expedient to apply hindsight as part of the leases evaluation. Additionally, the Company elected the practical expedient under ASU No. 2018-01,
"Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842",
which allows an entity to not reassess whether any existing land easements are or contain leases.
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. The Company determines whether a contract is or contains a lease at contract inception. The majority of the Company's lease arrangements are comprised of fixed payments and a limited number of these arrangements include a variable payment component based on certain index fluctuations.
Adoption of ASC 842 resulted in the recording of lease right-of-use assets ("lease assets") and lease liabilities of approximately
$104 million
and
$103 million
, respectively, as of January 1, 2019. The adoption did not impact consolidated net earnings and had no impact on cash flows.
The changes made to our Consolidated Balance Sheet as of January 1, 2019 for the adoption of ASC 842 were as follows:
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|
|
|
|
|
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|
|
|
|
|
|
(in millions)
|
Balance at December 31, 2018
|
|
Adjustments due to ASC 842
|
|
Balance at January 1, 2019
|
|
Other non-current assets
|
$
|
502
|
|
|
$
|
104
|
|
|
$
|
606
|
|
|
Accounts payable and accrued expenses
|
$
|
2,144
|
|
|
$
|
23
|
|
|
$
|
2,167
|
|
|
Other non-current liabilities
|
$
|
357
|
|
|
$
|
80
|
|
|
$
|
437
|
|
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. The Company adopted this guidance as of January 1, 2019 and there was no impact to the consolidated financial statements.
Accounting Standards Not Yet Adopted
In August 2018, the FASB issued 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; and (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 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.
(3) Revenue from Contracts with Customers
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, Revenue from Contracts with Customers, 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 million
at March 31, 2019 and December 31, 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 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
$8 million
and
$6 million
at March 31, 2019 and December 31, 2018. 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 9, "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
$12 million
and
$16 million
at March 31, 2019 and
$13 million
and
$17 million
at December 31, 2018, 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, when the 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
$31 million
and
$29 million
recorded in Prepayments and other current assets, and
$185 million
and
$187 million
recorded in Other non-current assets in the consolidated balance sheet at March 31, 2019 and December 31, 2018, respectively.
The Company's business is comprised of
two
reporting segments: Engine and Drivetrain. Refer to Note 21, "Reporting Segments," to the Consolidated Financial Statements for more information. The following table represents a disaggregation of revenue from contracts with customers by segment and region:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
Three months ended March 31, 2018
|
|
(In millions)
|
|
Engine
|
|
Drivetrain
|
|
Total
|
|
Engine
|
|
Drivetrain
|
|
Total
|
|
North America
|
|
$
|
412
|
|
|
$
|
445
|
|
|
$
|
857
|
|
|
$
|
402
|
|
|
$
|
448
|
|
|
$
|
850
|
|
|
Europe
|
|
801
|
|
|
227
|
|
|
1,028
|
|
|
846
|
|
|
291
|
|
|
1,137
|
|
|
Asia
|
|
340
|
|
|
303
|
|
|
643
|
|
|
422
|
|
|
337
|
|
|
759
|
|
|
Other
|
|
31
|
|
|
7
|
|
|
38
|
|
|
31
|
|
|
7
|
|
|
38
|
|
|
Total
|
|
$
|
1,584
|
|
|
$
|
982
|
|
|
$
|
2,566
|
|
|
$
|
1,701
|
|
|
$
|
1,083
|
|
|
$
|
2,784
|
|
(4) Research and Development Expenditures
The Company's net Research & Development ("R&D") expenditures are included in selling, general and administrative expenses of the Condensed 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:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Gross R&D expenditures
|
$
|
121
|
|
|
$
|
130
|
|
|
Customer reimbursements
|
(17
|
)
|
|
(13
|
)
|
|
Net R&D expenditures
|
$
|
104
|
|
|
$
|
117
|
|
The Company has contracts with several customers at the Company's various R&D locations. None of the Company's R&D related contracts exceeded
5%
of net R&D expenditures in any of the periods presented.
(5) Other Expense, net
Items included in other expense, net consist of:
|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Restructuring expense
|
$
|
14
|
|
|
$
|
8
|
|
|
Merger, acquisition and divestiture expense
|
1
|
|
|
2
|
|
|
Other expense (income)
|
14
|
|
|
(5
|
)
|
|
Other expense, net
|
$
|
29
|
|
|
$
|
5
|
|
During the three months ended March 31, 2019 and 2018, the Company recorded restructuring expense of
$14 million
and
$8 million
, respectively. This restructuring expense
primarily relates to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Refer to Note 19, "Restructuring," to the Condensed Consolidated Financial Statements for more information.
During the three months ended March 31, 2019 and 2018, the Company recorded
$1 million
and
$2 million
, respectively, 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 23, "Assets and Liabilities Held For Sale," to the Condensed Consolidated Financial Statements for more information.
During the three months ended March 31, 2019, the Company recorded
$14 million
of expense related to the receipt of a final unfavorable arbitration decision associated with the resolution of a matter related to a previous acquisition.
During the first three months of 2018, the Company recorded a gain of approximately
$4 million
related to the settlement of a commercial contract for an entity acquired in the 2015 Remy acquisition.
(6) Income Taxes
The Company's provision for income taxes is based upon an estimated annual tax rate for the year applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.
At March 31, 2019, the Company's effective tax rate for the first three months was
34.7%
. This rate includes reductions of income tax expenses of
$3 million
related to restructuring expense and
$5 million
related to other one-time adjustments. This rate also includes an increase in income tax expense of
$22 million
due to the U.S. Department of the Treasury's issuance of the final regulations in the first quarter of 2019 related to the calculation of the one-time transition tax.
At March 31, 2018, the Company's effective tax rate for the first three months was
28.6%
. This rate includes income tax expense of
$1 million
related to a commercial settlement gain and reductions of income tax expense of
$1 million
associated with restructuring expense, and merger and acquisition expense.
The annual effective tax rates differ from the U.S. statutory rate primarily due to foreign rates which differ from those in the U.S., U.S. taxes on foreign earnings, the realization of certain business tax credits, including foreign tax credits, and favorable permanent differences between book and tax treatment for certain items, including equity in affiliates' earnings.
(7) Inventories, net
Certain U.S. inventories are measured by the last-in, first-out (“LIFO”) method at the lower of cost or market, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or average-cost methods at the lower of cost and net realizable value. Inventories consisted of the following:
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|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Raw material and supplies
|
$
|
496
|
|
|
$
|
485
|
|
|
Work in progress
|
116
|
|
|
114
|
|
|
Finished goods
|
213
|
|
|
199
|
|
|
FIFO inventories
|
825
|
|
|
798
|
|
|
LIFO reserve
|
(18
|
)
|
|
(17
|
)
|
|
Inventories, net
|
$
|
807
|
|
|
$
|
781
|
|
(8) Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Land, land use rights and buildings
|
$
|
879
|
|
|
$
|
871
|
|
|
Machinery and equipment
|
2,889
|
|
|
2,851
|
|
|
Finance lease assets
|
2
|
|
|
2
|
|
|
Construction in progress
|
395
|
|
|
426
|
|
|
Total property, plant and equipment, gross
|
4,165
|
|
|
4,150
|
|
|
Less: accumulated depreciation
|
(1,500
|
)
|
|
(1,473
|
)
|
|
Property, plant and equipment, net, excluding tooling
|
2,665
|
|
|
2,677
|
|
|
Tooling, net of amortization
|
230
|
|
|
227
|
|
|
Property, plant and equipment, net
|
$
|
2,895
|
|
|
$
|
2,904
|
|
As of March 31, 2019 and December 31, 2018, accounts payable of
$84 million
and
$104 million
, respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the three months ended March 31, 2019 and 2018 were
$5 million
and
$6 million
, respectively.
(9) Product Warranty
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 following table summarizes the activity in the product warranty accrual accounts:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2019
|
|
2018
|
|
Beginning balance, January 1
|
$
|
103
|
|
|
$
|
112
|
|
|
Provisions for current period sales
|
15
|
|
|
13
|
|
|
Adjustments of prior estimates
|
7
|
|
|
1
|
|
|
Payments
|
(18
|
)
|
|
(10
|
)
|
|
Translation adjustment
|
—
|
|
|
2
|
|
|
Ending balance, March 31
|
$
|
107
|
|
|
$
|
118
|
|
The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Accounts payable and accrued expenses
|
$
|
61
|
|
|
$
|
56
|
|
|
Other non-current liabilities
|
46
|
|
|
47
|
|
|
Total product warranty liability
|
$
|
107
|
|
|
$
|
103
|
|
(10) Notes Payable and Long-Term Debt
As of March 31, 2019 and December 31, 2018, the Company had short-term and long-term debt outstanding as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Short-term debt
|
|
|
|
|
|
|
Short-term borrowings
|
$
|
24
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
8.00% Senior notes due 10/01/19 ($134 million par value)
|
135
|
|
|
135
|
|
|
4.625% Senior notes due 09/15/20 ($250 million par value)
|
251
|
|
|
251
|
|
|
1.80% Senior notes due 11/7/22 (€500 million par value)
|
558
|
|
|
570
|
|
|
3.375% Senior notes due 03/15/25 ($500 million par value)
|
497
|
|
|
497
|
|
|
7.125% Senior notes due 02/15/29 ($121 million par value)
|
119
|
|
|
119
|
|
|
4.375% Senior notes due 03/15/45 ($500 million par value)
|
494
|
|
|
494
|
|
|
Term loan facilities and other
|
9
|
|
|
15
|
|
|
Total long-term debt
|
2,063
|
|
|
2,081
|
|
|
Less: current portion
|
140
|
|
|
140
|
|
|
Long-term debt, net of current portion
|
$
|
1,923
|
|
|
$
|
1,941
|
|
In July 2016, the Company terminated interest rate swaps which had the effect of converting
$384 million
of fixed rate notes to variable rates. The gain on the termination was recorded as an increase to the notes and is being amortized as a reduction to interest expense over the remaining terms of the notes. The unamortized gain related to these swap terminations as of March 31, 2019 and December 31, 2018 was
$2 million
on the 4.625% notes.
The Company terminated fixed to floating interest rate swaps in 2009. The gain on the termination was recorded as an increase to the notes and is being amortized as a reduction to interest expense over the remaining term of the notes. The unamortized gain related to this swap termination at March 31, 2019 and December 31, 2018 was
$1 million
on the 8.00% notes.
The weighted average interest rate on short-term borrowings outstanding as of March 31, 2019 and December 31, 2018 was
2.8%
and
4.3%
, respectively. The weighted average interest rate on all borrowings outstanding, including the effects of outstanding swaps, as of March 31, 2019 and December 31, 2018 was
3.4%
.
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 Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA ") ratio. The Company was in compliance with the financial covenant at March 31, 2019. At March 31, 2019 and December 31, 2018, 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 use the proceeds for general corporate purposes.
The Company had no outstanding borrowings under this program as of March 31, 2019 and December 31, 2018.
The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed
$1.2 billion
.
As of March 31, 2019 and December 31, 2018, the estimated fair values of the Company’s senior unsecured notes totaled
$2,071 million
and
$2,058 million
, respectively. The estimated fair values were
$17 million
more than their carrying value at March 31, 2019 and
$8 million
less than their carrying value at December 31, 2018. Fair market values of the senior unsecured notes are developed using observable values for similar debt instruments, which are considered Level 2 inputs as defined by ASC Topic 820. The carrying values of the Company's multi-currency revolving credit facility and commercial paper program approximates fair value. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.
The Company had outstanding letters of credit of
$40 million
and
$43 million
at March 31, 2019 and December 31, 2018, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.
(11) 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).
|
The following tables classify assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
|
(in millions)
|
Balance at
March 31, 2019
|
|
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
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
A
|
|
Other long-term receivables (insurance settlement agreement note receivable)
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
C
|
|
Net investment hedge contracts
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
A
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
|
(in millions)
|
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:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
A
|
|
Other long-term receivables (insurance settlement agreement note receivable)
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
C
|
|
Net investment hedge contracts
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
A
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
A
|
(12) 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 March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018, the following commodity derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts
|
|
Commodity
|
|
Volume hedged March 31, 2019
|
Volume hedged December 31, 2018
|
|
Units of measure
|
|
Duration
|
|
Copper
|
|
188
|
|
257
|
|
|
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 March 31, 2019 and December 31, 2018, the Company had no outstanding interest rate swaps.
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 March 31, 2019 and December 31, 2018, the following foreign currency derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (in millions)
|
|
Functional currency
|
|
Traded currency
|
|
Notional in traded currency
March 31, 2019
|
|
Notional in traded currency
December 31, 2018
|
|
Ending Duration
|
|
Brazilian real
|
|
Euro
|
|
2
|
|
|
4
|
|
|
Jun - 19
|
|
Brazilian real
|
|
US dollar
|
|
3
|
|
|
5
|
|
|
Jun - 19
|
|
Chinese renminbi
|
|
US dollar
|
|
17
|
|
|
—
|
|
|
Dec - 19
|
|
Euro
|
|
Chinese renminbi
|
|
39
|
|
|
—
|
|
|
Dec - 19
|
|
Euro
|
|
British pound
|
|
10
|
|
|
7
|
|
|
Dec - 19
|
|
Euro
|
|
Swedish krona
|
|
540
|
|
|
540
|
|
|
Jun - 19
|
|
Euro
|
|
US dollar
|
|
10
|
|
|
19
|
|
|
Dec - 19
|
|
Japanese yen
|
|
Chinese renminbi
|
|
66
|
|
|
89
|
|
|
Dec - 19
|
|
Japanese yen
|
|
Korean won
|
|
4,243
|
|
|
5,785
|
|
|
Dec - 19
|
|
Japanese yen
|
|
US dollar
|
|
2
|
|
|
3
|
|
|
Dec - 19
|
|
Korean won
|
|
Euro
|
|
5
|
|
|
6
|
|
|
Dec - 19
|
|
Korean won
|
|
Japanese yen
|
|
186
|
|
|
266
|
|
|
Dec - 19
|
|
Korean won
|
|
US dollar
|
|
30
|
|
|
7
|
|
|
Dec - 19
|
|
Swedish krona
|
|
Euro
|
|
44
|
|
|
56
|
|
|
Jan - 20
|
|
US dollar
|
|
Euro
|
|
14
|
|
|
—
|
|
|
Jan - 20
|
|
US dollar
|
|
Mexican peso
|
|
445
|
|
|
575
|
|
|
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 March 31, 2019 and December 31, 2018, the following cross-currency swap contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-Currency Swaps
|
|
(in millions)
|
Notional
in USD
|
|
Notional
in Local Currency
|
|
Duration
|
|
Fixed $ to fixed €
|
$
|
250
|
|
|
€
|
206
|
|
|
Sep - 20
|
|
Fixed $ to fixed ¥
|
$
|
100
|
|
|
¥
|
10,978
|
|
|
Feb - 23
|
At March 31, 2019 and December 31, 2018, the following amounts were recorded in the Condensed 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
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Location
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Foreign currency
|
|
Prepayments and other current assets
|
|
$
|
3
|
|
|
$
|
2
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3
|
|
|
$
|
2
|
|
|
Net investment hedges
|
|
Other non-current assets
|
|
$
|
21
|
|
|
$
|
12
|
|
|
Other non-current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
Prepayments and other current assets
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Accounts payable and accrued expenses
|
|
$
|
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.
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 March 31, 2019 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
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
Net investment hedges:
|
|
|
|
|
|
|
|
Foreign currency
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
Cross-currency swaps
|
|
21
|
|
|
12
|
|
|
—
|
|
|
Foreign currency denominated debt
|
|
(18
|
)
|
|
(30
|
)
|
|
—
|
|
|
Total
|
|
$
|
7
|
|
|
$
|
(14
|
)
|
|
$
|
—
|
|
Derivative instruments designated as cash flow hedge instruments as defined by ASC Topic 815 held during the period resulted in the following gains and losses recorded in income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
(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
|
|
$
|
2,566
|
|
|
$
|
2,047
|
|
|
$
|
226
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 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
|
|
$
|
2,784
|
|
|
$
|
2,193
|
|
|
$
|
253
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
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)
|
|
Three months ended
|
|
Net investment hedges
|
|
March 31, 2019
|
|
March 31, 2018
|
|
Cross-currency swaps
|
|
$
|
9
|
|
|
$
|
(7
|
)
|
|
Foreign currency denominated debt
|
|
$
|
12
|
|
|
$
|
(16
|
)
|
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)
|
|
Three months ended
|
|
Net investment hedges
|
|
March 31, 2019
|
|
March 31, 2018
|
|
Cross-currency swaps
|
|
$
|
3
|
|
|
$
|
1
|
|
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.
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.
(13) Retirement Benefit Plans
The Company has a number of defined benefit pension plans and other postretirement benefit plans covering eligible salaried and hourly employees and their dependents. The estimated contributions to the Company's defined benefit pension plans for 2019 range from
$15 million
to
$25 million
, of which
$3 million
has been contributed through the first three months of the year. The other postretirement benefit plans, which provide medical and life insurance benefits, are unfunded plans.
The components of net periodic benefit cost recorded in the Condensed Consolidated Statements of Operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement
employee benefits
|
|
(in millions)
|
|
2019
|
|
2018
|
|
|
Three Months Ended March 31,
|
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2019
|
|
2018
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
2
|
|
|
3
|
|
|
2
|
|
|
3
|
|
|
1
|
|
|
1
|
|
|
Expected return on plan assets
|
|
(3
|
)
|
|
(5
|
)
|
|
(3
|
)
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of unrecognized prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Amortization of unrecognized loss
|
|
1
|
|
|
2
|
|
|
1
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit cost (income)
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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.
(14) 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 million
shares were available for future issuance as of March 31, 2019.
Restricted stock
In the first three months of 2019, the Company granted restricted stock in the amount of
930,338
shares to employees. Restricted stock granted to employees generally vests
50%
after
two years
and the remainder after
three years
on the last day of the month from the original month of the grant. Restricted stock granted to non-employee directors generally vests on the first anniversary of the date of grant. The Company recognizes the value of the restricted stock, which is equal to the market value of the Company’s common stock on the date of grant, as compensation expense ratably over the restricted stock's vesting period. As of March 31, 2019, the Company had
$57 million
of unrecognized compensation expense that will be recognized over a weighted average period of
2.3
years. The Company recorded restricted stock compensation expense of
$7 million
for both three months ended March 31, 2019 and 2018.
A summary of the Company’s nonvested restricted stock for the three months ended March 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares subject to restriction
(thousands)
|
|
Weighted average grant date fair value
|
|
Nonvested at December 31, 2018
|
1,516
|
|
|
$
|
42.97
|
|
|
Granted
|
930
|
|
|
$
|
41.92
|
|
|
Vested
|
(665
|
)
|
|
$
|
35.94
|
|
|
Forfeited
|
(6
|
)
|
|
$
|
45.41
|
|
|
Nonvested at March 31, 2019
|
1,775
|
|
|
$
|
44.77
|
|
Total Stockholder Return Performance Share Units
The Company grants performance share units to members of senior management that vest at the end of three-year periods based on the Company's total stockholder return relative to a peer group of companies. The Company recorded compensation expense of
$3 million
and
$2 million
for the three months ended March 31, 2019 and 2018, respectively.
A summary of the status of the Company’s nonvested total stockholder return performance share units for the three months ended March 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
(thousands)
|
|
Weighted average grant date fair value
|
|
Nonvested at December 31, 2018
|
297
|
|
|
$
|
60.35
|
|
|
Granted
|
190
|
|
|
$
|
51.52
|
|
|
Forfeited
|
(9
|
)
|
|
$
|
55.30
|
|
|
Nonvested at March 31, 2019
|
478
|
|
|
$
|
56.93
|
|
Relative Revenue Growth Performance Share Units
The Company also grants performance share units to members of senior management that vest based on the Company's revenue growth relative to
the vehicle market over three-year performance periods. The Company recorded a reduction in compensation expense of
$1 million
and compensation expense of
$7 million
for the three months ended March 31, 2019 and 2018, respectively.
A summary of the status of the Company’s nonvested relative revenue growth performance share units for the three months ended March 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares (thousands)
|
|
Weighted average grant date fair value
|
|
Nonvested at December 31, 2018
|
297
|
|
|
$
|
47.03
|
|
|
Granted
|
190
|
|
|
$
|
41.90
|
|
|
Forfeited
|
(9
|
)
|
|
$
|
44.12
|
|
|
Nonvested at March 31, 2019
|
478
|
|
|
$
|
45.04
|
|
In 2018, the Company modified the vesting provisions of restricted stock and performance share unit grants made to certain 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
$2 million
in the three months ended March 31, 2019.
(15) Stockholder's Equity
The changes of the Stockholder's Equity items during the three months ended March 31, 2019 and 2018, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BorgWarner Inc. stockholder's equity
|
|
|
|
(in millions of dollars)
|
Issued common stock
|
|
Capital in excess of par value
|
|
Treasury stock
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Noncontrolling interests
|
|
Balance, December 31, 2018
|
$
|
3
|
|
|
$
|
1,146
|
|
|
$
|
(1,585
|
)
|
|
$
|
5,336
|
|
|
$
|
(674
|
)
|
|
$
|
119
|
|
|
Dividends declared ($0.17 per share) *
|
—
|
|
|
—
|
|
|
—
|
|
|
(35
|
)
|
|
—
|
|
|
(20
|
)
|
|
Net issuance for executive stock plan
|
—
|
|
|
(10
|
)
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net issuance of restricted stock
|
—
|
|
|
(25
|
)
|
|
21
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchase of treasury stock
|
—
|
|
|
—
|
|
|
(69
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
160
|
|
|
—
|
|
|
11
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
|
Balance, March 31, 2019
|
$
|
3
|
|
|
$
|
1,111
|
|
|
$
|
(1,626
|
)
|
|
$
|
5,461
|
|
|
$
|
(675
|
)
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BorgWarner Inc. stockholder's equity
|
|
|
|
(in millions of dollars)
|
Issued common stock
|
|
Capital in excess of par value
|
|
Treasury stock
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Noncontrolling interests
|
|
Balance, December 31, 2017
|
$
|
3
|
|
|
$
|
1,118
|
|
|
$
|
(1,445
|
)
|
|
$
|
4,531
|
|
|
$
|
(490
|
)
|
|
$
|
109
|
|
|
Dividends declared ($0.17 per share) *
|
—
|
|
|
—
|
|
|
—
|
|
|
(36
|
)
|
|
—
|
|
|
(18
|
)
|
|
Net issuance for executive stock plan
|
—
|
|
|
(1
|
)
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net issuance of restricted stock
|
—
|
|
|
(15
|
)
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchase of treasury stock
|
—
|
|
|
—
|
|
|
(57
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Adoption of accounting standards
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
(14
|
)
|
|
—
|
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
225
|
|
|
—
|
|
|
12
|
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60
|
|
|
2
|
|
|
Balance, March 31, 2018
|
$
|
3
|
|
|
$
|
1,102
|
|
|
$
|
(1,486
|
)
|
|
$
|
4,736
|
|
|
$
|
(444
|
)
|
|
$
|
105
|
|
____________________________________
* The dividends declared relate to BorgWarner common stock.
(16) Accumulated Other Comprehensive Loss
The following tables summarize the activity within accumulated other comprehensive loss during the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
|
Beginning balance, December 31, 2018
|
|
$
|
(441
|
)
|
|
$
|
—
|
|
|
$
|
(235
|
)
|
|
$
|
2
|
|
|
$
|
(674
|
)
|
|
Comprehensive (loss) income before reclassifications
|
|
(5
|
)
|
|
—
|
|
|
3
|
|
|
—
|
|
|
(2
|
)
|
|
Income taxes associated with comprehensive income (loss) before reclassifications
|
|
(4
|
)
|
|
—
|
|
|
3
|
|
|
—
|
|
|
(1
|
)
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Ending balance, March 31, 2019
|
|
$
|
(450
|
)
|
|
$
|
—
|
|
|
$
|
(227
|
)
|
|
$
|
2
|
|
|
$
|
(675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
|
Beginning balance, December 31, 2017
|
|
$
|
(294
|
)
|
|
$
|
(1
|
)
|
|
$
|
(198
|
)
|
|
$
|
3
|
|
|
$
|
(490
|
)
|
|
Adoption of accounting standards
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
—
|
|
|
(14
|
)
|
|
Comprehensive income (loss) before reclassifications
|
|
62
|
|
|
(5
|
)
|
|
(4
|
)
|
|
—
|
|
|
53
|
|
|
Income taxes associated with comprehensive income (loss) before reclassifications
|
|
3
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
5
|
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
1
|
|
|
2
|
|
|
—
|
|
|
3
|
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Ending balance, March 31, 2018
|
|
$
|
(229
|
)
|
|
$
|
(4
|
)
|
|
$
|
(214
|
)
|
|
$
|
3
|
|
|
$
|
(444
|
)
|
(17) Leases
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. Most of the leases are operating leases with options to renew, with renewal terms that can extend the lease term from
1
to
5
years.
The option to renew is included in the lease term if it is reasonably certain that the Company will exercise that option. Certain leases also include options to terminate or purchase the leased asset. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option that is reasonably certain of exercise. The amount recognized in lease assets and liabilities for lease arrangements that include an option for renewal or early termination that is reasonably certain of being exercised is immaterial. Our lease agreements do not contain any material residual value guarantee or material restrictive covenants. The Company's policy is to account for the lease and non-lease components as a single lease component for all asset classes.
ASC 842 requires that the rate implicit in the lease be used if readily determinable. Generally, implicit rates are not readily determinable in our contracts and the incremental borrowing rate is used for each lease arrangement. The incremental borrowing rates are determined using rates specific to the term of the lease, economic environments where lease activity is concentrated, value of lease portfolio, and assuming full collateralization of the loans.
All leases with an initial term of 12 months or less that do not include an option to extend or purchase the underlying asset that the Company is reasonably certain to exercise ("short-term leases") are not recorded on the consolidated balance sheet and lease expense is recognized on a straight-line basis over the lease term. The short-term lease cost for the three months ended March 31, 2019 is less than
$1 million
and the total remaining payments for short-term leases as of March 31, 2019 are less than
$1 million
.
The following table presents the operating lease assets and lease liabilities as of March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Leases
(in millions)
|
|
Consolidated Balance Sheet Classification
|
|
March 31, 2019
|
|
Assets
|
|
|
|
|
|
Operating lease assets
|
|
Other non-current assets
|
|
$
|
98
|
|
|
Total operating lease assets
|
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current
|
|
|
|
|
|
Operating lease liabilities
|
|
Accounts payable and accrued expenses
|
|
$
|
23
|
|
|
Noncurrent
|
|
|
|
|
|
Operating lease liabilities
|
|
Other non-current liabilities
|
|
74
|
|
|
Total operating lease liabilities
|
|
|
|
$
|
97
|
|
The Company had less than
$1 million
of finance lease assets recorded in Property, plant and equipment, net, and less than
$1 million
of finance lease liabilities recorded in Long-term debt in the consolidated balance sheet at March 31, 2019.
In the three months ended March 31, 2019, the Company recorded operating lease cost of
$7 million
, reflected in Selling, general and administrative expenses in the consolidated statement of operations. The finance lease cost including amortization of leased assets and interest on lease liabilities was less than
$1 million
in the three months ended March 31, 2019. Variable costs for the three months ended March 31, 2019 are immaterial, and the Company does not have sublease income or gains/losses on sale leaseback transactions.
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities (undiscounted) as of March 31, 2019
(millions of dollars)
|
|
Operating Leases
|
|
2019 (excluding the three months ended March 31, 2019)
|
|
$
|
18
|
|
|
2020
|
|
20
|
|
|
2021
|
|
15
|
|
|
2022
|
|
12
|
|
|
2023
|
|
8
|
|
|
After 2023
|
|
37
|
|
|
Total lease payments
|
|
$
|
110
|
|
|
Less: Imputed interest
|
|
13
|
|
|
Present value of lease liabilities
|
|
$
|
97
|
|
Total finance lease payments for each annual period from 2019 (excluding the three months ended March 31, 2019) to 2023 and years after 2023 are less than
$1 million
.
Total rent expense was
$10 million
for the three months ended March 31, 2018. Future minimum operating lease payments at December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
(millions of dollars)
|
|
|
2019
|
$
|
24
|
|
|
2020
|
21
|
|
|
2021
|
15
|
|
|
2022
|
13
|
|
|
2023
|
10
|
|
|
After 2023
|
38
|
|
|
Total minimum lease payments
|
$
|
121
|
|
|
|
|
|
|
|
|
|
Lease Term and Discount Rate
|
|
March 31, 2019
|
|
Weighted-average remaining lease term (years)
|
|
|
|
Operating leases
|
|
8
|
|
|
Finance leases
|
|
2
|
|
|
Weighted-average discount rate
|
|
|
|
Operating leases
|
|
2.7
|
%
|
|
Finance leases
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
Other Information
|
|
Three Months Ended
|
|
(In millions)
|
|
March 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
6
|
|
Cash paid for finance leases included in operating and financing cash flows for three months ended March 31, 2019 is less than
$1 million
. Non-cash transactions related to lease liabilities arising from obtaining lease assets and modification or reassessment events are immaterial for the three months ended March 31, 2019.
As of March 31, 2019, the operating and finance leases that the Company signed but have not yet commenced are immaterial.
(18) Contingencies
The Company's environmental and product liability contingencies are discussed separately below. 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 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.
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 million
as of March 31, 2019 and December 31, 2018. 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. Du
e 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 on these claims 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 during the three months ended March 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Beginning Claims January 1
|
8,598
|
|
|
9,225
|
|
|
New Claims Received
|
529
|
|
|
503
|
|
|
Dismissed Claims
|
(310
|
)
|
|
(462
|
)
|
|
Settled Claims
|
(89
|
)
|
|
(106
|
)
|
|
Ending Claims March 31
|
8,728
|
|
|
9,160
|
|
Through March 31, 2019 and December 31, 2018, the Company incurred
$584 million
and
$574 million
, respectively,
in asbestos-related claim resolution costs (including settlement payments and judgments) and associated defense costs. During the three months ended March 31, 2019 and 2018, the Company paid
$11 million
and
$15 million
, respectively, in asbestos-related claim resolution costs and associated defense costs. These gross payments are before tax benefits and any potential insurance
receipts. Asbestos-related claim resolution costs and associated defense costs are reflected in the Company's operating cash flows.
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. The Company has accrued estimated amounts in its consolidated financial statements on account of asbestos-related claims that have been asserted but not yet resolved and for claims that have not yet been asserted. The Company's estimate of asbestos-related claim resolution costs and associated defense costs 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. As of March 31, 2019 and March 31, 2018, the Company’s reasonable best estimate of the aggregate liability for both asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet asserted, including estimated defense costs, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2019
|
|
2018
|
|
Beginning asbestos liability as of January 1
|
$
|
805
|
|
|
$
|
828
|
|
|
Claim resolution costs and associated defense costs
|
(10
|
)
|
|
(15
|
)
|
|
Ending asbestos liability as of March 31
|
$
|
795
|
|
|
$
|
813
|
|
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 million
as of March 31, 2019 and December 31, 2018. 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, 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 March 31, 2019 and December 31, 2018, the Company received
$271 million
in cash and notes from insurance carriers on account of asbestos-related claim resolution costs and associated defense costs.
As of March 31, 2019 and December 31, 2018, the Company estimates that it has
$386 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 million
, through March 31, 2019, 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.
The amounts recorded in the Condensed Consolidated Balance Sheets respecting asbestos-related claims are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Assets:
|
|
|
|
|
Other long-term asbestos-related insurance receivables
|
$
|
313
|
|
|
$
|
303
|
|
|
Deferred asbestos-related insurance asset
|
$
|
73
|
|
|
$
|
83
|
|
|
Total insurance assets
|
$
|
386
|
|
|
$
|
386
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
49
|
|
|
$
|
50
|
|
|
Other non-current liabilities
|
746
|
|
|
755
|
|
|
Total accrued liabilities
|
$
|
795
|
|
|
$
|
805
|
|
On July 31, 2018, the Division of Enforcement of the Securities and Exchange Commission ("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.
(19) Restructuring
In the third quarter of 2017, the Company initiated actions within its Engine segment designed to improve future profitability and competitiveness and started exploring strategic options for the non-core product lines. As a continuation of these actions, the Company recorded restructuring expense of
$7 million
and
$5 million
during the three months ended March 31, 2019 and 2018, respectively, primarily related to professional fees and employee termination benefits. Additionally, in the first quarter of 2019, the Company initiated a separate voluntary termination program in the Engine segment and recorded restructuring expense of
$4 million
in the three months ended March 31, 2019. The Company will continue its plan to improve the future profitability and competitiveness of its business in the Engine segment. These actions may result in the recognition of additional restructuring charges that could be material.
Additionally, the Company recorded restructuring expense of
$2 million
in the three months ended March 31, 2018 in the Drivetrain segment primarily related to manufacturing footprint rationalization activities.
The Company recorded restructuring expense of
$3 million
in the three months ended March 31, 2019 related to Corporate restructuring activities.
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 tables display a rollforward of the severance accruals recorded within the Company's Condensed Consolidated Balance Sheet and the related cash flow activity for the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Accruals
|
|
(in millions)
|
|
Drivetrain
|
|
Engine
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
4
|
|
|
$
|
21
|
|
|
$
|
25
|
|
|
Provision
|
|
—
|
|
|
7
|
|
|
7
|
|
|
Cash payments
|
|
—
|
|
|
(20
|
)
|
|
(20
|
)
|
|
Balance at March 31, 2019
|
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Accruals
|
|
(in millions)
|
|
Drivetrain
|
|
Engine
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
Provision
|
|
1
|
|
|
1
|
|
|
2
|
|
|
Cash payments
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
Translation adjustment
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Balance at March 31, 2018
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
6
|
|
(20) Earnings Per Share
The Company presents both basic and diluted earnings per share of common stock (“EPS”). Basic EPS is calculated by dividing net earnings attributable to the Company by the weighted average shares of common stock outstanding during the reporting period. Diluted EPS is calculated by dividing net earnings attributable to the Company 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. The dilutive effects of performance-based stock awards described in the Note 14, "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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(in millions, except per share amounts)
|
2019
|
|
2018
|
|
Basic earnings per share:
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
160
|
|
|
$
|
225
|
|
|
Weighted average shares of common stock outstanding
|
206.5
|
|
|
209.5
|
|
|
Basic earnings per share of common stock
|
$
|
0.77
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
160
|
|
|
$
|
225
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
206.5
|
|
|
209.5
|
|
|
Effect of stock-based compensation
|
0.6
|
|
|
1.3
|
|
|
Weighted average shares of common stock outstanding including dilutive shares
|
207.1
|
|
|
210.8
|
|
|
Diluted earnings per share of common stock
|
$
|
0.77
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
Anti-dilutive stock-based awards excluded from the calculation of diluted earnings per share:
|
0.5
|
|
|
—
|
|
(21) Reporting Segments
The Company's business is comprised of
two
reporting segments: Engine and Drivetrain. These segments are strategic business groups that 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. 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"). ROIC is comprised of Adjusted EBIT after deducting notional taxes compared to the projected average capital investment required.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Engine
|
$
|
1,598
|
|
|
$
|
1,716
|
|
|
Drivetrain
|
982
|
|
|
1,083
|
|
|
Inter-segment eliminations
|
(14
|
)
|
|
(15
|
)
|
|
Net sales
|
$
|
2,566
|
|
|
$
|
2,784
|
|
Adjusted EBIT
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Engine
|
$
|
241
|
|
|
$
|
280
|
|
|
Drivetrain
|
105
|
|
|
121
|
|
|
Adjusted EBIT
|
346
|
|
|
401
|
|
|
Restructuring expense
|
14
|
|
|
8
|
|
|
Merger, acquisition and divestiture expense
|
1
|
|
|
2
|
|
|
Other expense (income)
|
14
|
|
|
(5
|
)
|
|
Officer stock awards modification
|
2
|
|
|
—
|
|
|
Other postretirement income
|
—
|
|
|
(3
|
)
|
|
Corporate, including equity in affiliates' earnings and stock-based compensation
|
42
|
|
|
53
|
|
|
Interest income
|
(3
|
)
|
|
(2
|
)
|
|
Interest expense
|
14
|
|
|
16
|
|
|
Earnings before income taxes and noncontrolling interest
|
262
|
|
|
332
|
|
|
Provision for income taxes
|
91
|
|
|
95
|
|
|
Net earnings
|
171
|
|
|
237
|
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
11
|
|
|
12
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
160
|
|
|
$
|
225
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Engine
|
$
|
4,824
|
|
|
$
|
4,731
|
|
|
Drivetrain
|
4,018
|
|
|
3,920
|
|
|
Total
|
8,842
|
|
|
8,651
|
|
|
Corporate *
|
1,262
|
|
|
1,444
|
|
|
Total assets
|
$
|
10,104
|
|
|
$
|
10,095
|
|
____________________________________
* Corporate assets include investments and other long-term receivables and certain deferred income taxes.
(22) Recent Transactions
On
January 2, 2019
, the Company acquired Rinehart Motion Systems LLC and AM Racing LLC, two established companies in the specialty electric and hybrid propulsion market, for approximately
$15 million
, of which
$10 million
was paid in the first quarter of 2019 and the remaining
$5 million
will be paid upon satisfaction of certain conditions.
The Company created Cascadia Motion LLC ("Cascadia Motion") to combine assets and operations of these two acquired companies. Based in Oregon, Cascadia Motion specializes in design, development and production of hybrid and electric propulsion solutions for prototype and low-volume production applications. It allows the Company to offer design, development and production of full electric and hybrid propulsion systems for niche and low-volume manufacturing applications.
In connection with the acquisition, the Company recognized
$5 million
of intangible assets, goodwill of
$7 million
within the Drivetrain reporting segment, and other assets and liabilities of
$2 million
to reflect the preliminary fair value of the assets acquired and liabilities assumed. The intangible assets will be amortized over a period of
2
to
15
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, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, the Company is required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. Due to the nature of the transaction, goodwill is not deductible for tax purposes.
The Company is in the process of finalizing all purchase accounting adjustments related to the acquisition of Cascadia Motion. Certain estimated values for the acquisition, including goodwill, intangible assets and deferred taxes, are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition.
Due to its insignificant size relative to the Company, supplemental pro forma financial information of the combined entity for the current and prior reporting period is not provided.
(23) Assets and Liabilities Held For Sale
In 2017, the Company started exploring strategic options for non-core 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. 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. All closing conditions were satisfied, and the sale was closed on April 1, 2019. The Company received partial cash proceeds of
$23 million
prior to March 31, 2019. As the cash was legally restricted for withdrawal or usage prior to closing on April 1, 2019, the Company reflected the proceeds as restricted cash on the consolidated balance sheet at March 31, 2019. As of March 31, 2019 and December 31, 2018, assets of
$50 million
and
$47 million
, including allocated goodwill of
$7 million
, and liabilities of
$22 million
and
$23 million
, respectively, were reclassified as held for sale on the Consolidated Balance Sheets. Based on the cash proceeds in conjunction with the closing of the transaction, the Company determined no additional adjustment to the carrying value was required to reflect fair value less costs to sell as of March 31, 2019. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
(millions of dollars)
|
2019
|
|
2018
|
|
Receivables, net
|
$
|
18
|
|
|
$
|
15
|
|
|
Inventories, net
|
39
|
|
|
42
|
|
|
Prepayments and other current assets
|
12
|
|
|
12
|
|
|
Property, plant and equipment, net
|
45
|
|
|
45
|
|
|
Goodwill
|
7
|
|
|
7
|
|
|
Other intangible assets, net
|
20
|
|
|
20
|
|
|
Impairment of carrying value
|
(91
|
)
|
|
(94
|
)
|
|
Total assets held for sale
|
$
|
50
|
|
|
$
|
47
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
17
|
|
|
$
|
18
|
|
|
Other liabilities
|
5
|
|
|
5
|
|
|
Total liabilities held for sale
|
$
|
22
|
|
|
$
|
23
|
|
