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 and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance sheet as of December 31, 2019 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, 2019.
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.
A novel strain of COVID-19/coronavirus ("COVID-19") was first identified in Wuhan, China in December 2019 and subsequently declared a pandemic by the World Health Organization on March 11, 2020. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions, closing of borders and business slowdowns or shutdowns in affected areas. As a result, COVID-19 has impacted the Company's business globally. Many OEMs temporarily suspended certain manufacturing operations, particularly in North America and Europe, due to market conditions and matters associated with COVID-19. Additionally, as a global manufacturer, the Company has responded to shelter-in-place and similar government orders in various locations around the world, including throughout the United States and Europe, which has resulted in the temporary closures of or reduced operations at the Company's manufacturing and assembly facilities.
The Company assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited to, its allowance for credit losses, the carrying value of the Company's goodwill, intangible assets, and other long-lived assets and valuation allowances on deferred tax assets with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of June 30, 2020 and through the date of this report. As a result of these assessments, there were no impairments or material increases in credit allowances or valuation allowances that impacted the Company's Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2020. Although the Company's operations have resumed, partially or in full at its various facilities, the Company's future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Consolidated Financial Statements in future reporting periods.
(2) New Accounting Pronouncements
Recently Adopted Accounting Standards
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-4, "Reference Rate Reform (Topic 848)." It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These optional expedients and exceptions allow a company to choose not to apply certain modification accounting requirements under GAAP to contracts affected by reference rate reform. A company that makes this election would present and account for a modified contract as a continuation of the existing contract. It also enables a company to continue to apply hedge accounting for hedging relationships in which the critical terms change due to rate reform. This guidance was effective March 12, 2020 and provides relief to contract modifications through December 31, 2022. The Company adopted this guidance on March 12, 2020, and there was no impact to the Condensed Consolidated Financial Statements.
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 was effective for interim and annual periods beginning after December 15, 2019. The Company adopted this guidance as of January 1, 2020, and the impact on its Condensed Consolidated Financial Statements was immaterial.
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 was effective for interim and annual periods beginning after December 15, 2019. The Company adopted this guidance as of January 1, 2020, and there was no impact to the Condensed 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 was effective for annual periods beginning after December 15, 2019. The Company adopted this guidance as of January 1, 2020, and the impact on its Condensed Consolidated Financial Statements was immaterial.
Accounting Standards Not Yet Adopted
In January 2020, the FASB issued ASU No. 2020-1, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." It clarifies the interaction among the accounting for equity securities, equity method investments, and certain derivative instruments. Specifically, for the purposes of applying the ASC Topic 321 measurement alternative, a company should consider observable transactions immediately before applying or upon discontinuing the equity method. Additionally, when determining the accounting for certain forward contracts and purchased options entered into to purchase securities, a company should not consider if the underlying securities would be accounted for under the equity method (ASC Topic 323) or fair value option (ASC Topic 825). This guidance is effective for interim and annual periods beginning after
December 15, 2020, and early adoption is permitted. The Company is still evaluating the impact of this guidance on its Condensed Consolidated Financial Statements.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." It removes certain exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740 and improves consistent application of and simplifies GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. This guidance is effective for interim and annual reporting periods beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance on its Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)." It (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 does not expect this guidance to have a material impact and it will include enhanced disclosures in the Consolidated Financial Statements upon adoption.
(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 Topic 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 the Company's products. For most of the Company's products, transfer of control occurs upon shipment or delivery; however, a limited number of the Company's customer arrangements for highly customized products with no alternative use provide the Company 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 $8 million and $10 million at June 30, 2020 and December 31, 2019, respectively, for these arrangements. These amounts are reflected in Prepayments and other current assets in the Company's Condensed Consolidated Balance Sheets.
Revenue is measured at the amount of consideration the Company expects 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.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90 days. The Company has evaluated the terms of its 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 Condensed 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 Topic 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 the Condensed Consolidated Balance Sheets and were $12 million and $6 million at June 30, 2020 and $10 million and $12 million at December 31, 2019, 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 any such 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 $38 million and $37 million recorded in Prepayments and other current assets in the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, respectively. The Company had $171 million and $180 million recorded in Other non-current assets in the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, respectively.
The Company's business is comprised of two reporting segments: Engine and Drivetrain. Refer to Note 20, "Reporting Segments," to the Condensed 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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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
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|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
(In millions)
|
|
Engine
|
|
Drivetrain
|
|
Total
|
|
Engine
|
|
Drivetrain
|
|
Total
|
|
North America
|
|
$
|
167
|
|
|
$
|
190
|
|
|
$
|
357
|
|
|
$
|
407
|
|
|
$
|
461
|
|
|
$
|
868
|
|
|
Europe
|
|
338
|
|
|
90
|
|
|
428
|
|
|
760
|
|
|
211
|
|
|
971
|
|
|
Asia
|
|
306
|
|
|
324
|
|
|
630
|
|
|
356
|
|
|
317
|
|
|
673
|
|
|
Other
|
|
8
|
|
|
3
|
|
|
11
|
|
|
30
|
|
|
9
|
|
|
39
|
|
|
Total
|
|
$
|
819
|
|
|
$
|
607
|
|
|
$
|
1,426
|
|
|
$
|
1,553
|
|
|
$
|
998
|
|
|
$
|
2,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
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|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
(In millions)
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|
Engine
|
|
Drivetrain
|
|
Total
|
|
Engine
|
|
Drivetrain
|
|
Total
|
|
North America
|
|
$
|
554
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|
|
$
|
613
|
|
|
$
|
1,167
|
|
|
$
|
819
|
|
|
$
|
906
|
|
|
$
|
1,725
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|
|
Europe
|
|
1,049
|
|
|
281
|
|
|
1,330
|
|
|
1,561
|
|
|
438
|
|
|
1,999
|
|
|
Asia
|
|
597
|
|
|
566
|
|
|
1,163
|
|
|
696
|
|
|
620
|
|
|
1,316
|
|
|
Other
|
|
38
|
|
|
7
|
|
|
45
|
|
|
61
|
|
|
16
|
|
|
77
|
|
|
Total
|
|
$
|
2,238
|
|
|
$
|
1,467
|
|
|
$
|
3,705
|
|
|
$
|
3,137
|
|
|
$
|
1,980
|
|
|
$
|
5,117
|
|
(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 June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Gross R&D expenditures
|
$
|
103
|
|
|
$
|
128
|
|
|
$
|
221
|
|
|
$
|
249
|
|
|
Customer reimbursements
|
(15)
|
|
|
(15)
|
|
|
(24)
|
|
|
(32)
|
|
|
Net R&D expenditures
|
$
|
88
|
|
|
$
|
113
|
|
|
$
|
197
|
|
|
$
|
217
|
|
The Company has contracts with several customers at the Company's various R&D locations. None of the Company's R&D-related customer reimbursements under these 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 June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expense
|
$
|
37
|
|
|
$
|
13
|
|
|
$
|
52
|
|
|
$
|
27
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|
|
Merger, acquisition and divestiture expense
|
21
|
|
|
5
|
|
|
42
|
|
|
6
|
|
|
Asset impairments
|
17
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
Net gain on insurance proceeds for property damage
|
(6)
|
|
|
—
|
|
|
(6)
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|
|
—
|
|
|
Unfavorable arbitration loss
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
Other income
|
(1)
|
|
|
(2)
|
|
|
(1)
|
|
|
(2)
|
|
|
Other expense, net
|
$
|
68
|
|
|
$
|
16
|
|
|
$
|
113
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2020, the Company recorded restructuring expense of $37 million and $52 million, respectively, primarily related to actions to reduce structural costs. During the three and six months ended June 30, 2019, the Company recorded restructuring expense of $13 million and $27 million, respectively. This restructuring expense primarily related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Refer to Note 18, "Restructuring," to the Condensed Consolidated Financial Statements for more information.
During the three and six months ended June 30, 2020, the Company recorded merger, acquisition and divestiture expense of $21 million and $42 million, respectively, primarily related to professional fees associated with the Company's anticipated acquisition of Delphi Technologies PLC ("Delphi Technologies"). During the three and six months ended June 30, 2019, the Company recorded merger, acquisition and divestiture expense of $5 million and $6 million, respectively, primarily related to its review of strategic acquisition targets, including its 20% equity interest in Romeo Systems, Inc. ("Romeo") and divestiture activities for non-core pipe and thermostat product lines.
During the three and six months ended June 30, 2020, the Company recorded asset impairment costs of $9 million in the Engine segment and $8 million in the Drivetrain segment, related to the write down of property, plant and equipment associated with the recently announced closures of two European facilities. During the three months ended March 31, 2020, the Company also recorded $9 million of asset impairment cost to record its investment in Romeo at its fair value of $41 million. Refer to Note 21, "Recent Transactions and Events," to the Condensed Consolidated Financial Statements for more information.
During the three and six months ended June 30, 2020, the Company recorded a $6 million net gain from insurance recovery proceeds from damages created by a tornado that struck the Company's facility in Seneca, South Carolina (the "Seneca Plant"). Refer to Note 21, "Recent Transactions and Events," to the Condensed Consolidated Financial Statements for more information.
During the six months ended June 30, 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.
(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.
The Company's effective tax rate for the six months ended June 30, 2020 was 44.6%. This rate was unfavorably impacted by $94 million of restructuring expenses and merger, acquisition and divestiture expenses that were largely non-deductible for tax purposes, resulting in only $9 million of tax benefit being recognized. This rate was further unfavorably impacted by $26 million of asset impairment costs for which no tax benefit was recognized as full valuation allowances were recorded against the corresponding deferred tax assets. The Company also recorded reductions in income tax expense of $10 million for other one-time adjustments primarily related to tax law changes in India that were enacted during the first three months of 2020 and the release of certain unrecognized tax benefits due to the closure of an audit.
The Company's effective tax rate for three months ended June 30, 2020 was 6.0%. The rate includes restructuring expenses, merger, acquisition and divestiture expenses, and asset impairment costs that are largely non-deductible for tax purposes. During the three months ended June 30, 2020, the Company recorded $75 million of such expenses for which only a $5 million tax benefit was recognized.
The Company's effective tax rate for the six months ended June 30, 2019 was 31.7%. This rate includes reductions of income tax expense of $7 million related to restructuring expense, $6 million related to other postretirement expense, and $5 million for other one-time tax 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 during the first three months of 2019 related to the calculation of the one-time transition tax associated with the Tax Cuts and Jobs Act of 2017.
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, net consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Raw material and supplies
|
$
|
554
|
|
|
$
|
502
|
|
|
Work in progress
|
121
|
|
|
113
|
|
|
Finished goods
|
175
|
|
|
207
|
|
|
FIFO inventories
|
850
|
|
|
822
|
|
|
LIFO reserve
|
(14)
|
|
|
(15)
|
|
|
Inventories, net
|
$
|
836
|
|
|
$
|
807
|
|
(8) Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Land, land use rights and buildings
|
$
|
863
|
|
|
$
|
860
|
|
|
Machinery and equipment
|
3,059
|
|
|
2,971
|
|
|
Construction in progress
|
335
|
|
|
360
|
|
|
Finance lease assets
|
1
|
|
|
1
|
|
|
Total property, plant and equipment, gross
|
4,258
|
|
|
4,192
|
|
|
Less: accumulated depreciation
|
(1,707)
|
|
|
(1,513)
|
|
|
Property, plant and equipment, net, excluding tooling
|
2,551
|
|
|
2,679
|
|
|
Tooling, net of amortization
|
230
|
|
|
246
|
|
|
Property, plant and equipment, net
|
$
|
2,781
|
|
|
$
|
2,925
|
|
As of June 30, 2020 and December 31, 2019, accounts payable of $60 million and $102 million, respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the six months ended June 30, 2020 and 2019 were $5 million and $9 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)
|
2020
|
|
2019
|
|
Beginning balance, January 1
|
$
|
116
|
|
|
$
|
103
|
|
|
Provisions for current period sales
|
27
|
|
|
27
|
|
|
Adjustments of prior estimates
|
5
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
(28)
|
|
|
(30)
|
|
|
Translation adjustment
|
(1)
|
|
|
(1)
|
|
|
Ending balance, June 30
|
$
|
119
|
|
|
$
|
106
|
|
The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Accounts payable and accrued expenses
|
$
|
66
|
|
|
$
|
63
|
|
|
Other non-current liabilities
|
53
|
|
|
53
|
|
|
Total product warranty liability
|
$
|
119
|
|
|
$
|
116
|
|
(10) Notes Payable and Long-Term Debt
As of June 30, 2020 and December 31, 2019, the Company had short-term and long-term debt outstanding as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Short-term debt
|
|
|
|
|
Short-term borrowings
|
$
|
45
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
4.625% Senior notes due 09/15/20 ($250 million par value)
|
250
|
|
|
251
|
|
|
1.800% Senior notes due 11/07/22 (€500 million par value)
|
560
|
|
|
558
|
|
|
3.375% Senior notes due 03/15/25 ($500 million par value)
|
497
|
|
|
497
|
|
|
2.650% Senior notes due 07/01/27 ($1,100 million par value)
|
1,087
|
|
|
—
|
|
|
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
|
7
|
|
|
7
|
|
|
Total long-term debt
|
3,014
|
|
|
1,926
|
|
|
Less: current portion
|
252
|
|
|
252
|
|
|
Long-term debt, net of current portion
|
$
|
2,762
|
|
|
$
|
1,674
|
|
The Company may utilize uncommitted lines of credit for short-term working capital requirements. As of June 30, 2020 and December 31, 2019, the Company had $45 million and $34 million, respectively, in borrowings under these facilities, which are classified in Notes payable and short-term debt on the Condensed Consolidated Balance Sheets.
The weighted average interest rate on short-term borrowings outstanding as of June 30, 2020 and December 31, 2019 was 2.6% and 2.5%, respectively. The weighted average interest rate on all borrowings outstanding, including the effects of outstanding swaps, as of June 30, 2020 and December 31, 2019 was 2.5% and 2.8%.
On June 19, 2020, in anticipation of the acquisition of Delphi Technologies and to refinance the Company's $250 million 4.625% senior notes due in September 2020, the Company issued $1.1 billion in 2.650% senior notes due July 2027. Interest is payable semi-annually in arrears on January 1 and July 1 of each year. These senior notes are not guaranteed by any of the Company’s subsidiaries. This issuance was not conditioned upon the consummation of this acquisition; however, if the acquisition is not consummated on or prior to April 28, 2021 or the transaction agreement is cancelled, then the Company will be required to redeem and repay the senior notes at 101% of the principal amount, including accrued interest.
On April 29, 2020, the Company entered into a $750 million delayed-draw term loan which was subsequently cancelled on June 19, 2020 in accordance with its terms, following the Company's issuance of the $1.1 billion in senior notes.
On March 13, 2020, the Company amended its multi-currency revolving credit facility by increasing the size of the facility from $1.2 billion to $1.5 billion and by extending the maturity until March 13, 2025. The multi-currency revolving credit agreement provides for the facility to automatically increase to $2.0 billion upon the closing of the anticipated acquisition of Delphi Technologies. Additionally, the agreement allows the Company the ability to increase the facility by $1.0 billion with bank group approval. The credit agreement contains customary events of default and one key financial covenant which is a debt to Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") ratio. The Company was in compliance with the financial covenant at June 30, 2020. At June 30, 2020 and December 31, 2019, 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. 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 June 30, 2020 and December 31, 2019.
The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed $1.5 billion.
As of June 30, 2020 and December 31, 2019, the estimated fair values of the Company’s senior unsecured notes totaled $3,145 million and $2,025 million, respectively. The estimated fair values were $138 million higher than their carrying value at June 30, 2020 and $106 million higher than their carrying value at December 31, 2019. 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 $28 million at June 30, 2020 and December 31, 2019. 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 June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
|
|
|
|
|
(in millions)
|
Balance at
June 30, 2020
|
|
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
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedge contracts
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
A
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedge contracts
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
|
|
|
|
|
(in millions)
|
Balance at
December 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:
|
|
|
|
|
|
|
|
|
|
|
Net investment hedge contracts
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
A
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
A
|
|
Net investment hedge contracts
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
A
|
(12) Financial Instruments
The Company’s financial instruments include cash and cash equivalents, marketable securities and accounts receivable. 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 and options, 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 June 30, 2020 and December 31, 2019, 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 June 30, 2020 and December 31, 2019, the following commodity derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts
|
|
|
|
|
|
|
Commodity
|
|
Volume hedged June 30, 2020
|
Volume hedged December 31, 2019
|
|
Units of measure
|
|
Duration
|
|
Copper
|
|
95
|
|
203
|
|
|
Metric Tons
|
|
Dec - 20
|
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 and options to reduce market value risk associated with changes in interest rates (fair value hedges and cash flow hedges). At December 31, 2019, the Company had no outstanding interest rate swaps. On February 19, 2020, the Company executed a €750 million notional interest rate swaption contract that expired on June 30, 2020, and was designated as a cash flow hedge to mitigate against interest rate fluctuations on anticipated debt issuance. The premium cost for this contract was immaterial.
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 its 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 European subsidiaries. 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 June 30, 2020 and December 31, 2019, the following foreign currency derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (in millions)
|
|
|
|
|
|
|
|
|
|
Functional currency
|
|
Traded currency
|
|
Notional in traded currency
June 30, 2020
|
|
Notional in traded currency
December 31, 2019
|
|
Ending Duration
|
|
Brazilian real
|
|
Euro
|
|
—
|
|
|
1
|
|
|
Mar - 20
|
|
|
|
|
|
|
|
|
|
|
|
British pound
|
|
Euro
|
|
13
|
|
|
9
|
|
|
Mar - 21
|
|
British pound
|
|
US dollar
|
|
—
|
|
|
4
|
|
|
Mar - 20
|
|
Chinese renminbi
|
|
US dollar
|
|
4
|
|
|
2
|
|
|
Dec - 20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
British pound
|
|
2
|
|
|
—
|
|
|
Jan - 21
|
|
Euro
|
|
Chinese renminbi
|
|
7
|
|
|
—
|
|
|
Oct - 20
|
|
Euro
|
|
Hungarian forint
|
|
1,289
|
|
|
—
|
|
|
Jan - 21
|
|
Euro
|
|
Japanese yen
|
|
181
|
|
|
383
|
|
|
Dec - 20
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
Polish zloty
|
|
110
|
|
|
—
|
|
|
Dec - 20
|
|
Euro
|
|
US dollar
|
|
7
|
|
|
18
|
|
|
Dec - 20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indian rupee
|
|
Japanese yen
|
|
19
|
|
|
—
|
|
|
Jul - 20
|
|
|
|
|
|
|
|
|
|
|
|
Japanese yen
|
|
Chinese renminbi
|
|
7
|
|
|
—
|
|
|
Jul - 20
|
|
Japanese yen
|
|
Korean won
|
|
2,514
|
|
|
—
|
|
|
Dec - 20
|
|
|
|
|
|
|
|
|
|
|
|
Korean won
|
|
Euro
|
|
7
|
|
|
13
|
|
|
Dec - 20
|
|
Korean won
|
|
Japanese yen
|
|
355
|
|
|
409
|
|
|
Dec - 20
|
|
Korean won
|
|
US dollar
|
|
28
|
|
|
4
|
|
|
Dec - 20
|
|
|
|
|
|
|
|
|
|
|
|
Swedish krona
|
|
Euro
|
|
—
|
|
|
3
|
|
|
Jan - 20
|
|
US dollar
|
|
Euro
|
|
1
|
|
|
14
|
|
|
Dec - 20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US dollar
|
|
Mexican peso
|
|
343
|
|
|
—
|
|
|
Mar - 21
|
The Company selectively uses cross-currency swaps and certain foreign currency-denominated debt to hedge the foreign currency exposure associated with its net investment in certain foreign operations (net investment hedges). At June 30, 2020 and December 31, 2019, the following cross-currency swap contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-Currency Swaps
|
|
|
|
|
|
(in millions)
|
June 30, 2020
|
|
December 31, 2019
|
|
Duration
|
|
US dollar to Euro:
|
|
|
|
|
|
|
Fixed receiving notional
|
$
|
1,100
|
|
|
$
|
—
|
|
|
Jul - 27
|
|
Fixed paying notional
|
€
|
976
|
|
|
€
|
—
|
|
|
Jul - 27
|
|
US dollar to Euro:
|
|
|
|
|
|
|
Fixed receiving notional
|
$
|
500
|
|
|
$
|
500
|
|
|
Mar - 25
|
|
Fixed paying notional
|
€
|
450
|
|
|
€
|
450
|
|
|
Mar - 25
|
|
US dollar to Japanese yen:
|
|
|
|
|
|
|
Fixed receiving notional
|
$
|
100
|
|
|
$
|
100
|
|
|
Feb - 23
|
|
Fixed paying notional
|
¥
|
10,978
|
|
|
¥
|
10,978
|
|
|
Feb - 23
|
At June 30, 2020 and December 31, 2019, 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 815:
|
|
Location
|
|
June 30,
2020
|
|
December 31, 2019
|
|
Location
|
|
June 30,
2020
|
|
December 31, 2019
|
|
Foreign currency
|
|
Prepayments and other current assets
|
|
$
|
1
|
|
|
$
|
—
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2
|
|
|
$
|
1
|
|
|
Net investment hedges
|
|
Other non-current assets
|
|
$
|
23
|
|
|
$
|
3
|
|
|
Other non-current liabilities
|
|
$
|
11
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
Prepayments and other current assets
|
|
$
|
1
|
|
|
$
|
—
|
|
|
Accounts payable and accrued expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
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 June 30, 2020 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
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
Foreign currency
|
|
$
|
(1)
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges:
|
|
|
|
|
|
|
|
Foreign currency
|
|
6
|
|
|
5
|
|
|
—
|
|
|
Cross-currency swaps
|
|
34
|
|
|
16
|
|
|
—
|
|
|
Foreign currency-denominated debt
|
|
(19)
|
|
|
(17)
|
|
|
—
|
|
|
Total
|
|
$
|
20
|
|
|
$
|
4
|
|
|
$
|
(1)
|
|
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 June 30, 2020
|
|
|
|
|
|
|
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
|
Other comprehensive income (loss)
|
|
Total amounts of earnings and other comprehensive income(loss) line items in which the effects of cash flow hedges are recorded
|
|
$
|
1,426
|
|
|
$
|
1,252
|
|
|
$
|
184
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income (loss)
|
|
|
|
|
|
|
|
$
|
1
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
|
Other comprehensive income(loss)
|
|
Total amounts of earnings and other comprehensive income(loss) line items in which the effects of cash flow hedges are recorded
|
|
$
|
3,705
|
|
|
$
|
3,084
|
|
|
$
|
397
|
|
|
$
|
(60)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income (loss)
|
|
|
|
|
|
|
|
$
|
(2)
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
|
Other comprehensive income (loss)
|
|
Total amounts of earnings and other comprehensive income(loss) line items in which the effects of cash flow hedges are recorded
|
|
$
|
2,551
|
|
|
$
|
2,038
|
|
|
$
|
212
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income (loss)
|
|
|
|
|
|
|
|
$
|
(1)
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
(1)
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
|
Other comprehensive income(loss)
|
|
Total amounts of earnings and other comprehensive income(loss) line items in which the effects of cash flow hedges are recorded
|
|
$
|
5,117
|
|
|
$
|
4,085
|
|
|
$
|
438
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income (loss)
|
|
|
|
|
|
|
|
$
|
(1)
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
(2)
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
The gains or losses recorded in income related to components excluded from the assessment of effectiveness for derivative instruments designated as cash flow hedges were immaterial for the periods presented.
Gains and (losses) on derivative instruments designated as net investment hedges were recognized in other comprehensive income (loss) during the periods presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Net investment hedges
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Foreign currency
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
Cross-currency swaps
|
|
$
|
(17)
|
|
|
$
|
(4)
|
|
|
$
|
18
|
|
|
$
|
5
|
|
|
Foreign currency-denominated debt
|
|
$
|
(10)
|
|
|
$
|
(7)
|
|
|
$
|
(2)
|
|
|
$
|
5
|
|
Derivatives designated as net investment hedge instruments as defined by ASC Topic 815 held during the period resulted in the following gains recorded in Interest expense and finance charges on components excluded from the assessment of effectiveness:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Net investment hedges
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
5
|
|
There were no gains or 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. These derivatives resulted in the following gains and (losses) recorded in income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Contract Type
|
|
Location
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Foreign Currency
|
|
Selling, general and administrative expenses
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
3
|
|
|
$
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 2020 range from $15 million to $20 million, of which $10 million has been contributed through the first six months of the year. The other postretirement benefit plans, which provide medical and life insurance benefits, are funded on a pay-as-you-go basis.
During the three months ended June 30, 2019, the Company settled approximately $50 million of its U.S. pension projected benefit obligation by liquidating approximately $50 million in plan assets through a lump-sum disbursement made to an insurance company. Pursuant to this agreement, the insurance company has unconditionally and irrevocably guaranteed all future payments to certain participants that were receiving payments from the U.S. pension plan. The insurance company has assumed all investment risk associated with the assets that were delivered as part of this transaction. Additionally, during the three months ended June 30, 2019, the Company discharged certain U.S. pension plan obligations by making lump-sum payments of $13 million to former employees of the Company. As a result, the Company settled $63 million of U.S. pension projected benefit obligation by liquidating pension plan assets and recorded a non-cash settlement loss of $26 million related to the accelerated recognition of unamortized losses.
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)
|
|
2020
|
|
|
|
2019
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2020
|
|
2019
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
2
|
|
|
3
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
1
|
|
|
Expected return on plan assets
|
|
(2)
|
|
|
(6)
|
|
|
(3)
|
|
|
(6)
|
|
|
—
|
|
|
—
|
|
|
Settlement
|
|
—
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of unrecognized prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
Amortization of unrecognized loss
|
|
—
|
|
|
2
|
|
|
1
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit cost
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
27
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
|
|
|
|
|
Other postretirement
employee benefits
|
|
|
|
(in millions)
|
|
2020
|
|
|
|
2019
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2020
|
|
2019
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
3
|
|
|
5
|
|
|
5
|
|
|
6
|
|
|
1
|
|
|
2
|
|
|
Expected return on plan assets
|
|
(5)
|
|
|
(12)
|
|
|
(6)
|
|
|
(11)
|
|
|
—
|
|
|
—
|
|
|
Settlement
|
|
—
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of unrecognized prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(2)
|
|
|
Amortization of unrecognized loss
|
|
1
|
|
|
5
|
|
|
2
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit (income) cost
|
|
$
|
(1)
|
|
|
$
|
8
|
|
|
$
|
27
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The components of net periodic benefit (income) cost other than the service cost component are included in Other postretirement (income) expense 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 5 million shares were available for future issuance as of June 30, 2020.
Restricted stock During the first six months of 2020, the Company granted restricted stock in the amount of 766,205 shares and 30,674 shares to employees and non-employee directors, respectively. Restricted stock granted to employees generally vests 50% after two years and the remainder after three years. Restricted stock granted to non-employee directors generally vests on the first anniversary of the grant date. 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 June 30, 2020, the Company had $45 million of unrecognized
compensation expense that will be recognized over a weighted average period of 2 years. The Company recorded restricted stock compensation expense of $7 million for the three months ended June 30, 2020 and 2019, and $14 million for the six months ended June 30, 2020 and 2019.
A summary of the Company’s nonvested restricted stock for the six months ended June 30, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares subject to restriction
(thousands)
|
|
Weighted average grant date fair value
|
|
Nonvested at December 31, 2019
|
1,664
|
|
|
$
|
44.26
|
|
|
Granted
|
766
|
|
|
$
|
34.05
|
|
|
Vested
|
(466)
|
|
|
$
|
46.00
|
|
|
Forfeited
|
(9)
|
|
|
$
|
42.23
|
|
|
Nonvested at March 31, 2020
|
1,955
|
|
|
$
|
39.87
|
|
|
Granted
|
31
|
|
|
$
|
29.67
|
|
|
Vested
|
(75)
|
|
|
$
|
41.19
|
|
|
Forfeited
|
(24)
|
|
|
$
|
40.49
|
|
|
Nonvested at June 30, 2020
|
1,887
|
|
|
$
|
39.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance share units The Company grants performance share units to members of senior management that vest at the end of three-year periods based the following metrics:
•Total Stockholder Return Units: based on the Company's total stockholder return relative to a peer group of companies.
•Relative Revenue Growth Units: based on the Company's revenue growth relative to the vehicle market.
•Adjusted Earnings Per Share Units: introduced in the first quarter of 2020, this performance metric is based on the Company’s earnings per share adjusted for certain one-time items and non-operating gains and losses against a 3-year defined target.
A summary of the status of the Company’s nonvested performance share units for the three and six months ended June 30, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholder Return
|
|
|
|
Relative Revenue Growth
|
|
|
|
Adjusted Earnings Per Share
|
|
|
|
|
Number of shares (thousands)
|
|
Weighted average grant date fair value
|
|
Number of shares (thousands)
|
|
Weighted average grant date fair value
|
|
Number of shares (thousands)
|
|
Weighted average grant date fair value
|
|
Nonvested at December 31, 2019
|
240
|
|
|
$
|
64.61
|
|
|
240
|
|
|
$
|
48.52
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
142
|
|
|
$
|
28.55
|
|
|
142
|
|
|
$
|
34.11
|
|
|
115
|
|
|
$
|
34.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2020
|
382
|
|
|
$
|
48.02
|
|
|
382
|
|
|
$
|
41.54
|
|
|
115
|
|
|
$
|
34.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(8)
|
|
|
$
|
50.17
|
|
|
(8)
|
|
|
$
|
42.35
|
|
|
(3)
|
|
|
$
|
34.11
|
|
|
Nonvested at June 30, 2020
|
374
|
|
|
$
|
47.97
|
|
|
374
|
|
|
$
|
41.52
|
|
|
112
|
|
|
$
|
34.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded compensation expense (reductions) for performance share units in the periods presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
(in millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Total Stockholder Return
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Relative Revenue Growth
|
|
(3)
|
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
Adjusted Earnings Per Share
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Total compensation expense (reduction)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
3
|
|
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 for the six months ended June 30, 2019.
(15) Stockholders' Equity
The changes of the Stockholders' Equity items during the three and six months ended June 30, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BorgWarner Inc. stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Issued common stock
|
|
Capital in excess of par value
|
|
Treasury stock
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Noncontrolling interests
|
|
Balance, March 31, 2020
|
$
|
3
|
|
|
$
|
1,109
|
|
|
$
|
(1,623)
|
|
|
$
|
6,036
|
|
|
$
|
(801)
|
|
|
$
|
140
|
|
|
Dividends declared ($0.17 per share*)
|
—
|
|
|
—
|
|
|
—
|
|
|
(35)
|
|
|
—
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net issuance of restricted stock
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
(98)
|
|
|
—
|
|
|
14
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
Balance, June 30, 2020
|
$
|
3
|
|
|
$
|
1,115
|
|
|
$
|
(1,623)
|
|
|
$
|
5,903
|
|
|
$
|
(787)
|
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BorgWarner Inc. stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Issued common stock
|
|
Capital in excess of par value
|
|
Treasury stock
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Noncontrolling interests
|
|
Balance, March 31, 2019
|
$
|
3
|
|
|
$
|
1,111
|
|
|
$
|
(1,626)
|
|
|
$
|
5,461
|
|
|
$
|
(675)
|
|
|
$
|
111
|
|
|
Dividends declared ($0.17 per share*)
|
—
|
|
|
—
|
|
|
—
|
|
|
(35)
|
|
|
—
|
|
|
(10)
|
|
|
Net issuance for executive stock plan
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net issuance of restricted stock
|
—
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchase of treasury stock
|
—
|
|
|
—
|
|
|
(31)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
172
|
|
|
—
|
|
|
10
|
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
(3)
|
|
|
Balance, June 30, 2019
|
$
|
3
|
|
|
$
|
1,116
|
|
|
$
|
(1,653)
|
|
|
$
|
5,598
|
|
|
$
|
(670)
|
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BorgWarner Inc. stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Issued common stock
|
|
Capital in excess of par value
|
|
Treasury stock
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Noncontrolling interests
|
|
Balance, December 31, 2019
|
$
|
3
|
|
|
$
|
1,145
|
|
|
$
|
(1,657)
|
|
|
$
|
5,942
|
|
|
$
|
(727)
|
|
|
$
|
138
|
|
|
Dividends declared ($0.17 per share*)
|
—
|
|
|
—
|
|
|
—
|
|
|
(70)
|
|
|
—
|
|
|
(5)
|
|
|
Net issuance for executive stock plan
|
—
|
|
|
(16)
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net issuance of restricted stock
|
—
|
|
|
(14)
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
22
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(60)
|
|
|
(3)
|
|
|
Balance, June 30, 2020
|
$
|
3
|
|
|
$
|
1,115
|
|
|
$
|
(1,623)
|
|
|
$
|
5,903
|
|
|
$
|
(787)
|
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BorgWarner Inc. stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
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*)
|
—
|
|
|
—
|
|
|
—
|
|
|
(70)
|
|
|
—
|
|
|
(30)
|
|
|
Net issuance for executive stock plan
|
—
|
|
|
(9)
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net issuance of restricted stock
|
—
|
|
|
(21)
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchase of treasury stock
|
—
|
|
|
—
|
|
|
(100)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
332
|
|
|
—
|
|
|
21
|
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
(2)
|
|
|
Balance, June 30, 2019
|
$
|
3
|
|
|
$
|
1,116
|
|
|
$
|
(1,653)
|
|
|
$
|
5,598
|
|
|
$
|
(670)
|
|
|
$
|
108
|
|
____________________________________
* 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 and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit retirement plans
|
|
Other
|
|
Total
|
|
Beginning balance, March 31, 2020
|
|
$
|
(571)
|
|
|
$
|
(2)
|
|
|
$
|
(228)
|
|
|
$
|
—
|
|
|
$
|
(801)
|
|
|
Comprehensive (loss) income before reclassifications
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
6
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
7
|
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
1
|
|
|
(2)
|
|
|
—
|
|
|
(1)
|
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ending balance, June 30, 2020
|
|
$
|
(557)
|
|
|
$
|
(1)
|
|
|
$
|
(229)
|
|
|
$
|
—
|
|
|
$
|
(787)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit retirement plans
|
|
Other
|
|
Total
|
|
Beginning balance, March 31, 2019
|
|
$
|
(450)
|
|
|
$
|
—
|
|
|
$
|
(227)
|
|
|
$
|
2
|
|
|
$
|
(675)
|
|
|
Comprehensive (loss) income before reclassifications
|
|
(15)
|
|
|
(1)
|
|
|
1
|
|
|
—
|
|
|
(15)
|
|
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
2
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
(2)
|
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
28
|
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
—
|
|
|
(6)
|
|
|
—
|
|
|
(6)
|
|
|
Ending balance, June 30, 2019
|
|
$
|
(463)
|
|
|
$
|
(1)
|
|
|
$
|
(208)
|
|
|
$
|
2
|
|
|
$
|
(670)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit retirement plans
|
|
Other
|
|
Total
|
|
Beginning balance, December 31, 2019
|
|
$
|
(497)
|
|
|
$
|
—
|
|
|
$
|
(230)
|
|
|
$
|
—
|
|
|
$
|
(727)
|
|
|
Comprehensive (loss) income before reclassifications
|
|
(56)
|
|
|
(2)
|
|
|
6
|
|
|
—
|
|
|
(52)
|
|
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
(4)
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(5)
|
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
1
|
|
|
(5)
|
|
|
—
|
|
|
(4)
|
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Ending balance, June 30, 2020
|
|
$
|
(557)
|
|
|
$
|
(1)
|
|
|
$
|
(229)
|
|
|
$
|
—
|
|
|
$
|
(787)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit retirement plans
|
|
Other
|
|
Total
|
|
Beginning balance, December 31, 2018
|
|
$
|
(441)
|
|
|
$
|
—
|
|
|
$
|
(235)
|
|
|
$
|
2
|
|
|
$
|
(674)
|
|
|
Comprehensive (loss) income before reclassifications
|
|
(20)
|
|
|
(1)
|
|
|
4
|
|
|
—
|
|
|
(17)
|
|
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
(2)
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(3)
|
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
31
|
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
—
|
|
|
(7)
|
|
|
—
|
|
|
(7)
|
|
|
Ending balance, June 30, 2019
|
|
$
|
(463)
|
|
|
$
|
(1)
|
|
|
$
|
(208)
|
|
|
$
|
2
|
|
|
$
|
(670)
|
|
(17) 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 contingencies are discussed below. The Company's management does not expect that an adverse outcome in any of these other 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 such adverse outcome 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 14 such sites as of June 30, 2020 and December 31, 2019. 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 had an accrual for environmental liabilities of $3 million as of June 30, 2020 and December 31, 2019. 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).
Securities and Exchange Commission ("SEC") Investigation
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 historical accounting for asbestos-related claims not yet asserted. The Company is fully cooperating with the SEC in connection with its investigation. The Company recently entered into settlement discussions with the Division of Enforcement staff and has reached an understanding in principle on the material terms of settlement subject to approval by the SEC. If the settlement is approved by the SEC, the Company would enter into an administrative resolution with respect to the reporting, books and records, and internal controls provisions of the federal securities laws and pay a civil penalty of approximately $1 million.
(18) Restructuring
The Company has initiated a comprehensive plan to reduce existing structural costs. As actions under this plan, during the three months ended June 30, 2020, the Company decided it will close two European facilities, affecting approximately 550 employees. The Company recorded employee termination benefits of $3 million in the Engine segment and $17 million in the Drivetrain segment related to these facilities during the three months ended June 30, 2020. These benefits are subject to negotiation with labor unions, which could result in additional restructuring expenses. Also, during the three and six months ended June 30, 2020, the Company recorded $7 million and $12 million in the Engine segment as well as $3 million and $5 million, respectively, in the Drivetrain segment, primarily related to severance costs and professional fees, for other actions associated with this plan. Additionally, the Company continues a voluntary termination program in the Engine segment that resulted in restructuring expense of $5 million and $13 million during the three and six months ended June 30, 2020 and $7 million and $11 million during the three and six months ended June 30, 2019. Future cash payments for these restructuring activities are expected to continue through 2022.
During the three and six months ended June 30, 2019, the Company recorded restructuring expense of $4 million and $11 million, respectively, primarily related to professional fees and employee termination benefits, as a continuation of actions within the Engine segment to improve future profitability and competitiveness and explore strategic options for non-core product lines. The Company also recorded
restructuring expense of $3 million during the six months ended June 30, 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 Company is evaluating numerous options across its operations and plans to take additional restructuring actions to reduce existing structural costs over the next few years. These actions are expected to result in significant restructuring expense.
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 and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Accruals
|
|
|
|
|
|
(in millions)
|
|
Drivetrain
|
|
Engine
|
|
Total
|
|
Balance at December 31, 2019
|
|
$
|
4
|
|
|
$
|
30
|
|
|
$
|
34
|
|
|
Provision
|
|
1
|
|
|
11
|
|
|
12
|
|
|
Cash payments
|
|
—
|
|
|
(13)
|
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
$
|
5
|
|
|
$
|
28
|
|
|
$
|
33
|
|
|
Provision
|
|
17
|
|
|
11
|
|
|
28
|
|
|
Cash payments
|
|
(1)
|
|
|
(14)
|
|
|
(15)
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020
|
|
$
|
21
|
|
|
$
|
25
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Provision
|
|
—
|
|
|
8
|
|
|
8
|
|
|
Cash payments
|
|
—
|
|
|
(2)
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
$
|
4
|
|
|
$
|
14
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19) (Loss) 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 Condensed 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 112,100 of adjusted earnings per share performance share units and the 132,600 of relative revenue growth performance share units granted in 2020 were excluded from the computation of the diluted earnings per share for the six months ended June 30, 2020 because the related performance criteria had not been met as of the 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
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
(in millions, except per share amounts)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Net (loss) earnings attributable to BorgWarner Inc.
|
$
|
(98)
|
|
|
$
|
172
|
|
|
$
|
31
|
|
|
$
|
332
|
|
|
Weighted average shares of common stock outstanding
|
206.0
|
|
|
205.7
|
|
|
205.8
|
|
|
206.1
|
|
|
Basic (loss) earnings per share of common stock
|
$
|
(0.47)
|
|
|
$
|
0.84
|
|
|
$
|
0.15
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
Net (loss) earnings attributable to BorgWarner Inc.
|
$
|
(98)
|
|
|
$
|
172
|
|
|
$
|
31
|
|
|
$
|
332
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
206.0
|
|
|
205.7
|
|
|
205.8
|
|
|
206.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of stock-based compensation*
|
—
|
|
|
1.1
|
|
|
0.6
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding including dilutive shares
|
206.0
|
|
|
206.8
|
|
|
206.4
|
|
|
207.0
|
|
|
Diluted (loss) earnings per share of common stock
|
$
|
(0.47)
|
|
|
$
|
0.83
|
|
|
$
|
0.15
|
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________________________
* The Company had a loss for the three months ended June 30, 2020. As a result, diluted loss per share is the same as basic loss per share in the period, as any dilutive securities would reduce the loss per share.
(20) 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 its 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
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Engine
|
$
|
826
|
|
|
$
|
1,569
|
|
|
$
|
2,260
|
|
|
$
|
3,167
|
|
|
Drivetrain
|
607
|
|
|
998
|
|
|
1,467
|
|
|
1,980
|
|
|
Inter-segment eliminations
|
(7)
|
|
|
(16)
|
|
|
(22)
|
|
|
(30)
|
|
|
Net sales
|
$
|
1,426
|
|
|
$
|
2,551
|
|
|
$
|
3,705
|
|
|
$
|
5,117
|
|
Adjusted EBIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Engine
|
$
|
28
|
|
|
$
|
249
|
|
|
$
|
236
|
|
|
$
|
490
|
|
|
Drivetrain
|
1
|
|
|
102
|
|
|
64
|
|
|
207
|
|
|
Adjusted EBIT
|
29
|
|
|
351
|
|
|
300
|
|
|
697
|
|
|
Restructuring expense
|
37
|
|
|
13
|
|
|
52
|
|
|
27
|
|
|
Merger, acquisition and divestiture expense
|
21
|
|
|
5
|
|
|
42
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments
|
17
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
Net gain on insurance proceeds for property damage
|
(6)
|
|
|
—
|
|
|
(6)
|
|
|
—
|
|
|
Unfavorable arbitration loss
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
Officer stock awards modification
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Corporate, including stock-based compensation
|
38
|
|
|
48
|
|
|
75
|
|
|
99
|
|
|
Equity in affiliates’ earnings, net of tax
|
(2)
|
|
|
(9)
|
|
|
(7)
|
|
|
(18)
|
|
|
Interest income
|
(3)
|
|
|
(2)
|
|
|
(5)
|
|
|
(5)
|
|
|
Interest expense
|
18
|
|
|
14
|
|
|
30
|
|
|
28
|
|
|
Other postretirement (income) expense
|
(1)
|
|
|
27
|
|
|
(3)
|
|
|
27
|
|
|
(Loss) earnings before income taxes and noncontrolling interest
|
(90)
|
|
|
255
|
|
|
96
|
|
|
517
|
|
|
(Benefit) provision for income taxes
|
(6)
|
|
|
73
|
|
|
43
|
|
|
164
|
|
|
Net (loss) earnings
|
$
|
(84)
|
|
|
$
|
182
|
|
|
$
|
53
|
|
|
$
|
353
|
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
14
|
|
|
10
|
|
|
22
|
|
|
21
|
|
|
Net (loss) earnings attributable to BorgWarner Inc.
|
$
|
(98)
|
|
|
$
|
172
|
|
|
$
|
31
|
|
|
$
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
Engine
|
$
|
4,218
|
|
|
$
|
4,536
|
|
|
Drivetrain
|
3,821
|
|
|
4,075
|
|
|
Total
|
8,039
|
|
|
8,611
|
|
|
Corporate *
|
2,298
|
|
|
1,091
|
|
|
Total assets
|
$
|
10,337
|
|
|
$
|
9,702
|
|
____________________________________
* Corporate assets include cash and cash equivalents, investments and other long-term receivables, and certain deferred income taxes.
(21) Recent Transactions and Events
Seneca, South Carolina Facility Tornado
On April 13, 2020, a tornado struck the Seneca Plant causing damage to the Company’s assets. The Seneca Plant, which is one of the Company's largest Drivetrain plants, was not in operation at the time. The Company expects its insurance policies to cover the full repair or replacement of the Company's assets that incurred loss or damage. As of June 30, 2020, the Company received $85 million in cash proceeds from insurance carriers related to this event, substantially all of which have been applied to losses and expenses incurred. For the three months ended June 30, 2020, the Company recorded a net gain on insurance proceeds of $6 million related to the damage of assets (net of deductible expense of $1 million). In addition, all clean-up and repair costs incurred through June 30, 2020 have been fully recovered through these insurance proceeds. The Company expects its insurance policies to provide coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that will be incurred relating to the damages and losses sustained. The Seneca Plant has resumed operations; however, the Company has not yet determined the full impact to its financial position, results of operations, or cash flows, including the timing of those impacts.
Proposed Acquisition of Delphi Technologies PLC
On January 28, 2020, the Company entered into a definitive agreement (the "Transaction Agreement") to acquire Delphi Technologies in an all-stock transaction. The transaction, which is expected to close in 2020, is subject to the receipt of regulatory approvals and satisfaction or waiver of other closing conditions.
On March 30, 2020, Delphi Technologies provided notice to the lenders pursuant to its credit agreement, dated September 7, 2017, as amended, to draw the full available amount under the revolving facility thereunder (the “Revolver Draw”), resulting in a total of $500 million outstanding under the revolving facility. Following the Revolver Draw, on March 30, 2020, the Company sent a written notice to Delphi Technologies asserting that Delphi Technologies materially breached the Transaction Agreement as a result of Delphi Technologies effecting the Revolver Draw without the Company’s prior written consent and asserting that, if such breach was not cured within 30 days, the Company had the right to terminate the Transaction Agreement. The Company received a response letter from Delphi Technologies on that date disputing the Company’s breach assertion on the basis that the Company unreasonably withheld and conditioned its consent to the Revolver Draw, in material breach of the Transaction Agreement.
On May 6, 2020, the Company and Delphi Technologies entered into an Amendment and Consent Agreement (the “Amendment”) pursuant to which, among other things, the Company consented to the Revolver Draw subject to the terms and conditions contained in the Amendment. The Amendment also amended the Transaction Agreement to include the following additional conditions to the Company's obligations to close the transaction (the “Closing”): (a) as of 11:59 p.m. (New York time) on the date immediately prior to the Closing, (i) the net amount of the revolver borrowings outstanding under the credit agreement (net of cash balances) cannot exceed $115 million, and (ii) the total amount of revolver borrowings outstanding under the credit agreement cannot exceed $225 million, and (b) Delphi Technologies has satisfied a specified net-debt-to-adjusted EBITDA ratio. In addition, the Company and Delphi Technologies agreed to reduce the exchange ratio for the transaction such that, pursuant to the terms of the Transaction Agreement, the Company will issue, in exchange for each Delphi Technologies share, 0.4307 shares of BorgWarner common stock.
Upon closing of the transaction, current BorgWarner stockholders are expected to own approximately 85% of the combined company, while current Delphi Technologies shareholders are expected to own approximately 15%.
BorgWarner Morse TEC LLC
Like many other industrial companies that have historically operated in the United States, the Company, or parties that the Company was obligated to indemnify, had been named as one of many defendants in asbestos-related personal injury actions. On October 30, 2019, the Company entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") with Enstar Holdings (US) LLC ("Enstar"). Pursuant to the Purchase Agreement, the Company transferred 100% of the equity interests of BorgWarner Morse TEC LLC ("Morse TEC") to Enstar. As Morse TEC was the obligor for the Company's asbestos-related liabilities and policyholder of the related insurance assets, the rights and obligations related to these items transferred upon the sale, and pursuant to the Purchase Agreement, Morse TEC has indemnified the Company and its affiliates for asbestos-related liabilities as more specifically described in the Purchase Agreement. This indemnification obligation with respect to Asbestos-Related Liabilities (as such term is defined in the Purchase Agreement) is not subject to any cap or time limitation. Following the completion of this transfer, the Company has no obligation with respect to previously recorded asbestos-related liabilities. In accordance with ASC Topic 810, "Consolidation," this subsidiary was derecognized as the Company ceased to control the entity, and the Company removed the associated assets and liabilities from the consolidated balance sheet.
Romeo Systems, Inc.
In May 2019, the Company invested $50 million in exchange for a 20% equity interest in Romeo, a technology-leading battery module and pack supplier. The Company accounts for this investment in Series A-1 Preferred Stock of Romeo under the measurement alternative in ASC Topic 321, "Investments - Equity Securities" for equity investments without a readily determinable fair value. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. During the three months ended March 31, 2020, after completing a qualitative assessment which indicated the Company's equity investment in Romeo may have been impaired, the Company recorded a $9 million asset impairment cost to record this investment at its fair value of $41 million. The estimated fair value of Romeo was determined using unobservable inputs including quantitative information from lower valuations in recently completed or proposed financings and the liquidation preferences included in the Romeo stock agreements. These unobservable inputs are considered Level 3.
In September 2019, the Company and Romeo contributed total equity of $10 million and formed a new joint venture, BorgWarner Romeo Power LLC (the "Romeo JV"), in which the Company owns a 60% interest.
Rinehart Motion Systems LLC and AM Racing LLC
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 during the first three months of 2019, $2 million was paid during the first three months of 2020 and the remaining $3 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.